Co-location 2.0

Five years ago, a whole new industry segment – data centre hosting or ‘co-location' – emerged out of nowhere. At the height of the dot com boom and in anticipation of rocketing demand for computer room floorspace, investors poured cash into scores of start-ups – some local, some pan-European, some with global ambitions. Their cash funded the building of state of the art, multi-million pound data centres that would provide the technical environment for the new economy's e-tailers, e-marketplaces, B2B exchanges and the Internet service providers and telecoms that would support them.

At one stage, there were around 30 such pan-European data centre providers; companies such as Interxion, which signed up 167 customers in 2002 alone and raised e300 million in venture funding to build out 20 data centres, recruited wildly and launched lavish marketing campaigns. Others raised millions through initial public offerings, even before they had any revenue flowing, let alone profits. And the notion that such companies could burn their way through e10 million a quarter was treated more as a badge of credibility than a red flag.

When the crash came, it hit on an almost unprecedented scale. Out of the 30 pan-European players, 24 went bust or were pulled out of data centre hosting by their parent companies, including Exodus Communications, KPMQuest, CityReach and Digiplex. Joining them into receivership were scores of smaller, country-specific independents such as WorldPort in Ireland and NT Telehaus in Germany.

One of the survivors, London-headquartered TeleCity, puts some figures on the size of the downfall. It estimates that in 2001 there was 16.5 million sq ft of European hosted data centre space on offer; today that figure is down to 6.5 million sq ft. That highlights the wild ride: in the space of just 18 months, for example, Interxion, another of the survivors in Europe, lost half of its 450 customers.


The main players

  • Redbus Interhouse was founded in 1998 and went public in 2000. It has seven data centres in Europe in London, Amsterdam, Frankfurt, Milan and Paris. Turnover of £7.6 million in the first half of 2004 was up 15% on the same period in 2003. Just achieving EBITDA profitability.
  • TeleCity, founded in 1998, has nine sites across Europe and has finally reported positive operating cash flow. In early February, its board said it was considering an indicative offer for the company which is valued at £56 million.
  • IX Europe was also founded in 1998 and has eight centres in Europe. In 2000 it acquired centres in both Zurich and Frankfurt and in April 2004 it bought Telehouse's Geneva facility.
  • Interxion, was founded in 1998 and is headquartered in the Netherlands. It has sourced E300 million in venture funding and operates 20 facilities across 11 European countries. It became cash flow positive in October 2004.
  • Global Switch, founded in 1998, has eight facilities in seven cities. With data centres in both Singapore and Sydney, it has over 2.8 million sq ft of space in Europe and Asia.
  • Telehouse Europe, founded in 1988, is the longest-standing of the group, and is part of conglomerate KDD. It boasts nine sites across six European cities. Turnover in 2003 was £33.5 million. It has been successful in the UK and France, but sold its Swiss business to IX Europe in 2004.
  • Equinix and Switch and Data, both founded in 1998, are the main US co-location providers. Equinix is valued at $750 million and offers a 1 million sq ft footprint in 14 locations across the US and Asia Pacific. Switch and Data has 35 smaller facilities across North America and revenue in 2004 of $91 million.



Others had a lucky escape. The UK-based Redbus Interhouse, which markets itself as a five-star hotel for IT systems and spent £120 million equipping nine centres (two of which have since closed), owes much of its survival to AOL, its anchor tenant, which rented 25% of Redbus's estate from the start.

The tenants that went away were mostly telcos and other carriers (which bought up rack space on the assumption that there would be a huge surge in online services), Internet service providers, application service providers, dot-com start-ups and corporates whose IT infrastructure was overloaded and who needed to ensure the delivery of discrete applications such as customer relationship management or supply chain management.

But now after their brush with death, the industry's remaining players are bouncing back. Not only has the surplus in capacity been corrected, demand from customers for data centre hosting is returning with growing levels of occupancy and financial stability at the vendors. Behind that is a growing trust in the model, especially by corporates, and an appreciation that data centre hosting can be the optimal approach for delivering some companies' key applications or even their whole IT service.

Second coming

The historical reason for co-location still stands: small and mid-sized business which require heavy-duty computing power typically do not have the resources to invest in their own data centre with its re-enforced and raised flooring, air conditioning, high power capacity and physical security. These customers (typically with five to 50 servers) need to exploit the economies that result from sharing the same computer floor space with other customers, housing their equipment in a secured cage or hiring a dedicated area of the data centre.

But there are other clear reasons why organisations are being drawn to such centres. Location is one crucial deciding factor. The best facilities sit directly on the two critical pipelines for power and data: the National Grid and one of the main Internet Exchanges.

