92. Data Centers

Summary

The Economics of Everyday Things: Episode 92 - Data Centers

Host: Zachary Crockett
Produced by: Freakonomics Network
Release Date: May 12, 2025

---

Introduction to Data Centers

In Episode 92 of The Economics of Everyday Things, journalist Zachary Crockett delves into the often-overlooked backbone of our digital lives: data centers. These sprawling facilities, typically hidden behind unassuming facades, are the physical homes for the vast amounts of data we generate and consume daily.

The Backbone of the Digital World

Zachary begins by highlighting the omnipresence of data centers in our daily activities. Whether streaming a video, sending a message, or accessing cloud storage, data centers play a critical role in facilitating these actions.

Zachary Crockett [00:58]: "If you're anything like the average American, you check your phone more than 200 times every day... but the cloud is much more material than that."

Raoul Martinek, CEO of Databank, emphasizes the fundamental role of data centers:

Raoul Martinek [01:47]: "If you think about everything on your phone, everything on a computer, it really is carried by these physical building blocks. And the data center is at the core of it, right?"

Martinek further adds his personal affinity for data centers:

Raoul Martinek [02:09]: "I love being in a data center because it just kind of it charges me up."

Structure and Function of Data Centers

Data centers are massive, windowless structures designed to house thousands of servers and networking equipment. Their primary functions are to store and process vast amounts of data securely and efficiently.

Zachary Crockett [03:26]: "From the outside, a data center doesn't look like much... Inside, rows and rows of computer equipment hum quietly."

Martinek describes the environment within:

Raoul Martinek [03:35]: "It's kind of a quiet place overall. There's a lot of humming of this computer equipment."

The Hot Market for Data Centers

The demand for data centers has surged, driven by the exponential growth of digital services and the rise of artificial intelligence. Corporate giants like Microsoft, Amazon, and Google build their own facilities, while colocation providers like Databank offer shared spaces for multiple companies.

Zachary Crockett [05:56]: "Most of the rest of the data centers, including those built by Databank are the digital equivalent of apartment buildings full of rental units."

Building and operating these centers is capital-intensive. The cost can run up to $10 million per megawatt of capacity, translating to significant investments for large-scale facilities.

Raoul Martinek [06:48]: "We just recently completed a 40 megawatt data center in the Atlanta market. So that data center cost us $440 million."

Northern Virginia: The Data Center Hub

A significant concentration of data centers is located in Northern Virginia, often referred to as "Data Center Alley." This region handles approximately 70% of the world's Internet traffic, making it a pivotal hub for global digital infrastructure.

Chris Kim [11:37]: "70% of the world's Internet traffic flows through that part of the country."

The area's prominence stems from historical developments, including the establishment of the first modern computer network, ARPANET, near the Pentagon. This led to a cascade effect of fiber optic expansion and subsequent data center establishments.

Zachary Crockett [12:18]: "The more fiber that got laid, the more high speed Internet capacity that was available."

Building and Operating Data Centers

Constructing a data center involves strategic planning, from acquiring land in optimal locations to ensuring robust power and networking infrastructure. Companies like Databank focus on areas with strong electrical grids, affordable land, and proximity to fiber optic networks.

Clayton Rosati [14:24]: "We look for proximity to major electrical infrastructure. Is there a transmission line that runs through the area?"

Operational costs are substantial, with electricity being a significant factor. Pricing for electricity in data centers can average around $150 per kilowatt, influencing the overall profitability and location decisions.

Economic Impact on Local Communities

Data centers bring both opportunities and challenges to their host communities. While they require substantial investments, the promise of economic growth often leads rural municipalities to offer tax incentives to attract these facilities.

Clayton Rosati [15:44]: "If we could attract a data center or a couple of data center campuses, what economic impact would that have on our county?"

However, critics argue that the economic benefits are limited. Data centers typically employ a minimal number of staff, and the increased utility consumption can strain local resources.

