Working in Shadow

The shadow government may be coming soon to a data center near you. The "government continuity" effort, launched to address new worst-case scenarios suggested by Sept. 11, is looking for secure space in the suburbs of Washington, according to an article this week in the Washington Business Journal (free registration required). The Bush administration doesn't speak about the location of these facilities, for obvious reasons. But whether driven by the shadow government or other security needs, landlords with tech space in Northern Virginia say federal interest has been on the uptick.

"We've found a great amount of interest from government agencies," Hossein Fateh, a principal in Dupont Fabros, said at the recent IMN conference in New York. "These agencies are taking up hundreds of thousands of square feet, especially in Northern Virginia." But they're not always forthcoming about their plans for the facilities. "I introduce myself and say 'Hi, I'm Hossein Fateh from Dupont Fabros.' They shake your hand and say 'Hi, I'm Bob.' "

Government security agencies are generally seeking stand-alone buildings that can house workers as well as equipment. In most cases, sites need to comply with the Sensitive Compartmented Information Facility (SCIF) code, a National Security Agency standard for buildings that handle sensitive government data or intelligence. A key emphasis of the guidelines is the ability to impose extraordinary controls on building access.

Then there's the "blast radius" issue. For many agencies, the site location process is driven by the cold calculus of post-Sept. 11 homeland security. To address concerns about terrorists gaining nuclear capabilities, sources say sensitive government operations are seeking to be at least 25 miles away from downtown Washington.

Even before Sept. 11, several developers announced plans for huge complexes of secure space in Northern Virginia. Fortress Development's plans for its CyberPlex@Dulles development call for a gradual buildout that could eventually include 860,000 square feet of data center space and 2.5 million square feet of SCIF-ready office space. US DataPort, meanwhile, plans to eventually build up to 3.7 million square feet of data center space on a 188-acre parcel in Prince William County, dubbed Virginia Gateway.

Whether the new realities will get these ambitious projects off the drawing board and fill them with tenants remains to be seen.

Bankruptcies Take Their Toll

To understand the impact of the growing list of telecom bankruptcies, look no further than Universal Access. Just two months ago, the interconnection provider announced higher-than-expected earnings and an operating (EBITDA) profit. It was a moment of sunshine amidst the gloom, offering the industry evidence that a company could navigate the wreckage and execute a business plan. That moment didn't last.

On Friday Universal Access told Wall Street that customer bankruptcies have left management unable to make reliable projections about the company's revenue. The bankruptcy of a single customer, Aleron, will shave $4.8 million off first quarter income. The threatened chapter 11 filing by another unnamed customer (almost certainly MFN) has put another $3.3 million in 1Q revenue at risk.

Not surprisingly, the news sparked a steep selloff today in the company's shares, even though UAXS emphasized that it has a "sound cash position" and limited debt. With new sales slowing, the driver behind its performance may now be cost-control measures. That's the case at more and more companies, which creates a Catch-22 cited elsewhere in Universal Access' announcement, which noted a lengthening sales cycle as potential customers cut or postpone planned spending.

You watch your pennies carefully when you're worried about customers' solvency. Sure, they may look healthy today. But in the current environment, the wheels can come off quickly. Two months ago, Universal Access had an upbeat story. Sometimes it's the customers' customers you have to worry about.

The Fiber Debate

Is there a fiber glut or a looming shortage? That depends upon which indicators you use to track the amount of demand and available fiber, and one's outlook about the industry and its future. This week, two widely-followed publications argued that we're facing a bandwidth shortage.

First, at the "mass media" level, there was USA Today, which weighed in with Thursday with a column by tech reporter Kevin Maney suggesting a shortage "sooner than the conventional wisdom dictates." For the more discerning professional, the fiber-optic portal Light Reading offered a similar analysis based upon projections by equipment makers.

As always, the debate hinges on the "lit vs. unlit" issue of fiber utilization. Both the fiber glut and fiber shortage camps cite a litany of statistics to support their arguments. It reminds me of the old newsroom saying that statistics are often used "like a drunk uses a lamppost" - for support rather than illumination.

MFN Appears Done

The news from Metromedia Fiber Network this morning is grim indeed. MFN has just $37 million in cash remaining, and has "deferred" a $30 million interest payment due to Verizon last Friday. The company has $3.3 billion in debt, giving it a cash-to-debt ratio of just over 1 percent. Yep, MFN owes nearly 100 times as much money as it has. The bankruptcy filing appears to be a fait accompli; once a company publicly says it may file Chapter 11, the game is essentially over.

Any smart lender with a genuine interest in MFN would seek the preferred status of a post-bankruptcy debtor-in-possession loan. No one wants to be the last person to give a company money before they file Chapter 11.

In gaining its last round of funding, MFN was able to convince some of its existing stakeholders to pony up. But it required protracted negotiations in which almost every piece of the package relied upon another loan. Logic suggests that as its cash has dwindled in recent weeks, MFN has no doubt had further discussions with those stakeholders, apparently without success.

Meanwhile, an analysis from the Light Reading web site raises hard questions about Level 3's viability, predicting a "near term financing crisis" for the provider.

Landlords as service providers

Should landlords be in the business of providing retail managed services and competing with their tenants? According to one panel at last week's IMN event in New York, the answer is an unequivocal yes. "It's time to cannibalize," advised Ivan Kotcher, President of Orishatech LLC, a Washington DC-based consulting firm. "Take that business directly from your customer and move up. Don't be afraid to take that margin." That's easier said than done.

Yet other panelists concurred with Kotcher. "There's a reason colo providers are making that shift (to managed services), and you should as well," advised Moz Aslam, the colocation manager at Interaqt Corp. One panelist went so far as to opine that since landlords already employ janitors and building managers, it's not a huge leap to add IT staffers.

Here's where I get off this train. I've been skeptical of the giddy enthusiasm for managed services for some time. It's a trend, and it's coming, just not as quickly as its advocates would have you think. The "xSP" business is already overcrowded, with large numbers of companies chasing a limited amount of demand. If all your tenants were rolling in dough from selling managed services, you wouldn't be spending so much time tracking chapter 11 cases.

Landlords need to be mindful of this. During this downturn, some landlords have indeed been able to wring additional revenue from their buildings by converting empty shell space into finished colo facilities. This is best accomplished in premium buildings in strong markets. But it's not without risk. The landlord absorbs the cost of finishing the space and funding the service offerings. Besides, do you "cannibalize" your relationships with an existing, rent-paying customer to spend hundreds of dollars a square foot to chase potential future business?

Then there's that "core competency" matter. If your expertise is real estate, hiring a janitor to clean the building is a lot different than hiring an IT worker to oversee managed firewalls for corporate clients. Even now, when out-of-work technology pros are easier to find, it's no simple matter to move up the food chain.

Are you a landlord or a managed service provider? Let's hear from you on this topic.

$70 Billion?

How much excess fiber optic cabling was laid in the telecom/Internet boom? According to new data from Adventis, telecom companies spent $70 billion more than necessary to deploy fiber during their network build-outs. Much of that fiber will remain "dark" and may never see traffic because it will be obsolete by the time the supply of excess fiber is absorbed. It's just another data point for restating the obvious. But if you need a number to quantify the extent of the industry train wreack, it's a big one.