Dollars Per Square Foot

Does Managed Hosting Make More Cents as a Network Service?

Unsurprisingly then, network service providers (NSPs) increasingly are betting their marketing dollars on virtual private networks (VPNs), traffic prioritization services, on-demand bandwidth provisioning and other value-added network services to which they can attach premium prices over and above commodity access and transport services.

Yet at the same time, if there's gold in them thar' differentiated bit pipes, there may be even more riches to be squeezed out of data centers designed to house and manage web servers, application servers, databases, storage arrays and other assets associated with enterprise information technology (IT) and business process support.

While selling data center "collocation" real estate for hosting customer-facing web site servers may have brought first-generation hosting companies this far, that collocation play quickly is being overtaken by a second generation of "managed hosting" services.

"Managed service customers will spend three to four times what collocation customers spend, and the strategic relationship you have with the customer as a managed hoster is quite different," says Ron McMurtrie, vice president of eServices for WorldCom Inc.

Managed hosting will grow worldwide from $4.7 billion this year to become a $27 billion business in 2006, accounting for 56 percent of the overall web hosting market, according to industry researcher Ovum.

Who will reap those dollars? Analysts and a number of NSPs say companies owning Internet access and transport infrastructure will stand first in line. Some argue that the separation of hosting from data networking services -- as if they were distinct, unrelated businesses -- no longer makes sense for either buyers or sellers.

"Hosting, Internet service and content delivery emerged as separate industries in the first wave of Internet development," Bill Whyman, president of The Precursor Group, reported recently. "This will change, and these industries will likely become products within a new larger network services market."

Repeatable Processes

The cost of hosting market entry -- whether for stand-alone hosters or NSPs -- can run from $20 million to $40 million per data center, a figure that only can be amortized through multiple premium revenue streams, says WorldCom's McMurtrie.

Initially spurred by the collocation opportunity, NSPs have hurried to build Internet data center (IDC) space. Now this infrastructure is becoming an integral part of NSP assets and operations, and the aggressive NSPs are positioning themselves to squeeze maximum value out of that IDC real estate by acquiring, or partnering for, managed hosting expertise.

In the past few years, managed hoster Digex Inc. has passed through the ownership of one NSP, Intermedia Communications Inc., then another, WorldCom, which last year acquired Intermedia and a controlling stake in Digex. Earlier this year, Metromedia Fiber Networks Inc. acquired hoster AboveNet Communications as well as management service provider SiteSmith. In July, tier one carrier Cable & Wireless plc acquired business Internet and distributed data center operator Digital Island Inc.

More recently, on Aug. 28, Qwest Communications International Inc. reached a strategic agreement with Loudcloud Inc., a well-funded outsourcer of managed Internet operations and applications infrastructure for enterprise companies.

At the same time, first-generation hosters are attempting to redefine themselves in the managed hosting image. For example, according to its second-quarter results, the total revenue mix for Exodus Communications Inc. comprised 48 percent from infrastructure, 31 percent from managed and professional services and 21 percent from Internet connectivity. Exodus reported capital expenditures of $188.6 million, principally representing investments in building and expanding its Internet data centers.

The regional Bell operating companies also appear intent on leap-frogging the passive collocation approach. Although the former GTE was forced by law to spin off its Genuity Inc. managed hosting arm, GTE parent Verizon Communications launched a Verizon Information Technology data center outsourcing unit earlier this summer.

All these deals suggest that traditional NSPs and hosting service providers (HSPs) lack the people and processes to seriously compete in each other's sandboxes. Most players also all argue that networking expertise combined with managed hosting expertise add up to something greater than the parts.

WorldCom offers vanilla collocation services in some 80 data centers worldwide, "because we're able to sell a bunch of other network assets with it," McMurtrie says. Then, when WorldCom works with its Digex affiliate to sell more involved managed hosting, "it's not the network you're pitching, nor even just public-facing web sites, but also running applications for them and running sophisticated databases under that," he adds. "Owning the infrastructure, from the data center through the network, allows you more quality control than if you're operating with leased facilities."

The equation runs both ways: Managed hosting services can fill networks, and managed networking services can fill data centers.

Fundamental changes in buying patterns among enterprises themselves now disallow decisions that balkanize access and transport from the applications infrastructure underlying processes like customer relationship management (CRM), according to Joel Whitman, vice president of product marketing and Internet strategy for managed hoster and tier-1 IP backbone provider Genuity. "IT departments are no longer able to make decisions without demonstrating aggregated return on investment," he says. "There's an access cost associated with getting a CRM app out to a sales person on the road; now that has to be an element of the CRM application development decision-making."

If it has become difficult for buyers to purchase network services and data center services as if they were separate things, he says, so too has it become more difficult for one-trick NSPs or HSPs to sell them as separate things.

