Looking behind the facade - Industry Trend or Event

CommunicationsWeek International, May 8, 2000 by Andrew Gliniecki

The carrier hotel space is hot. And it's going to get hotter. Network operators and dedicated specialists are now falling over themselves to furnish much needed collocation space. But network service providers assuming one carrier hotel is much the same as the next, be warned. It pays to check them out thoroughly before you check in. And the economics are changing too. New entrants into the carrier hotel business are making it less and less economic for carriers themselves to get involved in building collocation facilities.

It came out of nowhere. Eighteen months ago there were maybe 150,000 square feet of collocation space in London, Europe's most mature carrier hotel market. Today there is 1 million sq ft with 500,000 sq ft more in the pipeline, according to figures from Insignia Richard Ellis. It's hardly surprising. The burgeoning and ever more important carrier hotel business is a direct result of the introduction of competition into the telecoms sphere. In retrospect it seems obvious. New competing networks need to swap traffic with old ones, as well as each other. And not just voice networks: IP hosting is now the major driver. Providing the right environment for all this to happen was bound to become big business.

These environments have become ever more sophisticated. And even though competing facilities may look the same on paper, quality can vary a great deal-we are still a long way from commoditized collocation services even though third-party brokers such as Arbinet and Band-X are now very active in the market. Differences in levels of security, fire control, facilities management and power supply strategy are significant from site to site.

But the economics of collocation have also changed dramatically in recent months. Early players such as TeleCity and Redbus, essentially from the comms sphere, were looking for high margins, based in part, on the added value provided through technical facilities management. Now, however, a new breed of carrier hotel provided by companies from the world of real estate has come onto the scene. The net effect has been firstly to squeeze overall margins, but also to introduce a more sophisticated form of market segmentation. Outfits such as Global Switch, for instance, are building facilities that provide a mix that includes basic raw space for Global Crossing-a large anchor tenant wishing to fit out the building to its own specifications-along with fully equipped facilities for smaller players wanting to accommodate a few racks of equipment.

In general, this is good news. It expands the market while putting pressure on prices. Companies such as Level 3, which were once forced to build collocation facilities because there was no alternative, may now feel able to change their strategies. But a word of warning. Not all the companies emerging from the real estate sphere will have a deep enough, understanding of telecoms to provide collocation buildings that are up to scratch. And even those operators who claim a comms background or expertise often exaggerate their track record.

Reducing time to market is, understandably, top of the agenda for network service providers. And the temptation to speed up the quest for collocation space must be immense. But in the current climate carefully orchestrated site visits are a must-accompanied by a comprehensive series of considered questions. The last thing any network operator wants is to check into what touts itself as a five-star hotel only to later discover what amounts to a third-rate boarding house.