Colocation is the business model behind the companies in Marc Lichtenfeld’s “SpaceX Royalty” pitch, even though the promo never uses the word. It is how data-center landlords like Equinix and Digital Realty actually make their money, and once you understand it, the “royalty” framing becomes easier to see for what it is: rent, not royalties.
What Colocation Actually Is
Colocation means renting space, power, and connectivity inside a professionally managed data center, rather than building your own. A company brings its own servers and networking gear, but it leases the physical infrastructure around them, the building, the cooling, the security, and the internet connections. That is the “colo” arrangement in a sentence.
The appeal is practical. Building a data center costs hundreds of millions and takes years, so most companies, including the biggest cloud providers, would rather rent than own in many markets. The landlord shoulders the capital and the maintenance, and the tenant pays a recurring fee, which is why colocation revenue is often described as rent-like.
Why It Is a Good Business
Colocation is attractive because the revenue is recurring and the customers are sticky. Moving servers out of a data center is expensive and disruptive, so tenants tend to stay for years and sign multi-year leases. On top of that, the network effect of interconnection means the more networks and cloud providers inside a facility, the more valuable it is to everyone else, which makes the best locations hard to replicate.
That combination, recurring revenue plus stickiness plus network effects, is why the data-center REITs trade at premium valuations despite modest yields. It is a landlord business with a technology moat. We explain how the REIT structure turns that rent into shareholder dividends in our data center REITs explainer.
Colocation Is Not a Royalty
Here is where the promo’s language does its work. A royalty is a payment to someone who owns an asset but lets someone else operate it, like a song or a mineral right. Colocation rent is not that; it is a fee for a service, the use of physical space and power. The data-center REITs collect rent, and because they are REITs, they pass most of it out as dividends. The promo relabels that ordinary dividend as a “SpaceX royalty” to make it sound exotic and secret.
The reality is more boring and more honest. Digital Realty and Equinix collect rent from cloud providers, banks, and enterprises, some of whose traffic happens to be Starlink traffic. Whether a given packet is Starlink’s or a bank’s does not change the economics of the building. For the full teardown of that framing, see our SpaceX royalty portfolio teardown.
The Investor Takeaway
Colocation is a genuinely strong business model, and the companies that dominate it are quality income producers. The lesson is to buy them for the business, not the branding. The “royalty” is a dividend, the “supplier” is a landlord, and the SpaceX connection is a thin thread of internet traffic wrapped in a clever story.
Colocation Versus Hyperscale
The data-center world splits into two broad business models, and the distinction clarifies where companies like Equinix and Digital Realty actually sit. Colocation is the model where a landlord rents space, power, and connectivity to many tenants who bring their own servers. Hyperscale is the model where a single giant tenant, a cloud provider or a social platform, builds or leases enormous dedicated facilities for its own use.
The two models answer to different economics. Colocation is a retail business with many customers, which makes its revenue diverse and its occupancy steady, but it requires selling to thousands of tenants. Hyperscale is a wholesale business with a few very large customers, which means bigger contracts and faster growth but also far more concentration risk if one of those customers pauses its buildout.
The colocation landlords have increasingly blended the two, leasing large blocks to cloud providers while keeping their retail colocation base. That blend is part of what makes the sector resilient: when one type of demand slows, the other often holds. It is also part of what the SpaceX royalty pitch gets wrong, because the rent these companies collect comes from a broad mix of cloud, enterprise, and network customers, not from any single satellite operator, and the model works the same with or without Starlink in the picture.
Understanding the difference between colocation and hyperscale matters for valuation too. A colocation facility that hosts hundreds of customers is a portfolio of small, stable cash flows. A hyperscale facility is a concentrated bet on one tenant’s growth. The best operators do both, but the mix changes the risk profile, and a careful investor will know which kind of building they are actually buying.
Ready to see the research? Click here to access Marc Lichtenfeld’s report.
NewsletterVetter is an independent publication. We receive compensation from some of the services we review through affiliate links. Nothing on this site is investment advice. Always do your own research.