Zachary Crockett [17:13]: "One of them is Clayton Rosotti, the professor in Ohio where Rosati teaches... Data centers are increasingly popping up on farms, significantly impacting utility consumption."

Challenges and Criticisms

The shift from agricultural land to data centers can lead to increased electricity and water usage, raising concerns about the sustainability and environmental impact on local communities. Additionally, the promise of job creation is often unmet, as data centers require relatively few employees compared to traditional industries.

Chris Kim [16:36]: "The switch from farms to data centers can have a significant impact on a rural community's utility consumption."

Security Measures in Data Centers

Security is paramount in data centers, often surpassing the stringent measures found in financial institutions. Facilities are protected by multiple layers of security, including biometric access, security fences, and sometimes even personal security guards for high-profile clients.

Raoul Martinek [19:04]: "I would say it's even more secure than a bank... No one really who's not allowed to be there can get there again."

Martinek elaborates on the extensive security protocols:

Raoul Martinek [19:23]: "We subdivide the data hall into different cages that are physically secured... some customers go to the extent of hiring a personal security guard."

Anecdotes and Real-World Incidents

The episode recounts unique incidents that highlight the vulnerabilities and unexpected challenges faced by data centers. For instance, a power outage at an Equinix data center in Northern Virginia was caused not by a cyberattack but by a snake interfering with equipment.

Clayton Rosati [20:42]: "A snake crawled up one of the pieces of equipment and sadly, the snake is no longer with us. But they shorted out the feed to the site."

Conclusion

Data centers are the unsung heroes of the digital age, enabling the seamless flow of information and services that millions rely on daily. While they drive significant economic activity and technological advancement, they also present challenges related to environmental impact, local resource strain, and limited job creation. As the demand for digital services continues to surge, understanding the economics and infrastructure of data centers becomes increasingly essential.

---

Notable Quotes:

• Raoul Martinek [19:26]: "We kind of subdivide the data center, the data halls, into different kind of cages that are physically secured."

• Clayton Rosati [15:44]: "If we could attract a data center or a couple of data center campuses, what economic impact would that have on our county?"

• Chris Kim [11:37]: "70% of the world's Internet traffic flows through that part of the country."

---

This comprehensive exploration by Zachary Crockett sheds light on the intricate world of data centers, revealing their pivotal role in our interconnected society and the multifaceted economic implications they entail.

Transcript

[Stripe Representative]

Stripe is the go to choice for AI companies from early stage startups to scaled enterprises. 78% of the leading AI companies use Stripe to go to market quickly and scale globally. That includes pioneers like Nvidia, OpenAI and Perplexity. Stripe has developed cutting edge tools to improve everything from fraud detection to checkout optimization. Whether you're aiming for incremental gains or planning for enterprise transformation, see how Stripe can [e-mail] Are you still quoting 30 year old movies? Have you said cool beans in the past 90 days? Do you think Discover isn't widely accepted? If this sounds like you, you're stuck in the past. Discover is accepted at 99% of places that take credit cards nationwide and every time you make a purchase with your card, you automatically earn cash back. Welcome to the now it pays to Discover. Learn [e-mail] credit card based on the February 2024 Nelson Report.

[Zachary Crockett]

If you're anything like the average American, you check your phone more than 200 times every day. When you tap on the screen, you're asking your phone to retrieve and display some data. Maybe a message from your friend or a YouTube video of a friendly Canadian showing you how to fix your dishwasher. You're usually told that this data exists in the cloud, which might make you think it's floating around in some ethereal network in the sky. But the cloud is much more material than that. When you hit play on that video, your phone forms a request. It directs that request to a cell tower, and fiber optic cables funnel it to a computer server. All of these servers are inside thousands of physical warehouses called data centers.

[Raoul Martinek]

If you think about everything on your phone, everything on a computer, it really is carried by these physical building blocks. And the data center is at the core of it, right? All this information originates and terminates in a data center.

[Zachary Crockett]

That's Raoul Martinek, the CEO of a company called Databank.

