Fevered Pitch

Data centers, MSPs fight over customers

The battle between owners of data centers and companies that want to sell more lucrative Web services is intensifying — and its bound to leave corporate customers caught in the crossfire.

As the two kinds of Web service suppliers fight for dominance, customers may feel bullied into choosing sides, as LowestBids.com felt in recent dealings with Exodus Communications. Such conflicts are sure to intensify as the economics of Web hosting change.

The surge in Web hosting will taper off dramatically this year, and most of the growth in the sector will come from so-called managed services, the Web Hosting Bible predicted. The influential industry report, written by Andy Schroepfer, formerly a hosting analyst at The Goldman Sachs Group, is being published today. Web hosting grew by 275 percent last year, but growth will shrink to 66 percent this year, Schroepfer said.

With the total available data center space in the U.S. growing from 33 million square feet to 66 million square feet by the end of next year, the revenue of data center owners that dont tap into managed services will plummet, he said.

No longer is it enough to simply house a companys Web servers in what is known as colocation space. Research indicated that in 2000, colocation revenue averaged $18 per square foot; colocation with some managed services netted $67 per square foot; and pure managed service players extracted $212 per square foot.

"In this report, I talk about 2001 being a significantly slower market than 2000," Schroepfer said. "No longer is there is an opportunity to simply put a Web presence online in a colocation center . . . but to put enterprise applications and employee-based Intranet applications on the Web. "

The trend may force businesses seeking to put more of their operations on the Web to choose between their existing providers of services, such as data backup, and data center owners that are adding services. Figuratively speaking, data center owners have the right of way within their facilities, and can make customers deal on their terms. Typical contracts in data centers run for two years, so experts said this is a good time for customers to explore the fast-changing dynamics.

Managed service providers (MSPs), almost by definition, dont own data centers. Instead, they lease equipment from data center owners such as Exodus and WorldCom, and then sell Web-based services such as server maintenance and network security from the leased infrastructure.

But data center owners are facing tremendous pressure to recoup their massive investments, which will amount to roughly $16.5 billion in the U.S. this year. As the economy slows and the customer base shrinks because of dot-com failures, they want to sell businesses the add-on services themselves, and are using what some of the smaller managed service players see as bullying tactics.

Some data center owners have acquired MSPs to bridge the gap: Metromedia Fiber Network acquired SiteSmith for $1.36 billion, and WorldCom took control of Digex in a $6 billion stock and debt deal.

Loudcloud, an MSP that held its initial public offering this month, has tried to make clear that it wants to own its customers, although it leases space from big data center operators such as Exodus.

"Our customers are not Exodus customers. We are using Exodus more as a high-quality real-estate provider," said Jonathan Heiliger, chief operating officer of product operations at Loudcloud.

But as more data center owners develop their own managed services, more MSPs become unwelcome in those data centers.

"We believe our professional services unit can meet all of our customers needs, and has more experience working in the hosting business for four years managing Web sites from Yahoo! and Hotmail to eBay," said Peter Fortenbaugh, senior vice president of strategic planning at Exodus.

For data center owners, selling managed services wont be a cakewalk, especially with existing MSP customers, whose initial reaction to managed service offerings from their data center operators is cautious at best.

"We can get data center facilities anywhere. Ive got people calling me on a weekly basis, asking if I want to move my system," said Mark Benthin, chief technology officer at biotech marketing firm Aptilon Health.

Aptilon outsources management of its online operations to MSP Coradiant, including network security, external network monitoring and data backup. Coradiant, in turn, runs the servers that customers such as Aptilon typically own by leasing space at a WorldCom data centers.

In case of a conflict, Benthin said hed rather move to another data center than risk ending his relationship with Coradiant.

"WorldCom would have to build a relationship with us, and that takes time. Its like having my portfolio with Yahoo! Finance. I know I could have my portfolio anywhere, but then I would have to build this relationship all over again," Benthin said.

But giant WorldCom may be flexing its muscles with Coradiant and others. Last week, WorldCom unveiled a full line of managed services that directly compete with Coradiants offerings. And WorldCom Chief Executive Bernie Ebbers indicated that growth in the data center business would help WorldCom meet its financial growth targets.

"We would absolutely, vigorously pursue any hosting customer that is looking for managed services," said Ron McMurtrie, vice president of E-Services at WorldCom.

And if Coradiant came asking for more space to provide managed services for another customer?

"We would look at the space and make a decision if this would be the best investment for this space vs. filling it with our managed services," McMurtrie said.

Already such conflicts are cropping up. Exodus customer LowestBids, colocated at Exodus, sought to back up data and keep archive files off its servers. It hired MSP SiteSmith to figure out a solution. For an undisclosed cut of a $30,000 contract, SiteSmith secured the services of StorageWay, a storage service provider.

"SiteSmith was working for a customer that was purchasing services from Exodus, and Exodus was not comfortable allowing that customer to add a circuit to take advantage of a service that SiteSmith wanted to provide that customer. In fact, it was trying to block it," said Richard Dym, vice president of marketing at SiteSmith.

Exodus insisted on reselling LowestBids the StorageWay contract, cutting SiteSmith out of the deal, said LowestBids CTO Chris McPeters.

Exodus routinely takes over other contracts that MSPs pitch to companies colocated in Exodus data centers, according to McPeters. With LowestBids, Exodus also took over a contract to resell Dell Computer servers and battery backup, pushing SiteSmith out on the premise that Exodus owned the colocation space used by the company.

McPeters predicted that now that Exodus has its own set of managed services, it will try to push SiteSmith out of its data centers.

"Exodus is like Microsoft — they want to push everybody out and control everything," McPeters said.

Exodus Fortenbaugh had no immediate knowledge of the LowestBids episode. But he observed that the customer probably was no worse off after buying the service through Exodus, because it was still the service the customer wanted. With managed services accounting for 38 percent of Exodus revenue, and ranging from security monitoring to complex hosting, Fortenbaugh makes no excuses for being competitive.

The bottom line for managers purchasing Web hosting and managed services is to think through these conflicts of interest before signing up, said companies that have found themselves caught in the middle.