After The Fire, Opportunity

Two big stories have shared this week's headlines: intense wildfires burning in the West, and WorldCom putting an exclamation point on the telecom meltdown. In an odd way, one serves as a metaphor for the other. A wildfire is unrelenting and unpredictable, burning off dead wood as it advances. Yet it's also true that forests experience some of their most dramatic growth in the immediate aftermath of a fire, the scorched earth providing a fertile environment for new life. Is this possible for the data center business? A number of industry observers think so.

This week several analysts are saying the continuing bankruptcies and the abrupt departure of Loudcloud and Intel from the hosting sector are actually good news, clearing the playing field for newer players to establish a profitable niche. In its article Hosting Turmoil No Surprise, The WHIR summarizes sentiments seen in several similar media stories this week.

Some in the venture capital community are also focusing on potential opportunities in data centers. Kodiak Venture Partners today affirmed its focus on the data center sector, saying it sees opportunity in storage management. Meanwhile, Venture Wire has scheduled Data Center Ventures, a September conference designed to showcase opportunities for private equity investment in startups targeting the storage and security markets.

Some investment managers even think it's time to selectively shop for telecom stocks. In a story titled Trolling For Value in Telecom, Fortune outlines the case that it's a good time for investors to do some bottom fishing, citing SBC as a favored pick.

Do these reports provide mounting evidence that we've hit bottom? Not as far as timing is concerned. But they reinforce a belief held by most of us still working in this industry: there will eventually be a profitable business rising from the ashes.

Brace Yourself

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Political Boost for Terremark

It's always nice to have local politicians help tout the value of an Internet facility. It's even nicer when that politican's brother is the Leader of the Free World. Governor Jeb Bush of Florida turned out Monday to help publicize the strategic importance of Terremark's NAP of the Americas in Miami, which is housed in the mammoth Technology Center of the Americas (TECOTA).

It remains to be seen if political starpower can put a dent in the telecom slowdown, but yesterday's event helped focus attention on one of Miami's Internet assets. Gov. Bush, brother of President George W. Bush, got a tour of the TECOTA facility and spoke in support of the development of South Florida as an Internet connectivity hub.

"The NAP of the Americas is a unique asset that further solidifies Florida's position as the Gateway to Latin America," said Governor Bush. "As the Internet continues to become the backbone of the international economy, Florida's natural geography and IT infrastructure has given us the opportunity to be the hi-tech link between the United States, our neighbors to the South, Europe and the rest of the world."

The event highlighted Terremark initiatives to create similar Internet hubs in Madrid and Brazil, modeling those efforts after the NAP of the Americas. "As we continue our expansion plans to key Internet hub cities around the world, the NAP of the Americas in Miami remains the prime catalyst and the model for Terremark's growth and development globally," said Terremark chairman and CEO Manuel D. Medina.

Telecom industry veterans have been impressed with the infrastructure at TECOTA, but also wonder aloud about the prospects for such a huge facility in the current market. Global Crossing leased an entire 150,000 square foot floor, but is in bankruptcy. Sprint and the NAP (which occupies the entire second floor) are the other tenants.

Terremark, for its part, is staying busy trying to bring its ambition to fruition. The company just completed a $5 million sale of common stock to its Madrid partners. And when it comes to connectivity, fiber is great, but knowing a Bush or two can't hurt either.

Loudcloud and The Future

Marc Andreessen has seen Internet trends come and go. Yesterday he succinctly summarized the state of the hosting and managed services business. "When we started Loudcloud, we said we wanted to be the EDS of the Internet," said Andreessen. "Now EDS is the EDS of the Internet." If Loudcloud represents the "smart money" in the managed hosting space, what does its decision say about the future for hosting companies without three-letter names?

Andreessen, the chairman of Loudcloud, said the company's decision to sell to EDS was driven by a "change in the fundamental dynamic" of the web outsourcing business. "IT has become a game for very large companies," said Andreessen. "This is absolutely indicative of the way the industry is going."

Ever since the dot-com market imploded in 2000, Loudcloud and similar providers have been an industry in search of a working business model. As the hosting and colocation business dried up, analysts pointed to managed services as the new revenue engine, prompting many colocation providers shift gears and chase deep-pocketed corporate customers. Still others retooled to emphasize disaster recovery services.

The relentless nature of the telecom meltdown and the slowdown in corporate IT spending have conspired to delay the windfall. With little funding in sight and the break-even point receding further into the future, even a marquee name like Loudcloud reached the point where it had trouble forecasting its financial future.

Meanwhile, the lion's share of the action has been going to EDS and IBM Global Services. Scanning a landscape of struggling "New Economy" hosting providers, skittish enterprise customers are defaulting to the name-brand stability of the huge known quantities.

Can the managed services model be profitable for the remaining players? It had always seemed that time would be the salve for the industry's wounded. The Internet isn't going away; the market will eventually recover, and the survivors will benefit. Right?

With the clock ticking, the meter running and no recovery in sight, time is proving to be an ally to the giants, not the would-be giant slayers. EDS is the EDS of the Internet after all.

What Next for MFN?

Metromedia Fiber Network is back in the news. Analysts have been speculating that the company is likely to be sold off in pieces rather than emerging from Chapter 11 as a single entity. That seems to be a familiar refrain in recent bankruptcies, largely because lenders are loathe to touch telecom unless the opportunity is very clear and tightly focused. Now there are additional worries for MFN.

Thursday MFN announced that the company is under investigation by the SEC for its accounting practices. That shouldn't be a complete surprise, as earlier this year MFN said it would restate revenue for last year after its new auditors raised questions about its accounting.

Starting to sound a little like Global Crossing, isn't it? There are significant differences between the two companies. Nonetheless, the double-whammy of an SEC inquiry and uncertainties about the restructuring could be making customers and business partners nervous.

FiberNet, for one, seems to be taking prudent steps to hedge its bets. FiberNet, which uses MFN fiber to connect much of its Manhattan inter-building network, today announced it was purchasing dark fiber from KeySpan that will provide connectivity to key carrier hotels in New York.

Outsourced Hosting To Decline?

A recent survey of nearly 400 top IT managers by CIO Insights brings difficult news for companies hoping for growth in outsourced web hosting. "Demand for web site development outsourcing services is projected to drop from 42% last year to 30% this year, while demand for Web hosting should decline from 44% to 33%," according to the survey. What gives?

Many analysts have predicted that cost savings would drive future growth in outsourced hosting services for corporate web sites. That's only part of a complex picture. While some companies outsource their web operations because it's cheaper, others do so because they don't have adequate facilities, and still others because they lack the in-house expertise.

It's that third group that appears to be shrinking. The downturn in the Internet sector has made it easier (and in some cases, cheaper) to hire qualified web developers and IT staff that have been laid off from previous positions. As a result, companies that prefer to keep their web site in-house may find it easier to do so.

The decision to outsource requires that a company resolve a clash between two powerful corporate impulses - the desire to save money and the desire to control one's data. If the CIO survey is correct, those willing to pay a little more to keep things in-house may be finding it easier to do so.