[Raoul Martinek]

I love being in a data center because it just kind of it charges me up.

[Zachary Crockett]

These days, much of corporate America feels the same. The data center market has never been hotter. Your local bank, hospital and retailer likely all have servers in a data center somewhere.

[Raoul Martinek]

We have customers like Carnival Cruises and AMC Theaters, and we have customers like J.P. morgan and PNC Bank. We have major healthcare institutions. There's clients across the public sector. We'll have state and local governments as clients.

[Zachary Crockett]

That's the whole infrastructure of our digital lives, housed in nondescript buildings scattered across the country. And with the rise of AI, we're only going to get more of them. For the freakonomics Radio Network. This is the economics of everyday things. I'm Zachary Crockett. Today, data centers. From the outside, a data center doesn't look like much. Most are giant windowless masses of concrete and steel. They're often long and flat, less than three stories high. You might drive past one every day on your way to work and not know what's inside.

[Raoul Martinek]

You have these things called data halls where all this computer equipment is in these racks. So there's rows and rows and rows of computer equipment.

[Zachary Crockett]

Those computers belong to companies that provide Internet services. The data center's main job is to keep them secure, powered on and connected to the Internet.

[Raoul Martinek]

It's kind of a quiet place overall. There's a lot of humming of this computer equipment. You go into a 20,000 foot data hall where there's thousands of servers and storage devices and network gear racked up and it makes a hum.

[Zachary Crockett]

That equipment is doing two things, the first of which is storing all of this data.

[Raoul Martinek]

A lot of what's in a data center is, you know, industrial size hard drives.

[Zachary Crockett]

Every photo you copy into a cloud service like Google Drive or Apple's iCloud storage lives in a server in a distant data center. Every movie or TV show on a streaming service, same thing. Let's say you fire up Peacock and hit play on Wicked from your couch in Brooklyn.

[Raoul Martinek]

When you click on that button, while the gold copy of that movie is sitting in that location in Washington D.C. the actual movie was copied to the New York metropolitan area. And then that information is going from that server to, let's say that user in Brooklyn. They actually distribute copies of that movie to a whole bunch of different locations all over the country. All over the world.

[Zachary Crockett]

But data centers don't just store data, they also process it. According to some estimates, streaming a one hour show on Netflix requires a little less than 1 kilowatt hour of power on the server side, asking ChatGPT to render an image of a porcupine moonwalking. That might call for around 3 kilowatt hours, the equivalent of running a dishwasher for two full cycles. The industry has anticipated all of this new demand. The US is now home to more than 5,000 data centers. According to the asset manager Apollo. These are operated by dozens of different companies. Some data centers are built from the ground up by big tech companies like Microsoft, Amazon and Google.

[Raoul Martinek]

They're so big and their platforms are so big that it makes economic sense for them to spend money on data centers.

[Zachary Crockett]

Most of the rest of the data centers, including those built by Databank are the digital equivalent of apartment buildings full of rental units. They're called colocation facilities, and they host servers for dozens or hundreds of different companies at once, even the big tech companies like Microsoft, who use them for extra capacity.

[Raoul Martinek]

We go out, we acquire land in locations that we think are attractive from a data center perspective. We zone that land, we work with the local utility to bring power to that location, and then we hire a construction manager to build that data center on our behalf.

[Zachary Crockett]

It's an expensive process. The cost to build a data center is often somewhere around $10 million per megawatt. That's the amount of energy it takes to power a few hundred homes.

[Raoul Martinek]

We just recently completed a 40 megawatt data center in the Atlanta market. So that data center cost us $440 million.

[Zachary Crockett]

While a data center is being built, Databank works with realtors to find tenants who need servers.

[Raoul Martinek]

It's very similar to how they look at office space. One of these real estate brokers will come to us and say, hey, listen, I have a RFP here for 2 megawatts for customer XYZ and we'd like you to bid on it because we think you have a good location in a market that the client wants.

[Zachary Crockett]

Once the contract is secured, the company will install its own servers in a data center. That tenant is on the hook for their electricity costs, and they pay Databank a monthly rent.