The direct link into the Internet attracts organisations that require high bandwidth, and lots of it – organisations with huge, peak-period data traffic surges such as Transport for London (which is based at Interxion's facility in the City of London), or companies with multimedia broadcasting requirements such as online gaming sites and those providing movie and music downloads.

Plugging into the Internet backbone may be a huge plus for some, but for most organisations the single biggest issue that forces them to opt for co-location is power – or their lack of it.

Many companies, even those with their own computer rooms, find they simply cannot get enough power to their IT equipment. Five years ago, an average rack (of servers, routers, switches and so on) might consume around 1kW of power; today a rack can easily require 24kW. That stems from the fact that more processing power is being packed ever more tightly onto each board, with each board soaking up ever greater quantities of electricity.


Data centre hosting vacancy rate (%) in London, 2001-2004
Source: CB Richard Ellis

Multi-processor machines have exacerbated the issue, but as organisations start packing scores of highly dense blade servers into single racks, the problem becomes even more acute.

Moreover, the excessive levels of heat generated by these machines create their own problem – cooling – and the cost of the air-conditioning or other cooling systems required just to keep the racks operational is another driver for interest in co-location.

Another key trigger for the resurgence in data centre hosting is the pressure on companies to ensure the high availability of their IT services. Third-party facilities, with their specialist uninterruptible power supplies and back-up generators, typically recover from major power failures and other disasters faster than in-house data centres. At the same time, the larger co-location providers operate multiple sites and can protect and restore customer data by copying files to and from different locations.

As that suggests, co-location providers are looking for other ways to add value to their customer services. Some offer ‘pay-as-you-grow' rack space and flexible connectivity options. For example, Redbus allows one of its customers, MTV, to scale up its bandwidth requirements for two months every year to cope with the surge in online voting in the run-up to the MTV Awards.

On a different scale but in a similar vein, UK Sport, an agency responsible for managing and distributing public funds (£29 million annually) to athletes and sporting organisations, outsources several of its websites to Intercea, a managed service provider with its own Reading-based data centre. "In the run up to the Athens Olympics we needed 24 hour support. The cost of using an external data centre for a year worked out to be the same price as getting shift workers to cover the extra hours over the two month games," says Peter Fellows, head of ICT at UK Sport.


That flies in the face of the traditional view of data centre hosting: that suppliers simply provided the core infrastructure and a cage in which to lock the equipment. In an effort to add value to its services – as well as establish a broader revenue base – suppliers have created different levels of systems care and management.

Carrying out basic maintenance is now a standard offering, and engineers are available at most sites to conduct installations, reboots, tape changing and systems maintenance – what is often known as a ‘hands and eyes' service.

But the demand for more sophisticated, managed services is rising. "Back in 2002, 80% of our customers were wholesale customers just wanting the space. But in 2004, 60% of our customers were corporates, and they are increasingly opting for more and more services," says Rick Hudson, CEO of TeleCity.

Ovum analyst Les Brand is wary of how positive a trend this is. He fears that such service offerings will overlap with some of the managed service companies that host their clients at third-party data centres.

Nevertheless, that focus on services is helping data centre hosting to report better financial results (see box). They are all quick to emphasise that their fixed costs are now covered, so any extra customers they obtain from here on in will bring in the revenue they desperately need. Some, such as Interxion, having doubled its corporate customer base in 2004, are even cash positive and on the lookout for new facilities as occupancy rates in certain European cities (London and Brussels, in particular) rise towards 100%.


Carrier neutral colocation providers in key European markets
Source: The Colocation Exchange (January 2005)

Future trends

Looking ahead, analysts that track the sector – notably, CB Richard Ellis – expect demand to continue to grow at its current rate, and supply to remain static. Vacancy rates will continue to fall, they predict, as more corporate clients sign up for wholesale deals (lettings of more than 2,000 sq ft). "I think the market is poised for a dramatic revamp in terms of growth," says Tim Anker, director of The Colocation Exchange, an agent for buyers and sellers of data centre space.

In places, however, there is still lots of surplus capacity. Although some suppliers claim to be "almost full" at certain locations, vacancy rates across the European carrier-neutral hosting market stood at 43% at the end of the third quarter of 2004, according to CB Richard Ellis. Anker estimates London occupancy rates are running at around 80%.

With the market springing back, analysts are also predicting a wave of consolidation. Only in January, TeleCity announced that it was considering an undisclosed acquisition proposal. Some of the smaller, independent operators, such as LCL in Belgium, CityLifeline in London and Data Electronics in Dublin, also look ripe for acquisition.

Separately, analysts predict that Equinix will enter the European market. The global company, currently valued at $750 million, has strong coverage in the US and Pacific Rim but has pulled back from investing in London facilities on several occasions.

That kind of activity is a far cry from two or three years ago, when co-location providers were haemorrhaging cash and customers. Now, the sector which almost died at birth is finally showing signs of stabilising.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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