Out Of the Box

Putting flesh on the convergence of managed networking and managed hosting services, aggressive NSP and HSPs have not only acquired or partnered for Internet-IT expertise, they have launched managed hosting offerings.

On Aug, 20, for example, Genuity launched a package of services aimed at enterprises looking to migrate away from colo providers. The package includes migration consulting services, eServices Mission Planning, an e-business testing environment and a 60-day "test drive" before moving operations to a hosted production platform.

That service follows Genuity's model of pulling together service and infrastructure components to create a pre-bundled service, which the company markets as a series of Black Rocket packages. Genuity started its managed hosting foray with custom, "boutique" offerings through its Business Development Management consulting practice, but "that doesn't scale well, so we evolved it last year to a modular, componentized model," Whitman says.

That model combines "hosting service platform" components (including operations and engineering) with "converged network platform" components (such as leased line, dial, DSL, voice-over-IP and other access and transmission assets) and tier-1 backbone services associated with its "network service platform," as well as security practices covering both data center and network.

"It may be heresy, but we are a services company and less and less a technology company," Whitman says. "Much of what we had to do with Black Rocket was with operations and processes, rather than assembling technology components."

Where the customer further requires integration with its in-house IT systems, Genuity refers them to its preferred integrator partners Cap Gemini Ernst & Young and PriceWaterhouseCoopers.

Similarly, managed hoster Cervalis has partnered with system integrator Accenture. "Where the customer needs speed to market, we provide a baseline of e-commerce, developed and managed by Accenture as the outsourcer and bundled with our infrastructure, software and connectivity -- e-commerce storefront, catalogues and the rest on our hosting and management infrastructure," says Zack Margolis, vice president of marketing and business development for Cervalis.

As with others hanging out the managed hosting shingle, Cervalis presents a turn-key offer including planning, equipment purchase, infrastructure design and deployment, software licensing, connectivity, security and availability at guaranteed service levels. And while e-commerce and "new Internet applications" may still be the common entry point for most customers, Margolis says, "Over the last six months, we're seeing e-mail, collaboration, financial processing and other back-office apps."

To meet this more sophisticated demand, "we have to have a portfolio of highly skilled services to truly leverage the infrastructure for not just space, but to become an extension of the customer's operations," he says. That requires staff certified in leading IT vendor technologies, including Cisco Systems Inc. data switching, EMC Corp. storage systems, Microsoft Corp. operating and applications software and Oracle Corp. database and application software.

To do this at scale, the managed hosters are putting bows around proven and repeatable processes and infrastructure components.

Genuity was preparing in September to introduce four levels of relative customization and speed to deployment. Under working service tier names not yet finalized, an "express" service would be applied to those who want to be up and running in little more than a week. A "standard" service would integrate more complexity, including database services, firewalls, VPNs and the like while a "custom" service would maintain modularity but with a higher degree of sophistication. There would be a "bend metal" service for customers "truly at the leading edge" in a fashion similar to Genuity's original boutique approach.

Like Genuity, Cervalis has packaged a migration service, "for customers moving from one environment to another with a pre-bundled solution that has been through the fire," Margolis says. "It's the role of a general contractor who will build your dream house."

One Body

For the most part, Cervalis and other next-generation hosters including Avasta Inc., Loudcloud and Totality Corp. present themselves as network- or carrier-agnostic, leaving it to the customer to arrange access services with the carrier of its choice.

Put another way, Genuity's Whitman says, these hosters don't own or control network infrastructure -- a less than ideal scenario that perpetuates a false separation between the networking and hosting businesses.

"Hosting is not a category," he says. "Hosting is just another element of the network service platform that needs to become a transparent component from the customer's point of view. If you're just in the hosting business, you have no control over the access network, and vise versa."

In WorldCom's case, that control is enabling the company to turn half a dozen of its 80 generic data centers worldwide into densely populated hosting centers complete with managed network, servers, databases, applications and security. For customers like European beverage manufacturer Diageo plc, WorldCom leads with its global network reach. But it also runs market and customer survey and other business applications and databases, and it is mapping the managed infrastructure to the web-based systems that Diageo is gradually employing in-house.

All these players are after the same brass ring: More dollars per square foot of data center space and greater and greater revenue interplay between managed network and managed hosting service bundles.

Compared to aggressive first-generation hosters like Exodus and PSINet Inc., Genuity appeared slow in building raw data center space, says Whitman. "But we believed that, when you add managed access, managed storage and e-services on top, you get a differentiated data center with substantially greater revenue opportunities per square foot."

If it mattered in the colo businesses, says WorldCom's McMurtrie, "Size doesn't matter in managed hosting."

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