If the 1990s in Ireland were the era of the call centre, then the decade that began with the year 2000 should have marked the coming of the data centre.
Both sectors, populated in the main by large multinational firms, were keen to exploit the benefits Ireland has to offer — a generous corporate tax regime, its flexible workforce — and where the call-centre mini-industry had blazed a trail, the data centre market was expected to follow.
Companies in this market provide purpose-built facilities, so that customers can have their Websites or business applications hosted or even managed in a secure environment with ample storage and computing equipment, power supply and multiple high bandwidth telecoms connections.
Many data centres were built in anticipation of a boom in the market for colocation services, where telecoms firms would house their networking equipment in a secure facility. This part of the business is typically a low-margin, high volume offering.
Locally and internationally however, the data centre market has taken a pounding in recent months and many entrants to the market have gone to the wall or been forced to make cutbacks.
At one stage, more than 20 companies had plans — at various stages of advancement — to establish data-centre facilities in Ireland but some of the highest profile entrants have suffered as the economic downturn affected Internet-related businesses.
Last summer MWB Konnect, a London-based e-business incubation firm, as well as telecoms carrier, GTS, abandoned plans to construct two data centres in Dublin. Soon after, CityReach and 360networks filed for bankruptcy protection. However, while 360networks was still in the process of constructing a data centre facility at the time, CityReach had already opened for business having completed construction of a $30m, 10,800 sq m data centre at Clonshaugh in North Dublin.
Tellingly, CityReach had sold just 15 per cent of floor space at its Irish facility and it is understood that as little as ten per cent had actually been occupied by the time the company closed its doors.
In December, Worldport announced a decision to pull out of the Irish market, although it has yet to dispose of its data centre here.
The company had huge overheads, having built a fully fitted 10,800 sq m Internet data centre staffed by 120 employees servicing just 54 customers. By its own estimation, it was burning $5m per month in cash, although the company had at least financed its data centre operation without incurring any debt. Today, Worldport remains trading but has retrenched and is concentrating on business in the UK.
The Wolfe Group, an indigenous Irish firm that specialised in providing managed services, was forced to cease trading because of a lack of funding. The managed services market is often mentioned in the same breath as the data centre sector because it requires a hosting facility to house the technical infrastructure needed to provide the service.
Ironically, Wolfe went out of business a matter of months before it looked set to become cash positive, but its business plan was built on the need to expand into several European markets. The £10m in funding it would have required to do this proved too elusive given the prevailing conditions in the IT sector.
This turmoil was mirrored internationally when Exodus, then the world’s leading Web hosting provider, filed for bankruptcy protection last September. At the time of going to press, Cable & Wireless was finalising a bid to buy the assets of the company.
Many observers agree that the shakeout, in Ireland and elsewhere, may not be over. James Eibisch, research director with IDC, states: ‘In general, yes, there will be more failures and takeovers and difficulties in obtaining funding.’
So what went wrong?
The rise of the data hosting market has been umbilically tied to the growth of the Internet and the fallout from the collapse of the so-called dot-com boom has clearly affected the sector. The extent to which the Internet industry was talked up resulted in over-ambitious projections about the need for Web hosting capacity.
To have multiple competing data centres located in one city was not uncommon and it was certainly true in Ireland’s case. Observers reckon that at one stage in Dublin alone, there was six times the amount of hosting capacity that was actually required.
Europe-wide, it is estimated that the sector was heavily oversubscribed. Camille Mendler of the Yankee Group succinctly calls it a ‘glut’. According to Matt Exl, formerly a senior executive with CityReach and now managing director of consultancy firm Gemation: ‘There was not one major data centre in Europe that had a “fill rate” higher than 40 per cent.’
The Wolfe Group had tried to differentiate itself from the many other data centre providers by offering managed rather than unmanaged data services. According to Bob McClean, who was a senior executive with the company prior to its closure: ‘The revenue per square foot at Wolfe was an order of magnitude greater than a lot of [competing] data centres in Ireland. A lot of data centres’ major clients were telcos and ISPs. You need to broaden the appeal of the data centre.’
This move to value-added services became something of a mantra for many of the data centre firms, to the point where it seemed as though every player in the market was touting itself as a provider of services, instead of simply a space to put servers. The reality of whether they had the skills and people to provide these services may have been somewhat removed from the spin.
‘Having a building on its own is nowhere near enough at the moment,’ is how IDC’s Eibisch sums up the current situation.
Matt Exl adds that even where some data centres may have attracted large volumes of business, the customer profile didn’t lend itself to earning the most revenue from the centre. ‘If someone had high fill rates, these were often wholesale customers where someone takes a suite and resells it or becomes an ISP,’ he points out.
Additionally, as the market tightened, competition between data centres forced prices downwards. ‘If you have a large amount of space used up, it’s easy to say the fill rate is high, but the square foot charge is nowhere near the original projections,’ Exl says.
Building on ‘flawed premises’
Worldport’s Dublin data centre was built on the hopes that a lot of Internet traffic from the US would use Ireland as a stopping-off point on the way to Europe; and that users of managed services would not care whence those services were being provided. ‘Those two premises were flawed,’ is the candid view of Worldport chief operating officer, Nicholas Jeffery.
With the unfolding of the US dot-com crash, Internet traffic waned resulting in a noticeable reduction in related data services demand emanating from the US. In addition, corporate customers — even those who could accept the concept of outsourcing — did care about where their systems were being hosted.
