Background on our cost structure
With today's article, we want to transparently present how we have dealt with the topic in recent months and what news has emerged in the last few days. After an easing on the energy markets was initially not foreseeable, we started to deal with the topic. To understand the impact on our company, you need to know how our energy costs are made up.
Last year, as some may have seen on our socials, to ensure our growth in our data center maincubes FRA01 (instead of individual racks as before), we rented our own larger space that will be expanded with racks according to our needs. In the end, it is two rows of racks with their own cold aisle including a door in the middle, which we can expand until we reach the opposite wall. Associated with this are our own cable trays, which we can use to connect our racks independently as we wish. This setup creates space for the next few years and allows us to implement virtually all connection needs ourselves - whether for customer racks or our own. Through a long contract period we have ensured to be able to realize good conditions for the fixed costs over a long period of time.
What is quite common in the (larger) data center business also applies to us: Our total costs primarily consist of the so-called (fixed) power provision and a variable kWh price. The power provision is measured in kW and, in simple terms, means that we can use a certain peak power (for example 100 kW) and are also guaranteed that this load can also be cooled 24/7, i.e. that the waste heat from our infrastructure can be dissipated. Since the data center has to ensure that this power and cooling capacity can be provided at any time, it is common that you pay for your peak and not the average consumption. Therefore, you usually have to pay a little more for providing power than you consume on average.
In terms of actual power consumption, our price is made up of the annual purchase price of the data center and the so-called PUE (Power Usage Effectiveness). The PUE value results from the secondary consumers of the data center in relation to the productive load; i.e. primarily air conditioning, uninterruptible power supply (UPS) and other building technology.
Procedure so far
On the one hand, we tried to find out as soon as possible the electricity price for 2023 as a basis for calculation, and on the other hand, we already "preemptively" increased the price for new orders of some of our products by 11-14% a few months ago. The hope here was frankly to be able to absorb the roughly expected additional costs in 2023 by the actual increase as well as the additional revenues in the last months of this year in a sufficient size. We expressly wanted to avoid making blanket price increases for all products without knowing the final electricity price. Although many competitors have revised their prices upwards in recent months, in some cases drastically, we wanted to wait and see what electricity price we would ultimately have to factor in - knowing full well that the window of opportunity we have after the electricity price announcement until the start of the new year is getting smaller every day.
We had already received a roughly 40% increase in electricity prices from 2021 to 2022, but we were able to cushion this at the time through forward-looking planning and the previously quite low kWh price without having to touch existing contracts. Primarily, we adjusted dedicated servers at that time when they were terminated and thus re-rented. This allowed us to compensate for some of the additional costs.
The electricity price in numbers
On the afternoon of November 30, 2022, the time had come - we received a letter regarding the electricity price for 2023. The increase amounts to more than 80% compared to 2022 and thus, it must be said quite openly, exceeded our fears and in this respect dashed our hopes of being able to cross-finance it purely from new orders.
As it is the easiest to implement for them and represents one of the most important cost factors, we have communicated their new electricity price to all customers who obtain their own racks from us on the evening of November 30, 2022. This will apply from 01.01.2023 and cannot be absorbed by us in any way, as the margin for colocation is low and the electricity costs are passed on to us. Therefore, we design our colocation contracts in such a way that the electricity price is adjusted according to our procurement costs - of course also in the other direction in case of decreased costs.
Anyone reading this who has already guessed that we will now also have to increase prices for existing customers is correct. However, we do not want to go down the path of the current "market standard" across-the-board increase of all products by a certain percentage. Since we separate our racks by product, we were able to determine relatively quickly which of our products will generate which additional costs. We have done this in the last few days.
Ultimately, with this knowledge, we now approach the problem from different perspectives:
- Adjustment to favorable products: Thanks to a high level of customer loyalty, we still have active contracts that go back to 2014. At that time, for example, IP addresses were still free of charge for us and we sold VPS for 2.00€ / month and cheaper, even if not often. With today's IP and energy prices, this is no longer a good idea and must be corrected in all places where, from today's point of view, a price held for many years is no longer profitable. This also applies in particular to additional IPv4 addresses and IPv4 networks, but will also affect some newer products if they are simply no longer profitable in relation to the current calculation.
- Replacing old systems: For many old contracts, we still operate servers with old processors that are no longer energy-efficient enough. Next year, we will replace these with more modern CPUs, thus adding some value to products that we have to raise in price at the same time.
- Other power saving measures: Admittedly - there's not much more we can do, since we've been paying attention to energy efficiency for a long time, but we're working starting next week to further reduce the cost of cooling our servers by optimizing their ventilation without increasing the actual supply air temperature of our cold aisle, so our customers won't be at a disadvantage. Depending on the outcome, there will be a blog post on this.
Wherever possible, we will not only upgrade older products in terms of CPU performance, but also raise traffic and bandwidth to a modern level in order to be able to provide at least some added value.
Details about the price adjustment
We will write to all affected customers in the next few days and communicate the respective increase. In terms of our transparent communication policy, it is important to know how we will proceed in this regard. We will not make a hard adjustment on an exact cut-off date, but on the next regular due date that falls after this cut-off date. The following example is intended to illustrate this:
A product previously costs €10.00 per month and will be raised to €11.50 per month from 01.01.2023. However, the next due date of the product is 31.12.2022, i.e. before the cut-off date. Therefore, on this date, the product will be billed again for a full billing period at the old price - even if this is always paid one year in advance. In this way, we want to honor customers who have placed their trust in us with an individually selected longer billing period, and still allow those with a shorter billing period a certain degree of predictability, as each billing due before the cut-off date will be at the old price in any case, even if the period then billed extends well into the next year.
With the above-mentioned measures, we intend to compensate for about half of the additional costs. What about the other half?
Politicians are currently discussing an "electricity price brake". Many details are unclear; above all, of course, where exactly the effective electricity price for next year will settle for us. Of course, we do not expect the electricity price brake to solve the cost problem completely, but it should provide some relief.
In addition, many industry experts expect prices to ease from 2024. In this respect, our idea is to "swallow" the remaining additional costs in parts for a year and from 2024 to be able to buy electricity again at a price which, in combination with the necessary price adjustments, brings the profitability of our products back to the previous level. We believe this is more customer-friendly than making a major across-the-board increase now and holding out the prospect of price reductions later, which no one can really estimate.
It is annoying that we received the new electricity price so late, since our own communication was and is directly dependent on it, and we are aware that the resulting late communication will also meet with resentment. Nevertheless, we hope that we have done a good job of explaining why we proceeded as we did and not in any other way. The next year will bring some challenges for the hosting industry; not only in Germany. We are grateful to have loyal and understanding customers on our side and are therefore confident that we can make the best of the situation.