Interconnection is the high-margin line in retail colocation. Valued on its own margin, it explains why two buildings with the same rent roll can be worth very different amounts.
Cross-connects are small in revenue and large in profit. In an illustrative 2,000-cabinet retail colocation site at 85 per cent occupancy, two cross-connects per cabinet at $200 a month bring in $8.16m a year, 20.0 per cent of revenue but 36.0 per cent of EBITDA, because each one earns about a 90 per cent margin. At a 20x multiple that line is worth $146.9m of a $408.0m valuation, $43,200 per cross-connect.
Worked in full in The Digital Infrastructure Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A cross-connect is a physical cable, copper or fibre, run inside the building between two customers or between a customer and a network carrier, billed as a monthly recurring charge. The cable costs little to install and almost nothing to keep. The price reflects what it connects to, which is why the number of networks and clouds in a building drives its value more than its floor space.
| Input | Value |
|---|---|
| Cabinets built | 2,000 |
| Occupancy | 85% |
| Space and power rent per cabinet per month | $1,600 |
| Cross-connects per occupied cabinet | 2.0 |
| Price per cross-connect per month | $200 |
| EBITDA margin on space and power | 40% |
| EBITDA margin on cross-connects | 90% |
| EV/EBITDA multiple, applied to both lines | 20x |
Cross-connect revenue = occupied cabinets × cross-connects per cabinet × monthly price × 12
Share of EBITDA = cross-connect EBITDA ÷ (colocation EBITDA + cross-connect EBITDA)
Value per cross-connect = monthly price × 12 × margin × multiple
In Excel, with occupied cabinets in B1, cross-connects per cabinet in B2 and price in B3: =B1*B2*B3*12 for revenue.
Step 1, volumes. 2,000 cabinets at 85 per cent is 1,700 occupied. At 2.0 each, the site bills 3,400 cross-connects.
Step 2, revenue. Space and power: 1,700 × $1,600 × 12 = $32.64m. Cross-connects: 3,400 × $200 × 12 = $8.16m. Total $40.80m, of which interconnection is 20.0 per cent.
Step 3, EBITDA. Space and power carry the electricity, cooling, staff and maintenance, so 40 per cent of $32.64m is $13.06m. Cross-connects carry a technician's time and some cable: 90 per cent of $8.16m is $7.34m. Total $20.40m, a blended 50.0 per cent margin, with 36.0 per cent of it from cross-connects.
Step 4, value. At 20x, the site is worth $408.0m: $261.1m from space and power and $146.9m from cross-connects. Each cross-connect earns $2,160 of EBITDA a year and carries $43,200 of value.
| Line | Revenue, $m | EBITDA, $m | Value at 20x, $m |
|---|---|---|---|
| Space and power | 32.64 | 13.06 | 261.1 |
| Cross-connects | 8.16 | 7.34 | 146.9 |
| Total | 40.80 | 20.40 | 408.0 |
Per occupied cabinet, the tenant pays $1,600 a month for space and power and $400 for cross-connects. The landlord keeps $640 of the first and $360 of the second. To replace the cross-connect profit with rent, holding costs flat, every cabinet would need $360 a month more, a 22.5 per cent rent rise. Seen from the other side, the cross-connects lift the value of the same building by 56.2 per cent over what its space and power alone would support at the same multiple.
The cross-connect count is the measurable part of what investors call the ecosystem: a tenant with ten connections to carriers, clouds and partners in the building has a high cost of leaving, so the rent line churns less too. The cross-connect EBITDA understates the effect.
| Per cabinet | $150 a month | $200 a month | $250 a month |
|---|---|---|---|
| 0.5 | 9.5% / $288.7m | 12.3% / $297.8m | 15.0% / $307.0m |
| 1.0 | 17.4% / $316.2m | 22.0% / $334.6m | 26.0% / $352.9m |
| 2.0 | 29.7% / $371.3m | 36.0% / $408.0m | 41.3% / $444.7m |
| 3.0 | 38.8% / $426.4m | 45.8% / $481.4m | 51.3% / $536.5m |
Halve the density from 2.0 to 1.0 per cabinet and the site loses $3.67m of EBITDA and $73.4m of value with the same rent roll. That is the diligence question on a colocation acquisition: how many cross-connects per cabinet, to how many distinct networks, and how many of them are between customers rather than to a single carrier.
A hyperscale or wholesale building sits at the bottom of this table. One tenant takes whole halls, brings its own network and buys few or no cross-connects from the landlord. Its value rests on the lease and on the margin on power pass-through, which is why it is valued per MW and on the covenant rather than on an interconnection premium; see how to value a data centre per MW.
Multiply occupied cabinets by cross-connects per cabinet, price and twelve, then apply the line's own margin: $7.34m of EBITDA, 36.0 per cent of the total from 20.0 per cent of revenue. The Digital Infrastructure Investor values data centres, fibre and towers by the numbers, and the free workbook for this case builds the data centre lease, its power clause and three valuation methods for the book's hyperscale asset.
A physical cable run inside the building between two customers, or between a customer and a carrier or cloud on-ramp, billed as a monthly recurring charge. It costs little to install or maintain, so most of the fee is margin: in the illustrative site, $200 a month at a 90 per cent margin earns $2,160 of EBITDA a year per cross-connect.
Partly because of interconnection. Cross-connect revenue earns far higher margins than space and power and makes tenants stickier. In the illustrative site, 2.0 cross-connects per cabinet lift EBITDA from $13.06m to $20.40m on the same rent roll; a wholesale hall leased to one hyperscale tenant has little or none of that line.
It depends on the building's role, and there is no single benchmark; the point is to measure it per occupied cabinet and to count distinct networks. Illustratively, moving from 1.0 to 2.0 per cabinet at $200 a month raises the cross-connect share of EBITDA from 22.0 to 36.0 per cent and adds $73.4m of value at 20x.
This article is one calculation from The Digital Infrastructure Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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