Evolution in the face of revolution - CWI Roundtable: The Hosting Industry

CommunicationsWeek International, Feb 4, 2002

The dot-com collapse, the telecoms market downturn and Corporate Dissatisfaction with e-services have created a tough business case for hosting companies. Now, the name of the game is survival strategies.

What is the future for the hosting industry, in particular for the neutral operators that don't own their carrier networks? How are they coping with the consolidation that has pervaded telecoms over the past year?

CommunicationsWeek International chaired a roundtable to discuss prospects with three interested parties: Guy Willner, chief executive of independent colocation and hosting specialist IX Europe, based in London; Kevin Koski, senior vice president, hosting services at Amsterdam-based KPNQwest NV; and Dil Thomas, practitioner at management and technology consultancy Accenture plc, based in London. David Molony, editor of CWI, moderated.

David Molony: We'll warm up with a consolidation question. Is it enough that companies like Atlantic, First Telecom, Viatel have been forced out of existence?

Dil Thomas: Consolidation implies to me a pretty major restructuring of the industry. What I haven't actually seen is any of the old players disappearing from the landscape. The issue for me therefore is what's going to happen over the next five to ten years around the much bigger players, the traditional telecoms players--are they going to successfully make a transition into a market where it's much more consumer driven? You've got to get broadband to everybody's phone, you have to offer a much more competitive commercial environment in a much more flexible and speedy way.

Now do the big players actually put their investors' money at risk in the long-term, in terms of ten year investment cycles in capacity, in order to capture a market? I don't actually think they do because ultimately you're in the position where if you have the capacity ...you can drive price, you can drive market share in a market that will then increasingly commoditize. In the long-term...value-added services will be able to deliver on top of that capacity.

Guy Willner: I think that's a key issue. We've seen forays into various sectors and they've either killed the company, as in the case of Enron, or they've severely damaged the company in terms of operators who have gone too far into some sophisticated environments. DT: I think the other issue for me is the fact that a lot of the newer telcos, they never really cracked the blue chip market. They never really cracked the big corporate market and that was because I think at the more extreme end they practiced almost entirely in what I would call new wave technology-the e-commerce, the Internet. That drives you to question whether or not [new economy ventures are] sustainable without some link into the legacy world. Most large organizations that ultimately drive a lot of the traffic in these situations...have made a huge investment in existing systems. Therefore, to put a value proposition to them, you have to be able to stand in both worlds, and a lot of the more avant-garde players that came into the market co uldn't do that.

GW: But certainly by pushing only browser-based technologies, or e-commerce-best technologies, some of the guys that are right up front like Exodus have really upset the corporate sector and they've done a lot of damage by driving a wedge between traditional IT services and requirements, and this sort of blue sky stuff. You know [this if] you talk to a large corporate-they've maybe burnt $50 million in 2000 and 2001 on e-commerce stuff that nobody really understood. It literally is burnt, there is literally nothing whatsoever to show for the money they have spent and so they're saying anything to do with e-commerce or web, forget it. that's it. Maybe for the next two years, not only have companies got to bring the e-commerce together with the traditional site, they've also got to go maybe exclusively to the traditional site for a little while.

Has the process gone too far or has it shaken out some potential long-term customers?

DT: I think long-term customers are still there. What you are seeing is a flight back to people with strong balance sheets. Guys with the technology background that have gone into hosting, I would imagine their businesses are actually very strong. I could make an argument actually that this is going to drive a resurgence of the in-house IT department. You wouldn't have a power station [for a business]. Why have a data center?

GW: We've got a couple of interesting banks, three banks in Frankfurt now. We're about to close a big five in the U.K. We just signed a corporate that is very, very big-about a million dollar a year-a software management company. These guys are basically using [managed data centers] if you like as a commodity although I don't like to use the word. We had customers who have had some bandwidth requirements and carriers weren't interested at a low bandwidth level, so we took a small partner who then provided the bandwidth. We chose Nupremis and they went bankrupt so we said. "OK right We're not going to go for little partners any more, we'll go for the big guys." So we partnered with Enron and they go bankrupt. So-here we are, we're doing it ourselves. You know we've got our own black box, we're doing multi-homing. It's all very very reliable and we've got three carriers at the back.