Look Ma, No Data Center

Loudcloud is betting that the future of outsourcing lies in separating the business of running data centers from the business of supplying services.

Loudcloud is betting that the future of outsourcing lies in separating the business of running data centers from the business of supplying services.

So far, that stance has led to increased competition with its data center partners, such as Exodus Communications, and to unexpected support from active competitors, such as WorldComs Digex. As MSPs and Web hosters go through a painful period of consolidation, Loudclouds leadership is counting on this business model to win the hearts and minds of enterprise customers, because there are big challenges associated with developing new managed services.

"They [Exodus] have proven that it is tough to run both data center and MSP businesses simultaneously," says Ben Horowitz, Loudclouds CEO and co-founder, referring to widespread criticism of Exodus efforts to make more money selling managed services. "We colocate at Exodus, currently. They do compete with us. But Id say competition - as we consider whether to stay with Exodus or to move elsewhere for more space - is less of a factor than some of the other issues surrounding Exodus. Viability is a concern, [and] there are some technical concerns that we have." Exodus stock traded near $70 per share a year ago; today it is trading in the $1 range. Three of Exodus 10 board members resigned last month. CEO Ellen Hancock has repeatedly said she will entertain purchase offers.

Loudclouds business is brilliantly simple: Loudcloud leases space from AT&T, Equinix and Exodus, and then resells it with its own managed services to customers looking for a one-stop Web hosting and management solution. As large providers of hosting services, such as Exodus, seek to extract more revenue from their enterprise customers, they begin competing with MSPs colocated within their own data centers.

While Loudclouds Horowitz says his company never had any issues with colocation providers turned managed service vendors or with Exodus in particular, other MSPs, such as SiteSmith, did. SiteSmith executives say they expect to get the boot from Exodus because SiteSmith is an unwanted competitor.

Operators of carrier-neutral data centers, such as Equinix, also report increased activity by MSP competitors that let customers pay for hosting directly to Equinix, and then manage customers server farms via cross-connects furnished by Equinix. These players differ from Loudcloud because they dont resell colocation space, and are capable of provisioning existing colocation customers faster.

"We see more MSPs successful in being mobile," says Jay Adelson, Equinixs founder and chief technology officer.

Loudcloud is unfazed by these challenges. Competition coming from colocation players developing managed services is expected to be weak, Horowitz says, since developing expertise at managing Web servers, databases, scaling server farms and so on is both time-consuming and expensive. There is competition from hosters such as Digex that have advanced managed services expertise, but it is still avoidable because Digex isnt as focused, he claims. Loudcloud invests heavily to maintain its differentiation, employing 100 people that write support for its Opsware software. Opsware automates as many tasks as possible, allowing the company to manage many sites with few people.

"We are pretty pleased to compete with people who are not in this thing full time," Horowitz says. "Its pretty easy to differentiate under such circumstances."

As far as MSP competition goes, Horowitz believes it runs to the other extreme of being too narrowly focused. "I dont think customers want to be buying monitoring from one company and database administration with security from the other company. This is getting into a level of complexity where you might do it yourself," he says.

So far, Loudcloud is a money-losing operation, reporting a first-quarter loss of $60.3 million on revenue of $11.7 million, compared with a loss of $14.6 million on revenue of $86,000 in the same quarter a year ago. But a new five-year co-marketing agreement with Qwest Communications is expected to boost revenues some, as Loudcloud moves the majority of its new customers to Qwests hosting facilities.

Surprisingly, managed hosters, including Digex, embrace Loudclouds business model in principle.

Digex pioneered managed hosting before players such as Loudcloud found a way to sell managed services without owning data centers. Now that WorldComs acquisition of Digex is complete, the top brass plans to eventually surrender all ownership of data center facilities to WorldCom on the condition that data centers where Digex is colocated are designed to Digexs specs. And with all other factors being equal, Digex expects to beat Loudcloud - and any other MSP - at its own game, because Digexs managed service experience runs deep.

"We have been building out such capabilities since 1996, before Marc Andreessen knew these kinds of businesses existed," says Bobby Patrick, Digexs vice president of strategy and business development.