Altered Course

Carrier-neutral colos aim to change direction of Net economics

The latest war in the web hosting space might mark the beginning of a shift in control of the commercial Internet.

During the past six months, a united front of carrier-neutral colocation players and managed service providers (MSPs) has begun to develop services that allow them to offer packages that would rival turnkey offerings from the likes of Digex and Exodus Communications. While most are still at the PowerPoint stage, the seeping of this latest group of players into the Web hosting space is just the latest sign of a larger trend that ultimately may change the dynamics of the industry.

Carrier-neutral colocation, a business that companies like Equinix and are aggressively developing, is rapidly shifting from operating carrier-neutral peering points to operating service-provider-neutral business exchanges, where bandwidth, colocation and services like managed hosting are bought and sold.

These exchanges are different from the bandwidth-trading floors operated by Enron Broadband and RateXchange, since they are modeled after existing business practices in the Internet space instead of mirroring commodity-exchange businesses.

To support this new business model, a new generation of Internet data centers is being built, which might develop into the new core infrastructure of the commercial Internet. The architects of these new facilities intend to lure all of the existing commercial players —Internet service providers (ISPs), long-distance data carriers, last-mile fiber-optic service providers, content distributors, Web hosters, MSPs, application hosters and service integrators — to their facilities.

If this new approach works, these individual service providers will eventually be unable to sell their services without being present at these business exchanges, because most of their customers will be, directly or indirectly, buying their services there.

Today, the commercial Internet is controlled by gatekeepers running peering exchanges where customers looking for content and services are matched with appropriate providers. Thus, some of the larger backbone operators like Cable & Wireless, Sprint and WorldCom have the ability to control prices industrywide as they set the prices of interconnection within their exchanges.

That approach is now confronted with the "shopping mall" strategy. Internet business exchange operators like Equinix hope to exercise the same control over the Net by owning the so-called real estate, valuable because of the number of participants, range of services and ease of choice exercised by participants and visitors.

Being the gatekeeper is the best insurance to stay in the networking business the longest, since customers are less sensitive to prices and service quality as they stake their own business longevity on being able to do business with the gatekeeper.

Lines thus have been drawn between different types of business exchanges, and only time will tell which ones are going to grow up into full-fledged shopping meccas, which ones become respectable strip malls or, as may happen, which ones become abandoned warehouses.

Web Hosting Threat

The road to internet protocol services superiority is littered with the bones of carriers that didnt make it. Why should carrier-neutral players be any different?

On the surface, the times are just as hard for these players as they are in the rest of the Internet or the industry.

Instead of producing a sizable pop, shares of Equinix, the Redwood City, Calif.-based Internet business exchange prophet, are languishing at $5, down from its initial public offering price of $12 last August. Other players in the space are in no hurry to go public, opting instead for private placements, suggesting the public markets might not be impressed by their operating results.

Still, the facts suggest that business exchange-type businesses will be successful at penetrating new markets and waging competition against yesterdays partners. The owners of carrier-neutral facilities have now taken aim at Web hosting, one of telecoms highest growth areas.

Metromedia Fiber Network, which owns the carrier-neutral colocation facilities AboveNet Communications and, this month closed on its $2 billion merger with SiteSmith, an MSP. The move, according to MFN executives, will launch AboveNet, already a colocation and hosting player, into the managed services game.

"We believe that, post-acquisition, we will absolutely compete with Exodus and Digex," says Richard Dym, vice president of marketing at SiteSmith.

Carrier-neutral players like Switch & Data Facilities are eyeing potential combinations with SiteSmith. Rumors are swirling that tension is building between the original MSP, Marc Andreessens Loudcloud, and Exodus and GlobalCenter. Loudcloud has begun to shift its focus from the failing dot-com industry toward enterprise customers in need of managed hosting solutions, becoming, in the process, more of a competitor than a customer to Exodus and GlobalCenter.

More importantly, the cost of carrier-neutral colocation is dropping rapidly worldwide, for the first time making a choice between carrier-owned and carrier-neutral colocation financially viable.

"Neutral colocation was not that common in Europe two or three years ago," says Robert Haller, manager of carrier relations at "But every client [at] above five racks is now heavily considering moving into a neutral colocation, because if those customers were to switch to another carrier, they would need to duplicate their equipment, which costs a fortune."

The end game for carrier-neutral colocation providers is to persuade large hosting companies they would benefit more by being carrier-neutral customers rather than competitors. "I would say that there is nothing down the road preventing Exoduses of the world who want to use one of our facilities," says Stephen Janzen, Switch & Datas senior vice president of sales.

Still, the suggestion just sounds sacrilegious: Connectivity providers have long been a fixture at carrier-neutral facilities.

From PAIX to Equinix

The concept of carrier neutrality, implemented on a meaningful commercial scale, dates back to creation of the Palo Alto Internet Exchange under the auspices of Digital Equipment in 1996. The exchange was the first peering point not owned by a telco, where ISPs could exchange traffic without buying circuits from dominant carriers like MCI and UUnet.

But the idea proved contagious. Digitals PAIX general and operations managers Al Avery and Jay Adelson left in 1998 to found Equinix. In 1999, Paul Vixie, who later became chief technology officer at MFN, persuaded his cohorts at AboveNet to buy PAIX outright, shortly before AboveNet was itself acquired by MFN.

