2001
Heartbreak beckons for smaller hotels
By
Joia Shillingford
The Financial Times,
20 June 2001
Internet hotels are a physical example of convergence, housing both computer servers and high-speed telecoms links. But are they just another IT outsourcing fad, or are they here to stay?
Geir Ramleth, co-founder of DigiPlex, the Switzerland-based internet hotel company, says the need for fast internet access means they are definitely here to stay.
'Computers and telecoms have been united from the users' perspective; telecoms networks connect them to Internet servers,' he says. 'But combining huge quantities of computing and telecoms power at the same physical site is more unusual.'
Internet hotels (or co-location centres) were originally set up to house equipment from a surging band of start-up Internet companies. Thus, the bursting of the dotcom bubble could mean the centres are an outsourcing fad that is nearing its end.
But industry observers point out that economic pressures are encouraging large corporations to outsource the running of their Internet sites. 'Fads are not associated with providing great levels of support, high availability and dedicated and defined support commitments,' says Bernie Robertson, a senior consultant at PA Consulting Group.
However, he warns: 'Buyers do need to have a good understanding of how budget and service expectations can be aligned.'
In theory, at least, running the company's Web sites from a large, warehouse-like Internet hotel should cut costs because the centres are usually adjacent to city business districts but with lower rents.
In addition, they can share the cost of back-up electricity generators, 24-hour technical support, and site security over a number of clients. The centres are also likely to be located near a large source of power.
'Internet servers run on AC power, which is less efficient than the DC power used for a more traditional infrastructure,' says Rod Newman, a director of MKI, an Internet hotel construction company.
'As a result, a company running its Web servers from a corner of its office may find it has insufficient power to cope when it needs to expand,' he adds. Andy Ruhan, chief executive and co-founder of Global Switch, a large co-location company planning a London-listing, says: 'There are a lot of large tenders out at the moment from banks and financial services companies, with one continental bank looking to lease 50,000 sq ft.'
Jonathan Watts, managing director of Colt Telecommunications, which has 14 Internet solution centres around Europe, says: 'Corporate customers are starting to dip a toe in the water; they also feel less intimidated now there are fewer dotcoms to compete with.'
Thomas Davidsson, senior vice president for Europe at Web hoster Digex, majority owned by WorldCom, says some of the largest customers for Internet hotels have always been 'bricks and mortar' businesses.
Digex customers include Ford, Novartis and JP Morgan.
Mr Ruhan believes falling prices for bandwidth are making it more attractive to move a company's Internet services or Intranet off site.
Guy Willner, chief executive of IXEurope, says neutral Internet hotels give customers a cost advantage because 'they have around 10 separate telecoms services feeding into each hotel, which means customers can change suppliers without having to move'.
One indication that Internet hotels will be around for some time is that despite a generally difficult funding climate for technology-related businesses, the best are still attracting funds.
In May both DigiPlex and IX Europe raised additional funding. DigiPlex gained €55m from venture capital firms the Carlyle Group and Providence Equity Partners, which also participated in its first and second-round funding.
IX Europe raised €19m and Global Switch, which is currently owned by property companies Chelsfield and TrizecHahn, and Unicorn Assets (a private equity trust representing founder interests) expects to receive an additional E280m in funding from Risanamento Napoli, a Milan-listed property company. Risanamento is to combine with the co-location company by October, taking a 47 percent stake in the enlarged Global Switch.
Another sign of health is that prices for co-location space in Europe and the US remain stable, according to Band-X, the bandwidth and co-location exchange. 'UK prices range from £75 a square foot for a 50,000 sq ft shell [into which the customer puts its own computers] to £350 a sq ft per year for a smaller order including value-added services,' says Tim Anker, vice-president of co-location trading at the company.
'Worldwide, the average price for rack space, for Internet servers or telecoms equipment is $1,000 per month, boosted by high costs in Asia.' However, he warns that prices could come under pressure from distressed dotcoms which have contracted for an amount of space they can no longer fill or afford. These could try to sell on their space at knockdown prices, though it is likely that some Internet hotel businesses will take back the space themselves rather than see this happen. Internet hotels could also try to diversify into more traditional IT outsourcing.
'We are seeing a growing trend where the data centre and its staff move from inside the corporate building and into a new professionally-run Internet hotel,' says Mr Willner at IX Europe.
But Mr Davidsson at Digex does not think this will happen. He believes companies will outsource their IT department to an IT services company, their internet servers to a co-location centre or web hoster and their desktop PCs to a desktop services company.
Whatever happens, there is likely to be a shake-out in the Internet hotel sector, with the big players getting larger and the smaller ones disappearing as they fail to find funds.
So although Internet hotels are here to stay - the Phillips Group predicts a $5.4bn market by the end of 2001 - some will become heartbreak hotels for their backers. At least one UK co-location company is faltering and Colo.com of the US has filed under Chapter 11 of the US bankruptcy code.
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