Put Down that Joystick

Switch and Data Takes Collocation Seriously

While other carrier-neutral collocation providers set aside space in their centers where employees can play video games, Switch and Data leases real estate based only on customer needs, says Paul Harris, director of marketing.

"Even good competitors built game rooms in their facilities," he says. "I never heard [of] a customer that wanted a game room. We don't have any game rooms."

A small point in the larger realm of collocation services, perhaps, but one that may help illustrate why Switch and Data is a survivor, while other collocation and web-hosting providers have perished.

"Right now, there's a perception out there that the colo business is really on the ropes," says Lesley Bateman, former vice president of marketing at Switch and Data. Bateman voluntarily left the company in June as a result of a scaling back effort of the marketing staff, as Harris described it.

While it's true that many customers have scaled back on their business plans and some competitors, like COLO.COM, have filed for Chapter 11 bankruptcy protection, she says, companies like Switch and Data, and its larger competitor Equinix Inc. are "flourishing."

As of late May, Switch and Data was completing its 400th installation, and the company had seen a 34-percent increase in the number of contracts from the first quarter of 2000 to the first quarter of this year.

"We make money from those that want our space to link to bandwidth guys," says Harris. "Companies like Yipes [Communications Inc.] need points to interconnect with both managed service providers and long-haul carriers. And that's the sweet spot that Switch and Data is in."

Key customers include American Fiber Systems Inc., Cogent Communications Inc. Deutsche Telekom AG, Dominion Telecom, KMC Telecom Holdings Inc., Sigma Networks Inc. and Verio Inc.

Among the major companies/customers providing those customers with connectivity at Switch and Data centers include Level 3 Communications Inc., Qwest Communications International Inc., Telseon Inc. and Williams Communications Group Inc.

"Switch and Data is not a web hoster, which sells disk space to the dot comers," Bateman explains. "So we have a customer mix that's never been heavily dependent on those companies."

Switch and Data has a variety of customers and has remained focused on the execution of its original business plan, and that has been a reason for the company's success, Bateman says.

Core tenets of the business plan include focusing on downtown areas of large markets and controlling costs by adding space and employees only as need requires.

"We build smaller spaces to get them up more quickly," Bateman says. "And we get first right of refusal on many real estate deals, so we can add space later if needed."

Courtney Quinn, senior analyst at The Yankee Group, concurs, saying "Switch and Data has always had a very good understanding of meeting demand, but not exceeding it. They're very, very careful about what they're doing in new markets. We're seeing web-hosting companies that built like crazy and are now left with empty buildings."

Switch and Data also says it has relatively low per-site spending. Unlike others in the industry that started with 50,000 square feet per site, Switch and Data sites--of which there are 34--typically started at between 8,000 and 10,000 square feet per site and were expanded as needed, she says.

Bateman also says the industry average spent on building a collocation center is $300 to $400 per square foot, while Switch and Data spends approximately $250 per square foot. "We located sites downtown on fiber so we didn't have to pay carriers to build fiber to our door," she notes.

As far as staffing, the company starts with a manager for each center and then adds a technician after it gets its first customer. "Competitors may staff sites with up to seven people from day one," Bateman says.

The company's business plan is to make each center cash-flow positive within 12 to 18 months. According to Bateman, 12 sites are cash-flow positive, meaning several of its sites are ahead of schedule. The plan is to have all sites and the company overall operating cash-flow positive by early next year. "We've adjusted our business plan, so even if a slow down occurs, that will happen," she adds.

The actual cost of company services varies by city and contract. "Our rates are competitive," Bateman says. Harris adds that some of Switch and Data's competitors had "fire sales" in attempts to shore up their struggling businesses, adding "we never changed prices."

That consistency has kept customers like KMC Telecom Holdings satisfied.

"[Switch and Data is] financially sound," says Wendell Register, senior vice president of network operations at KMC Telecom, a nationwide fiber-based ICP. "In less than desirable market conditions, they secured new funding. That speaks for itself. As far as their business model goes, the bottom line is that locations are prime with Switch and Data. What Switch and Data can do is easily assist our buildout as we expand to multiple markets. They make calculated decisions, building the right locations at the right time. We can depend on a consistent product from city to city, and that enables KMC to offer a solid product."

Switch and Data has raised $138 million in equity since its inception in 1997. In January, the company closed $50 million in debt financing from Deutsche Banc Alex. Brown and First Union National Bank to expand the footprint of its centers. "That is our only debt that we have, which speaks well of us since we're not heavily debt-ridden," says Bateman.

Beyond enlarging its footprint, Switch and Data is expanding the services it offers in an attempt to retain customers through product bundling and to increase revenues.

The company began climbing the value chain this spring. In April, it rolled out network timing synchronization services in 10 of its centers. The service guarantees precision clocking and synchronization for customers, boasting accuracy to within one hundred-billionth of a second by using Stratum 1 clocking technology.

"People running networks with voice and mission-critical data need timing sources," explains Harris. "Because we have deep telecom operations experience, we know how to do that. You can go out and buy a Stratum 1 reference clock for 500 bucks, but Switch and Data put together the most dependable Stratum 1 solution on the market. We decided if we're going to deploy a service, it's going to be the most dependable possible."

The company has a "triple redundant timing solution" that uses a global positioning system. The backup to that is a CDMA signal. And if that fails, an iridium battery that runs for 45 days handles timing. "It's a minor product for us, but we want to do it right," says Harris, adding that the company invested $45,000 per site for the timing equipment to offer the service.

In May, Switch and Data came out with Premium Technical Support. The bundled offering includes Gold, Silver and Bronze technical support, based on the number of tech support hours desired and the length of the contract. As part of that, a dedicated call center provides customers with a single point of contact for tech support throughout Switch and Data's footprint. The plan starts at $1,300 per month.

"Switch and Data does a nice job delivering a turnkey package for the actual facility infrastructure and supporting services. Their recent addition of bundled technical support is of special interest to us," says Register of KMC, which offers data, voice and Internet services on a wholesale and retail basis. Switch and Data provides KMC with carrier-neutral collocation, power distribution, cross-connect management, security and 24/7 support.

In July, Storage @ccess Technologies Inc., a provider of total storage management solutions, and Switch and Data, the carrier-neutral collocation provider, announced an agreement to offer managed storage solutions throughout Switch and Data's nationwide footprint. Harris says the company also hopes to collaborate with specialists to add services in the security and monitoring areas.

"Storage needs are booming, and that's an interesting part of our story," he says. Joining forces with a storage services provider would enable the SSP to offer service in all of Switch and Data's locations, he adds.

Of course, Switch and Data isn't the only collocation provider recognizing the revenue potential of storage. InFlow Inc. recently announced StorageFlow, a suite of data-storage services it's delivering with the help of leading storage vendors EMC Corp. and StorageTek.

"Storage has an enormous amount of upside for revenue potential," says The Yankee Group's Quinn. She adds that partnerships are a great way to go, but they are delicate and quality control can become an issue, which could result in lost customers if service isn't delivered as promised.

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