[Raoul Martinek]

Today, pricing is around $150 per kilowatt.

[Zachary Crockett]

For databank, that translates to $150,000 per megawatt per month, meaning a fully occupied data center with a 40 megawatt capacity is getting roughly $6 million per month in rent. But those numbers can vary based on what market you're in.

[Raoul Martinek]

Markets like New York. Given land costs, labor costs can be more expensive.

[Zachary Crockett]

Coming up. Location, location, location.

[Clayton Rosati]

Does your happy place smell like pine needles and crisp air? Do you want to help plant over 1 billion trees across America each year? Do you want to use your skills to help our forest land thrive? Working forests want you work alongside geologists, biologists, computer scientists, project managers, and nearly a million more to ensure our forests can flourish for generations to come. Don't just plan for tomorrow. Plant it. Join us at workingforestsinitiative.com careers.

[Zachary Crockett]

The economics of Everyday Things is sponsored by Mint Mobile. Summer is just around the corner, and the folks at Mint Mobile have a hot take. Getting a summer bod is out and getting your savings bod is in. This spring and summer, everyone wants skimpy wireless bills and fat wallets. And with premium wireless plans for just $15 a month. You can have both without breaking a sweat or the bank. All plans come with high speed data and unlimited talk and text delivered on the nation's largest 5G network. Use your own phone with any Mint Mobile plan and bring your phone number along with all your existing contacts. This year, skip breaking a sweat and breaking the bank. Get your summer savings and shop premium wireless [e-mail] economics that's mintmobile.com economics upfront payment of $45 for a 3 month 5 gigabyte plan required equivalent to $25 per month new customer offer for the first 3 months only then full price plan options available, taxes and fees extra. See Mint Mobile for details. The Economics of Everyday Things is sponsored by indeed. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed with Indeed's sponsored jobs. Your post jumps to the top of the page for your relevant candidates so you can stand out and reach the people you want faster. There are no monthly subscriptions, no long term contracts, and you only pay for results. Join the 3.5 million employers worldwide that use Indeed to hire great talent fast. There's no need to wait any longer. Speed up your hiring right now with Indeed and listeners of this show will get a $75 sponsored job credit. To get your jobs more visibility@ Indeed.com everydaythings just go to Indeed.com everydaythings right now and support our show by saying you heard about Indeed on this podcast. Indeed.com everyday things terms and conditions apply. Hiring Indeed is all you need. Data centers can now be found in all kinds of places. They're on abandoned farms, in old telecommunications buildings, and even a former church. A company called Havenco once placed data centers on a sandbar in the middle of the ocean. But when you stream a TV show or hop onto a video call, there's a good chance you're being routed back to a data center in Northern Virginia, also known as Data Center Alley.

[Chris Kim]

If you ask any booster in Northern Virginia what makes Northern Virginia the Internet capital of the world, they'll tell you it's that 70% of the world's Internet traffic flows through that part of the country.

[Zachary Crockett]

That's Clayton Rosati, an associate professor at Bowling Green State University in Ohio. He studies data centers, and he says there's a simple reason for Virginia's dominance. The first modern computer network, arpanet, was largely developed by the Department of Defense, and most of the project's infrastructure was centered near the Pentagon. Soon after AOL set up a facility there and other companies followed.

[Chris Kim]

These companies essentially started creating what kind of snowball effect. The more fiber that got laid, the more high speed Internet capacity that was available. Now they have the highest concentration of data center capacity in the world.

[Zachary Crockett]

Databank has maintained a presence in Northern Virginia for years. So has one of its top rivals, equinix, which operates 270 data centers around the world. Like Databank, Equinix has a roster of recognizable tenants like Nokia, Walmart, Kohl's and Citizens Bank. But these days, Northern Virginia's data center hotspots like Ashburn are running out of space, which means prices are going up.

[Clayton Rossotti]

Ashburn is sort of beachfront property.

