Free Colo: Fact or Fantasy?

Measured in Internet years, it seems an eternity ago. In October 2000, more than 800 attendees packed the Colocation Summit in Washington to hear CityReach CEO Sanjaya Addanki make a bold prediction. "I'll probably be giving away space for free 12 months from now," said Addanki, who expected to use free colo as a teaser to sell managed services. "It's very much like Gillette, where you give away the razor for free and then sell the blades."

The big difference is that razor blades are cheap to produce and bought by tons of customers. Not so with managed services. Twelve months after Addanki's bold prediction, CityReach was in liquidation, having burned through $325 million. Two years down the road, the managed services market bears little resemblance to the giddy future envisioned in bar charts issued by IT research firms.

During that time, customers have continued to pay for colocation services. Prices are lower and margins have been squeezed, to be sure. But it's not a giveaway yet. The latest Band-X survey suggests an average North American price of $894 a month.

On Tuesday Cogent began offering a free rack to customers who purchase connectivity in three newly-launched data centers. It's a short-term promotion to attract customers to the former PSINet facilities. As such, it's hard to tell whether Cogent's strategy will have a significant impact on the broader colocation marketplace.

Offering colo as an add-on in bandwidth deals is not without historic precedent, according to my colleague Joe Suppers, president of Node Com. Joe recalls that incumbent carriers once wielded free colo in a similar fashion. That ended as the Internet began to grow, asthe the emergent need for "zero downtime" web operations demonstrated the value of carrier-neutral colo space.

So is this deja vu all over again? Or just a case of yet another overambitious business plan? We'll dig deeper into Cogent's business model in the near future. In the meantime, it bears watching whether free rack space offers will affect pricing beyond a single provider.