The trade-offs of data sovereignty

The increasingly common requirement for data not to leave a country or bloc has some important implications for cloud and data centre providers

Whether in the form of GDPR, the EU's Digital Markets Act, the American Innovation and Choice Online Act, or China's amended anti-trust laws, data sovereignty is the principle that individual countries should have the power to regulate the exchange and storage of data produced within their borders. We often see data sovereignty framed as a battle of privacy and security against big tech, but also has some significant economic effects.

Cloud's economic importance

Total spending by end-users on cloud is set to hit $500 billion worldwide by the end of this year, with public cloud spending in Europe alone set to double by 2026. This cloud infrastructure is responsible for many of the services consumers now take for granted in their day-to-day lives, whether it be banking, video games, or file backups.

However, a condition of data sovereignty laws is that they require users to consent outright to their data being transferred across national borders. Since organisations can't guarantee explicit consent from every user, this move requires organisations to store data within national borders.

There are some pros and cons that arise from this.

The pro of investment

This means that, in effect, data sovereignty laws push up demand for data centres within national borders. Whereas an organisation in London might previously have been able to store data in a low-cost data centre on the continent, it must now buy compute and storage space in a local data centre to do business.

Heightened demand for local compute and storage power means more data centres must be situated within a nation's borders. This, in turn, is a boon for foreign direct investment.

Data centres are the end-points of complex supply chains for equipment like servers, cabling and housing, often sourced from local suppliers. But even beyond the server racks themselves, there is also the need to construct the buildings to house data centres and install the local infrastructure to accommodate them.

And then there are the jobs created. Whether it be temporary jobs created during the construction phase or permanent jobs for staff to operate a facility, data centres represent a great driver of employment. The skilled jobs created from new domestic data centres provide new jobs for tech talent to agglomerate and upskill around, building up the potential of the national tech ecosystem.

The cons of costs

Unit economics favour larger scales for data centres - that is, it's cheaper to run a single large data centre than to run many small data centres. Also, data centres benefit greatly from geographic advantages, with the ideal location for a data centre being a place with cheap power and accessible cooling - think the likes of Iceland.

All together, economies of scale and comparative advantage have fuelled the dramatic reduction in the cost of storage and computing during the cloud revolution of the last couple of decades. With companies able to centralise storage and processing power into low-cost and efficient locations, they can also benefit from lower overheads for expenses like maintenance and wages.

Forcing the creation of many smaller data centres undermines all of this. Smaller data centres are more expensive to operate per unit of compute or storage. This means tighter profit margins for vendors, which will inevitably impact customers and consumers as providers increase their prices to improve their ROI. Given that the cloud powers just about every consumer and business process, prices for various goods and services will correspondingly face pressure to move upwards.

In addition, the higher barrier to entry into the market posed by data sovereignty laws also advantages hyperscale cloud providers, creating a greater risk of oligopolies and monopolies forming. With lower cash reserves and resources, smaller providers often fall behind in competing with the hyperscalers. Reducing competition and consumer choice means that, in the long run, prices may also be inflated above what they should be.

Finally, this will prevent operators from centralising data centres where energy and cooling are more economical and sustainable. Amid the data centre sector coming under scrutiny for its emissions and energy footprint, data sovereignty laws may prevent providers from sufficiently cutting their emissions.

Where should governments go?

In the end, data sovereignty laws entail an economic trade-off. On the one hand, they spur domestic investment, job creation, and tech ecosystem creation. But on the other hand, they also will push up prices for goods and services that rely on cloud infrastructure and impose environmental costs.

Just as we're keen to focus on the impact regulatory regimes may have on privacy and security, we also must look at the outcomes we want in terms of jobs and prices. The task of policymakers is to be aware of the economic trade-off of data sovereignty, and navigate it with their vision of the common good in mind.

David Friend is CEO and co-founder, Wasabi