The glut stops here: internet data centers have a glut on their hands. Aggressive pre-bust buildouts have resulted in too much space and not enough customers. Demand is growing, especially in Asia, but IDC operators need to re-examine their business models carefully if they want to survive - Special report: internet data centers

Telecom Asia, July, 2002 by Robert Clark, Joan Engebretson

In some ways, the recent history of the data center market is a sadly familiar story. Too many companies expanded too rapidly to support unproven services, creating a capacity glut. It happened with data CLECs and with fiber networks--and, like those other telecom industry segments, the data center business also has seen its share of startup failures, most notably Exodus Communications.

Even more than other industry segments, the fate of the data center operators was closely tied to the ill-fated dotcoms. Indeed, the key market for the data center operators was to house, and often to manage, the servers, storage and software to support Web-based businesses.

But although it has not lived up to initial exponential growth projections, the data center business is still growing faster than most industry segments--and analysts following this area agree that, perhaps more than for other parts of the industry, it can be a viable business with healthy margins by today's standards.

The severity of the data center Glut--and how quickly equilibrium will be restored--will depend not only on growth rates, but also on other critical factors. These include changes in server technology and in customer requirements that could quickly separate the quality data center operators, perhaps hastening the recovery for a chosen few, while driving the last nail into the coffin for the also-rans.

Few data center operators will reveal what percentage of their square footage is in use, but Tier 1 Research puts that number at 31% worldwide. Actual numbers vary widely between markets and between data center operators.

"Many are 10% to 20% full or less," says Tony Marson, research director for Probe Research. He cites the example of Qwest, which increased its available space by 32% in 2001, and is only 20% full overall.

Consolidation phase

Gregory Ewert, vice president of data services for global network operator BCE Teleglobe, is refreshingly frank. That company's Washington DC-area data center--like the one it operates in Montreal--is about 5% full, he says. "We'll never fill it, not in the short term."

The situation in Asia isn't much different. The short life of the Asian data center business has run in parallel to the equally tumultuous telecom and Internet sectors. It began with a flurry of investment in 1999, peaked in 2000, and began consolidating in 20m. Today, although most of the real estate developers blamed for the over-build have left the business, the industry is in consolidation phase.

With more than 11 million square feet of hosting capacity in ex-Japan Asia, it needs to be. The impact of the glut is seen in the cascading prices of hosting services, which declined 60%-80% last year, according to research group Gartner.

"On the whole, most players--especially the latecomers--are doing badly," Gartner said in a February report.

Nonetheless, says Gartner, despite the collapse of big names such as Exodus, PSINet and Level 3, continued Internet growth will drive steady expansion of the IDC market over the next five years.

Certainly, demand for data center hosting is increasing strongly. WorldCom expects 30%-40% growth in 2002. Rival AT&T says its business doubled last year and predicts 60% increase in volume this year.

"At the moment Asia is probably the best market to be in terms of growth. The US and Europe are pretty flat," says Ram Singlachar, regional product manager for WorldCom Asia Pacific.

But it's still at an early stage. Gartner warns that IDCs have "clearly overestimated the market potential" and many players are weighed down by over-investment and high operating costs.

"The hosting market is growing from a very low base and will need time to achieve critical mass--many are unlikely to make it," warns Gartner.

Ovum sounds a similar cautionary note. "With investors still counting their losses from earlier data center ventures, there is little in the way of new money coming into the market. Independent operators will have to be largely self-sustaining," said a recent Ovum analysis.

As a result, it adds, "ambitious facility and service development plans have to be put on hold, a pragmatic strategy of focusing on their existing assets and lines of business is the key to survival for most carrier-neutral operators".

Still, that's not deterring Asian telcos, who universally see the data center business as a new growth segment to which they come with hard-to-match strengths, such as strong corporate customer relationships, technical know-how, and the ability to leverage their existing product portfolio.

If there's one company that epitomizes these ambitions, it is Singapore Telecom. SingTel is laying out $280 million over three years to grow its network of centers in Singapore, Hong Kong and Japan, as well as with its Australian subsidiary Optus.

"If we don't look at this as an extension of our current business, there's the potential to lose the bandwidth business," says Mary Ong, chief executive of SingTel's web hosting business, Expan. As well as hosting, Expan offers security, database, DNS management, system management and monitoring, and network management services. Uniquely, the company has the support of an in-house computing specialist, SingTel's IT arm, NCS.