COLOCATION SUMMIT 2000:
Will Colocation Space Yearn To Be Free?
CityReach CEO: Services will fundamentally alter price equation

By Rich Miller
CarrierHotels News Staff

WASHINGTON, D.C. (Nov. 16, 2000) -- "I'll probably be giving away space for free 12 months from now," says Sanjaya Addanki.
The word "free" has always been an attention-getter on the Internet. It did the trick for Addanki, the new chief executive officer of CityReach International, during his talk Thursday at the Colocation Summit as he outlined his company's plans to provide free rack space while profiting primarily from managed services.
"It's very much like Gillette, where you give away the razor for free and then sell the blades," said Addanki, 43, an IBM veteran who joined CityReach as CEO in September. "All this is predicated on success in the managed services space."
Even if free server space never becomes widespread, some industry observers worried that such predictions could eventually pressure the lucrative margins in the colocation business, where top-tier facilities can charge thousands of dollars of annual revenue per square foot of rack space.
The critical importance of keeping e-commerce sites online on a 24x7x365 basis has convinced corporations of the value of reliability and redundancy in the data center. As a result, hosting and colocation providers have been able to maintain attractive price structures.
"Demand is still high for colocation services and prices for both 'pure colocation' and managed services offerings is set to rise in the medium term," notes The Phillips Group, the sponsor of last week's forum, in an upcoming study of the U.S. colocation market.
Nonetheless, the Internet's culture of free stuff is a business challenge. Last year numerous consumer e-commerce sites set out to swap free services - including Web pages and e-mail - for eyeballs for advertising. Many of these "B2C" players with ad-based revenue models were among the hardest hit in the NASDAQ stock market's dot-com selloff last spring.
Meanwhile, application service providers such as BigStep.com have offered free hosting and shopping carts to small businesses, hoping to build a captive market for value-added paid services such as merchant banking accounts.
London-based CityReach has made believers of its investors. The company currently has 1.5 million square feet of space in 12 cities, and has about $325 million available to pursue its vision of the service-driven colocation market, including $200 million in equity financing and $125 million in senior debt. It recently opened a U.S. headquarters operation in Ft. Lauderdale.
"Corporations want to work with other companies on the Web," said Addanki, who. "That's what the Business Internet is all about."

OTHER COLOCATION SUMMIT COVERAGE:
Managed Services Debate Heats Up
Despite hype, some execs say 'commoditization' is far off (Nov. 16)

Power Supply A 'Big, Big Issue'
Aging grids challenged by growth of the 'Net economy (Nov. 16)