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Colocation Not Dead And Buried |
11 12 02
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 dot.com 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.
Report Code: B108
Publication Date: December 2002
Price: EUR 5,000
Background
Frost & Sullivan is an international marketing consulting company that monitors
a comprehensive spectrum of high-tech markets for trends, market measurements
and strategies. This ongoing research is utilised to complement a series of
research publications to support industry participants with customised
consulting needs. Interviews and free executive summaries are available to the
press.