Scale and Profitability

In the last eight days, Cable & Wireless and Sprint have abandoned the US hosting market, saying their data centers won't make money anytime soon. This comes just two months after Level 3 divested Genuity's hosting customers and data centers to Computer Sciences, saying the operation was losing $5 million a year. Can anyone make money in the hosting business? That depends on the answer to a second question - is your cost structure manageable?

Hosting revenues are constrained, with a slumping economy and tough competition in the hosting market. There's no breakout on the short-term horizon, either. Yet a significant number of hosting and colocation providers report that they are profitable.

What distinguishes these operations from their unprofitable counterparts? In most cases, it's the size of their data centers. The companies exiting the hosting market are, by and large, the ones who built the biggest. The eight data centers Sprint will close total 800,000 square feet, including at least two sites larger than 150,000 square feet. Cable & Wireless' operations include a 230,000 square foot Internet Solutions center in Reston, Va. and a 200,000 square foot presence in Weehawken, NJ.

Sprint, C&W and Level 3 have all done the math and decided that current demand for web hosting services simply cannot support the cost of maintaining large data centers. "From our perspective, the long-term cost associated with being a primary player in this business far outweighs the return," Sprint told its employees in a memo.

Sprint is setting aside up to $175 million to pay for customer migrations and lease terminations. A number of its hosting centers are housed in multi-tenant buildings - making it difficult to market the space to enterprises shopping for disaster recovery facilities, who have a strong preference for stand-alone sites offering enhanced perimeter security.

Cable & Wireless is looking for potential buyers for its US operations. Plenty of hosting providers would like to have revenue from enterprise companies, which comprise most of C&W's remaining customer base. But few hosting firms are still shopping for data centers of 100,000 square feet or more. That market for these larger facilities is being driven by business continuity requirements, which is a much more active market these days.