Freeing the upfront cost of colocation space

Opinions are divided over the key to growth in the data center business. Some suggest subsidizing facilities and more managed services.

Colocation operators are hurrying to put together managed services in an effort to reduce the impact of commoditization of their basic facilities provisioning activities. Some are considering bundling rackspace for customer equipment as part of the deal--giving away for free the very business they entered just a year ago.

Operators and analysts are divided about the wisdom of offering free rackspace. Some say it is inevitable that facilities operators will offer network subsidies to entice applications developers and service providers to hand over outsourced business. BT Ignite is one company understood to have signed up a colocation company to offer a range of managed services. Others say this kind of deal will undermine the business model.

"The focus has switched from IP quality to IT quality," said Sanjaya Addanki, chief executive of city Reach International Ltd., London, a pure-play colocation business with facilities across Europe. "Delivery of managed infrastructure services is a stronger value proposition than just facilities."

But longer established players are skeptical about the sustainability of subsidized rackspace.

"Subsidizing one product via another is a risky strategy," said Rhett Williams, executive vice president and chief marketing officer, KPN-Qwest N.V., Hoofddorp, the Netherlands. "It's a course KPNQwest would not find prudent. Our products have to stand alone."

But city Reach is one company aggressively assembling a stack of managed services to support facilities on offer. The company is piloting a staged introduction of managed services, including security, storage and transaction management. For example, it has formed a strategic alliance with London-based public key infrastructure vendor Indicii Salus to develop security for ecommerce.

Security will be the first of city Reach's value-added services and is due for market launch next March. City Reach plans to use service provider and consultancy channels to bring its managed services to market.

Subsidies beyond rackspace

Some industry observers think that subsidies needn't stop at rackspace and that connectivity could be given away as a free commodity against sales of value-added services and content.

"The only way to get additional revenue from infrastructure is to get a share of service revenues," said Alexandre Haeffner, chief executive, telecom, media and networks, at Cap Gemini Ernst & Young, in Paris. "Networks may be subsidized by content providers because without pipes they can't push anything."

Hong Kong-based Stephen Hilton, director of Asia Pacific at MK International Ltd., of Woking, England, which undertakes outsourced construction of colocation facilities, also sees future value lying in a complete service offering.

"Internet data centers are still the biggest thing," he said. "but people are moving into offering total solutions. Companies see the value of the service chain."

Some analysts think customers will examine free offerings carefully. "Bearing in mind the business-to-business market is cynical of the term 'free' they'll look at exactly what they're getting," said Dean Bubley, analyst, Granville Baird Ltd., London. "I wouldn't say one player subsidizing or giving away rackspace means everyone else has to offer the same tariffs."

KPNQwest's Williams thinks users will take a mature approach. "It's hard to compete with free," he said. "But customers will be looking at the total cost of ownership."

Some players think they can continue to compete on infrastructure quality alone. "A lot of people are talking about subsidizing rackspace but not many are doing it," said Gary Growns, managing director, IXGuardian, a colocation subsidiary of GuardianIT plc. of Bracknell, England.

Granville Baird's Bubley thinks colocation providers are unlikely to be directly involved in subsidizing or giving away rackspace. "I'd be very surprised if individual colocation companies do that because they tend to focus on bulk sales and won't want to deal with small, individual requirements," he said.

Francesco Caio, chief executive of Netscalibur Ltd., London, a European IP services company, thinks there is still some way to go until data center supply meets demand. "Data centers might, over time, become a commodity and we might observe some kind of loss leading activity over time," he said. "But we still have the constraint of not having enough square meters [of data center capacity] out there."

However, Cap Gemini's Haeffner doesn't think that any specific type of organization is positioned to serve the market in an end-to-end capacity.

"We're in a situation where anyone can own a fraction [of the value chain]," he said. "One player will not own everything. The model will consist of horizontal alliances to build end-to-end services."

COPYRIGHT 2001 EMAP Media Ltd.
COPYRIGHT 2001 Gale Group