While Adelsons and Vixies views on the role of the carrier-neutral colocation in the future Net economy differ considerably, both MFN and Equinix have been consistently able to attract more and more carriers to trade bandwidth within their exchanges.

The big difference between carrier-neutral and carrier-owned exchanges is that in the first scenario the owners are not in the bandwidth business. Therefore, they make no money on the volume of the traffic exchanged between two parties.

"If two players inside an Equinix building hooked up [Dense Wavelength Division Multiplexing] equipment to each side of a piece of fiber, and then hooked each one of these wavelengths to OC-192 [10-gigabit-per-second] gear doing tons of bandwidth, and the guy next to them was tying a piece of string to a tin can, their cross-connect rates would be the same," says Adelson, who is CTO at Equinix.

Bandwidth vendors see nothing wrong with using carrier-neutral facilities as points of sale. In fact, competition is picking up and carriers are worried they might not get in. A PAIX facility in Northern Virginia looks half empty because carriers bought up cages in advance, expecting their business to grow. Adelson says hes seen, time and again, competing carriers rush their Equinix installations so they can begin selling within the same exchange at the same time.

But exchanges may become more than just convenient interconnection points, and could shift the economics of the Internet traffic. Today, accessing networks like WorldCom that touch the most eyeballs is an economic priority for most networked companies. Could exchanges lure these eyeballs out of backbones and into the data centers, so that peering becomes just another service available to its participants?

Vixie, still CTO at MFN, is not convinced the idea of mixing up carrier-neutral colocation for ISPs that seek to peer and everybody else is such a hot idea. In his mind, upselling services to peering ISPs affects the exchange owners neutrality. Not selling additional services makes carrier-neutral peering a very slow-growing business.

"Carrier-neutral peering is a good business, but it is not a hot market that addresses every man, woman and child," Vixie says. "PAIX is a business with a 100-year plan."

Indeed, in the MFN family of companies, PAIX and AboveNet are rigidly separated. Like any other customer, Vixie needs an escort to get into PAIX facilities. However, services are widely traded within AboveNet, which calls its data centers Internet service exchanges. AboveNet, which benefits from having access to PAIX as a customer, is in the business of selling bandwidth along with these services, as MFN management is convinced that as a stand-alone business, the carrier-neutral model is about as exciting as real estate.

This couldnt be farther from where Equinixs top brass weighs in.

"If you go to a Level 3 [Communications] building, youll need to buy a certain percentage of your bandwidth from Level 3; so you might decide you need a carrier-neutral center. That is where and Switch & Data sit," Adelson says. "At Equinix, it is not only that you need bandwidth from a number of different [connectivity] providers, you are there to interconnect with other people — ISPs and everybody else. So we have created a shopping mall for interconnection that includes carriers as one component."

Thus, Equinix is betting big that, in the final analysis, its data center and networking infrastructure will underlie the new world order, where commercial Internet merchants will lease space and buy services through simple flat-fee transactions within Equinix facilities just to stay in business.

Equinixs vision has followers: competitors. Switch & Data and both bet that carriers would choose to colocate with them rather than with Equinix, because ultimately their services would be cheaper. Both companies build their centers in downtown areas, while Equinix, because of the size of its facilities, always moves into suburbs.

In a metro area, Equinix might have one business exchange, where Switch & Data might have three or four data centers. These smaller data centers are physically closer to major fiber loops, which makes it cheaper to bring connectivity into these facilities, driving down the cost of real estate. Add services to the mix, and a competitive portfolio is rounded up.

"We are going to provide choices for our customers with players that are best in breed," says Patricia Higgins, president and chief executive of Switch & Data. "Our competitors will have tremendous barriers of entry, since the areas where our locations are have been locked up, so you either have them or you dont."

This competition is unfolding on a global scale, but elsewhere the fight for Net control is less violent.

Going Global

In Europe, Colo.coms launch in the fall wont make front-page news, since carrier-neutral competition is already in full swing. American imports like Equinix go against the locals, like Swiss DigiPlex.

While carrier-neutral colocation is not new, it is becoming an essential business.

"Insurance companies backing up a lot of our future customers force them to look into our services, as they could get three [service-level agreements] in our facility vs. one at Exodus," Colo.coms Haller says.

But can these facilities challenge regional backbones like Colt as the Nets essential infrastructure? They would have to be pan-European first.

"There is no international competition here yet,"s Haller say, adding that his company plans to fill that niche.

In Asia and Latin America, the situation is even less competitive, as business customers roll into such facilities thankful for good-quality bandwidth and colocation space. In many places, carrier-neutral facilities are the first high-quality data centers ever built.

"Our customers are starved for basic infrastructure," says Scott Puritz, OptiGlobe Communications" chairman and CEO. OptiGlobe built the first carrier-neutral facility in Brazil, and is rapidly ramping up in other major South American markets.

Executives at the neutral colocation play iAsiaWorks second the sentiment. Many customers are not concerned with the neutrality aspect of their facilities at all. But does this make these non-U.S. facilities less prone to try to become the Nets ultimate core in those regions? Not at all.

Operators of large-scale data centers set up to be neutral from day one hope their position would help them stay one step ahead of competitors, in some cases becoming regional equivalents of UUnet and Equinix rolled into one.

"On a peering side, we have so much content that our facility is a natural place to exchange, Puritz" says. "There is no other building like that south of Rio Grande."