[Zachary Crockett]

Chris Kim is the senior vice president of global customer care and customer experience at Equinix.

[Clayton Rossotti]

We're looking much further from the metropolitan areas than we did in the past because our core business was all about that interconnection challenge.

[Zachary Crockett]

If you're trying to stream content to millions of customers as fast as possible, it's valuable to have a data hub on the east coast, close to major population centers. But AI companies don't need that beachfront property. They use servers and data centers to train their algorithms. And in those cases, they aren't delivering information to an end user. They just need a lot of processing power.

[Clayton Rossotti]

These workloads can be far away. They don't have to have snappy performance.

[Zachary Crockett]

So they're looking far afield for places to store their servers.

[Clayton Rossotti]

Places like Atlanta, Georgia have become more popular, and then increasingly into the counties that surround Atlanta, Georgia, further and further from the city center.

[Zachary Crockett]

Kim says there are a few features he prioritizes when choosing a location. First, he needs a strong power grid, ideally in a market with cheap electricity.

[Clayton Rossotti]

We look for proximity to major electrical infrastructure. Is there a transmission line that runs through the area?

[Zachary Crockett]

He also needs fiber optic cables nearby.

[Clayton Rossotti]

They don't have to be built, right, right to that piece of property, but are they sufficiently close by in enough capacity that you can cost effectively build fiber to that piece of ground?

[Zachary Crockett]

And then, of course, there's the cost of land. Sometimes Equinix has to buy hundreds of acres when it's building a new facility.

[Clayton Rossotti]

We need a place where we can buy a piece of property at a reasonable price.

[Zachary Crockett]

The other big consideration is tax incentives.

[Clayton Rossotti]

When a data center moves into a county in Virginia, the data center, like all real estate, is taxed. But the contents of the data center, all those computer servers and routers and network switches, some of which are very expensive indeed, are also taxed as personal property.

[Zachary Crockett]

As data centers multiply across the American landscape, rural municipalities are jockeying to bring companies like Equinix and Databank to their region. Kim says elected leaders in underdeveloped areas will often try to sweeten the deal to entice them.

[Clayton Rossotti]

Gee, we maybe are a rural county. We don't have a substantial tax base. We might be a county that's got a central school set up with a high school, a middle school, and an elementary school, but we don't have the tax base to raise the money to actually make the kinds of improvements to those schools that we wish we could. If we could attract a data center or a couple of data center campuses, what economic impact would that have on our county?

[Zachary Crockett]

Many critics question that logic. One of them is Clayton Rossotti, the professor in Ohio where Rosati teaches. Data centers are increasingly popping up on.

[Chris Kim]

Farms here in Ohio in Wood County. They're located on old or on previously farmed land for soybeans or for corn.

[Zachary Crockett]

The switch from farms to data centers can have a significant impact on a rural community's utility consumption. Data centers sometimes keep servers cool with huge air conditioning systems that require as much as 5 million gallons of water a day. And there's some early evidence that the presence of data centers drives up the electric bills of nearby residents.

[Chris Kim]

They draw so much electricity and use so much water that a lot of people speculate that that will increase a burden on the communities that kind of gets externalized in some ways by the digital landlords.

[Zachary Crockett]

One thing data centers aren't bringing is jobs. A large data center is typically staffed by only a few electricians, security guards, and cabling technicians.

[Clayton Rossotti]

They're the technicians that work in the building. They're the critical facilities engineers who care for the equipment and the cooling systems and the generators and the electrical systems.

[Zachary Crockett]

Tenant companies often send in their own technical specialists to monitor their servers in.

[Clayton Rossotti]

The highest traffic data centers. There are more customers in the data center then we have staff.

[Zachary Crockett]

These employees sit in conference rooms in Equinix facilities waiting for something to go wrong.

[Clayton Rossotti]

We have a large retailer. They send a staff every day into our data center to be there to make sure that they can support any problem that might occur in their E Commerce platform because so much of their business is dependent on that E Commerce platform to deliver.

