Colocation Not Dead and Buried

Contrary to what some pundits are claiming, and despite the fact that many carriers are washing their hands of it, colocation ain't dead yet

December 10, 2002

4 Min Read

SAN JOSE, Calif. -- Colocation is not on its last legs, as some pundits have been claiming, despite the fact that many carriers are washing their hands of the service.A new study by Frost & Sullivan, the international market consultancy, concedes that the massive consolidation of both the carrier-neutral and carrier-specific colocation providers demonstrates an acknowledgement of poor profit margins as well as a surplus of colocation facilities.Investors are carrying out considerable belt-tightening indicative of a new-found reluctance to fund colocation projects that do not have a sound business model or the promise of a fast ROI.Still, Frost & Sullivan’s latest findings strike an optimistic note, showing that the market for colocation services can realistically achieve and maintain profitability, albeit at a vastly reduced pace than previous industry estimates implied. Frost & Sullivan pegs revenues amassed in the European colocation space at $191.10 million in 2002.The European colocation market is still in its infancy. Frost & Sullivan believes that this previously “over-hyped” market is likely to see steady increments in growth of around 30 per cent from the year 2005.Many European businesses have got entangled in the hype surrounding this much-touted technology and the study underlines that a large proportion of enterprises are still unfamiliar with the benefits of outsourcing with a colocation provider.The European colocation market underwent significant consolidation over the last few years, illustrated by the reduction of colocation data centres in operation and the consequent shrinkage in the amount of colocation space available in Europe in 2002.2005 is seen as a benchmark year signalling both economic upturn and faster growth in the Web hosting market. Demand for e-B2B and mobile application services should lift off, stimulating demand for colocation services.Exacerbated by the global economic downturn and constraints placed upon telecoms carriers as their huge debts became painfully obvious, the death of the dotcom phenomenon and the subsequent massive shake-out have stalled facility roll-out and forced colocation suppliers to rethink their previous measurements of the demand for space.“In this environment, it has been hard for colocation providers to win support for new investment. The golden days where investors were tolerant of big losses have come to an end, such that companies no longer have the freedom to spend as profligately as they had,” reports Marina Martin, Industry Analyst at Frost & Sullivan.“Clearer delineation between the various colocation facilities has been made possible with the official withdrawal of a number of carrier-specific colocation players from this marketplace. By focusing their efforts on managed Web and application hosting, managed security services and more recently Web services, they are still able to leverage existing data centre assets. As a result, we anticipate that colocation services only feature as part of a value-added managed service package with network operators,” Ms Martin notes.Large network operators who have some cash reserves are already starting to buy some of the colocation start-ups in order to avoid building costs. Frost & Sullivan predicts that many colocation firms will turn to partnering as they recognise gaps in their capabilities and product set and attempt to anchor themselves as the gateway to moving up the value-chain into managed services.The success of a colocation provider will depend on its ability to identify potential business verticals and geographic areas of demand as well as strategic channel partnerships. It will also depend on how well colocation companies can adapt to individual European modes of business, a criterion which is backed up by the trend towards a country-specific devolved form of operational management across European sites.In many cases, the threat of a squeeze on profit margins, otherwise known as commoditisation, is driving data centre providers to increase the range of services on offer to customers or partners.“A pattern appears to be emerging where colocation facilities are forming more partnerships, such as linking up with system integrators, to offer a more comprehensive range of services. The key challenge for colocation providers is to build on the core facilities management in order to broaden the spectrum of base infrastructure services,” Ms Martin explains.The previous race to build data centres across Europe has led to short-term saturation in the industry. The current environment has started to bear a striking resemblance to the aftermath of the rush in the late 1990s, which have felt the sting of consolidation and failed business models.As one of the pioneers of in the colocation market, Telehouse possesses one of the most established base of clients, as evinced by its leading market share. In addition to its original colocation facilities, the company also assumed ownership of three of the data centres it had been leasing from another colocation provider, Cybernet.Frost & Sullivan

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