It became apparent that the only business that would be generated in Dublin was from the indigenous market. ‘We found that out at the same time as everybody else, so a huge oversupply [in Ireland] happened immediately,’ says Jeffery. ‘For the good of the company and the market, we put our data centres and resources where the market went.’
And the market has gone to England, it seems. Jeffery claims that business there is ‘booming’ on the back of a surge in the amount of electronic transactions. ‘The UK market is the most dynamic for Web penetration, it is the second biggest in Europe behind Germany. The Irish market represents about 0.6 per cent of the European market,’ he says.
Seen in the cold light of day, Jeffery’s assessment doesn’t say much for the oft-quoted aspiration that Ireland would become a European e-commerce hub. But it does at least offer some optimism that the sector, while suffering presently, is not in need of life support and may be in line for recovery.
Analysts believe the data centre model, per se, is a sound one and local industry watchers think that the capacity now available in Ireland is closer to the amount the market really requires.
For the players that have remained in the market, being able to get the maximum possible return from the data centre — which after all, is a sunk cost — is the key to earning revenue. ‘Our business model from the outset was to provide services,’ says Mark Cawley, commercial director of Esat-X, which operates a 2,025 sq m centre in Dublin, with just two-thirds of the site fitted out to date. ‘We could comfortably have 15,000 servers in our data centre but it’s about maximising the revenue per floor tile,’ he points out.
James Eibisch of IDC thinks that a likely pointer to the future could be a meeting of minds between traditional IT outsourcing and services firms with the new breed of Internet-centric managed service providers. ‘Both [of these kinds of companies] are going in the same direction: the convergence of service and infrastructure, but within the context of an IP-based environment.’
This scenario could result in mergers between an old-style integration provider and a hosting firm, as evidenced by Cable & Wireless’ bid for Exodus.
Partnerships could also hold the key to the survival of some players in the market. Worldport is considering its options — it is seeking a buyer or a partner to acquire or run its Dublin data centre and has not ruled out a return to the Irish market in some form.
‘There is nothing stopping us moving back, it’s not completely off the cards,’ says Nicholas Jeffery. He admits that Worldport would face negative perception in the market, due to having pulled out of Ireland before. In addition, the glut of data centre facilities currently on the market mitigates against getting a price that would go some way towards recouping the cost.
‘There is no point in selling the facility for 10 cents to the dollar, better to throw a dust sheet over it,’ says Jeffery.
All of which would appear to make a partnership arrangement the most likely means of re-entering the local market. There is a precedent for this: Worldport came to a similar deal with a third party in Sweden where it also had a data hosting facility.
As a footnote to this development, Data Electronics announced in January that it had acquired the assets of the Wolfe Group. Data Electronics, a 25 year old Irish company with a background in hardware maintenance and facilities management, had recently made moves into the data centre space. It claims the deal has allowed it to save three quarters of the original purchase value of all Wolfe’s assets, specifically those comprising the necessary architecture for a resilient managed service.
But as the fate of the Wolfe Group and others has shown, even assuming that the data centre concept has legs, a crucial issue in determining the viability of individual companies is the need to know that a company will still be in business tomorrow. (In the current climate, this matters a good deal more than whether customers understand and accept the principle of outsourcing — and opinions still vary on that one.)
‘Customers are now as interested in how near you are to profitability as in the features of your data centre,’ agrees Mark Cawley. In that context, he says that the backing of a telco is important as it offers the kind of financial stability that many of the pure-play hosting providers could not. Significantly, many of those companies with data centres that have survived the local shakeout are telcos: in addition to Esat-X, there are Irish facilities maintained by Eircom, Worldcom, Nevada tele.com and Colt Telecom among others.
Data Electronics, an indigenous firm has been modest in its approach to the hosting market. The company’s facility in Dublin’s North West business park is currently fitted out to a capacity of 1,260 sq m and there is room to expand within that facility. However, company CEO Maurice Mortell says that any growth will only take place in line with revenues and actual customer deals. It bears repeating that the overriding mistake made by some of the large data centre players was to build huge facilities well in advance of any customer prospects.
Many of Data Electronics’ customers are of long standing. Its contract with Toyota Ireland dates back 8 years and its deal with Bloomberg has been in place for 12 years. The latter deal is a total outsourcing contract that allows Bloomberg to provide its business newswire services to Irish customers without having to establish a direct presence in this country.
Data Electronics is cash flow positive, adds Mortell. ‘There’s no strain on our business, we’re not looking over our shoulder.’ He is optimistic about the future of the market, in spite of the shakeout. ‘The managed services model will definitely work once companies get comfortable with the idea of outsourcing,’ he concludes. Maurice Mortell, CEO of
There are other pointers to the recovering health of the market. A lot of the hype around the data centre sector was linked to the application service provision (ASP) market, which is based on the concept of providing software as a service that businesses download from a supplier’s server. The hardware which stores the software would, so the theory went, be located at a secure facility.
‘There are proven benefits for using this model, asserts Francis O’Haire, technical director with Data Solutions, an Irish IT distributor that specialises in server-based computing software. ‘Now that business is tight, there is a case for selecting a good data centre or ASP, depending on your needs. It’s the climate for this kind of cost-saving model.’
Another point worth bearing in mind about the future viability of the data centre market is that the biggest software company of them all is betting heavily on the concept of software as a service, capable of being delivered over the Internet. ‘Microsoft don’t go down a road without knowing whether or not it’s going to happen,’ says O’Haire. ‘When ASP starts happening for real, data centres are going to be required.’
Subscribers 0
Fans 0
Followers 0
Followers