[Zachary Crockett]

If a disk goes bad or a software update fails, they rush into the server room to fix it. Anytime you discover that an Internet service has gone down, there's probably an employee hustling down the aisles of a data center looking for the guilty server.

[Clayton Rossotti]

You'll sometimes hear about software upgrades that didn't go right. We need to take the new software out and put the old software back while we figure out why that didn't go well, but keep running the business. Those are the kinds of interventions that people do in IT or every day. And often they're doing that in the data center.

[Zachary Crockett]

Most of the other staff members focus on security.

[Raoul Martinek]

I would say it's even more secure than a bank, right, because anyone can kind of walk into a bank and go to the counter with a data center. No one really who's not allowed to be there can get there again.

[Zachary Crockett]

That's Raoul Martinek, the founder of Databank. At the company's data centers, you'll find a security fence, a security guard, and hallways protected by biometric passcodes.

[Raoul Martinek]

Security is really, really important. Our customers are massively paranoid about it.

[Zachary Crockett]

Every server is covered by a cage for protection.

[Raoul Martinek]

We kind of subdivide the data center, the data halls, into different kind of cages that are physically secured. And then the customers put their equipment in there.

[Zachary Crockett]

But even a locked cage isn't enough for some customers.

[Raoul Martinek]

You have companies that will, despite all those security measures, encase all their equipment in a cage where there's a roof and even underneath the floor so that no one can get in there. And some customers even go to the extent of hiring a personal security guard and putting them right next to their equipment so that they can be 100% assured that no one's getting access to their data. That's how important it is to these businesses.

[Zachary Crockett]

It's strange to consider that the whole infrastructure of the Internet is squeezed into a series of giant buildings like this. Even weirder to appreciate that the Internet inhabits the physical world along with the rest of us. Chris Kim remembers a situation a few years ago when the power to one of Equinix's data centers suddenly dropped out. The problem wasn't a hacker or a piece of bad code.

[Clayton Rossotti]

A snake crawled up one of the pieces of equipment and sadly, the snake is no longer with us. But they shorted out the feed to the site.

[Zachary Crockett]

For the economics of everyday things, I'm Zachary Crockett. This episode was produced by Michael Waters and Sarah Lilly and mixed by Jeremy Johnston. We had help from Daniel Moritz Rapson.

[Clayton Rossotti]

There's lots of reasons why you wouldn't want to spend your whole day standing in a data center cage.

[Zachary Crockett]

The Freakonomics Radio Network the hidden side.

[Clayton Rosati]

Of everything.

[Zachary Crockett]

Stitcher.

[Stripe Representative]

Comcast Business helps retailers become seamlessly restocking frictionless paying favorite shopping destinations. It's how nationwide restaurants become touchscreen ordering quick serving eateries and how hospitals become the patient scanning data, managing healthcare facilities that we all depend on. With leading networking and connectivity, advanced cybersecurity and expert partnership, Comcast business is powering the engine of modern business powering possibilities.

[Walmart Representative]

Restrictions apply Walmart plus it's Walmart plus free delivery, which saves members time plus money Yep plus an included Paramount plus subscription to stream movies, shows, sports and that can't miss documentary Plus Burger King savings that's right, members get 25% off Burger King digital orders every day of the week. Walmart+ it's Walmart+ become a member at walmartplus.com $35 order minimum Paramount+ essential plan only separate registration required valid and participating USVKs in the BK app or bk.com for members only 25% off one time per calendar day.

[Zachary Crockett]

Terms apply.

[Walmart Representative]

See Walmart+ terms and conditions.

[Lowe's Representative]

Lowes Knows to bring your vision to life, it's important to find the right color. That's why Mylo's rewards members get a free paint or exterior stain sample to test your look and find the perfect color to confidently refresh your space. Lowe's we help you save Offer validation in store only 58 through 514 limit 1 per customer while supplies last. Discount taken at time of purchase. See Associate for details. Program Subject to terms and conditions [e-mail] terms subject to change.