The Newer Economy

Michael Mandel has a reputation as something of a seer on the fortunes of the "New Economy." Mandel, the lead economics writer for Business Week, helped popularize the term in the mid-1990s. Then in mid-2000, he published "The Coming Internet Depression: Why the High-Tech Boom Will Go Bust, and Why the Crash Will Be Worse Than You Think." So, in the depths of the Internet Depression he foresaw, what does Mandel see now for the New Economy? "When people ask me what the hot industries will be, I say it could be telecom, or it could be publishing."

Rewind for a second. Did he say "telecom?" Indeed he did. Mandel, the keynote speaker at last Friday's Trenton Forum on Interactive Publishing presented by Tramp Steamer Media, believes that the plummeting price of information, along with a push for corporate productivity, will create opportunities.

"My personal view is that we'll see a steadily growing demand for good and branded information, and that will become a dynamic engine for growth," said Mandel. "The fact is that the forces that drive (telecom and publishing) forward are still present, only with the opportunity to do it rationally. Competition was too intense in the telecom industry to support the premium services to pay for the cost of the infrastructure. ... Now there's an air of pessimism, and I think you'll see a reversal."

Mandel foresees that the plunging price of all things telecom will stimulate demand - echoing the long-held position of Level 3 CEO Jim Crowe, among others. As businesses seek to take advantage of affordable data services, it may create other opportunities for data center service providers.

"We'll see a rise in profits and business' willingness or make changes without raising labor costs," said Mandel. "There's going to be much more willingness to invest if you can prove it will produce cost savings."

That should be music to the ears of managed hosting providers, who are actively trying to sell enterprise customers on the merits of outsourcing their web and IT operations. But make no mistake - Mandel isn't predicting rosy times ahead. He's predicting that there will be profits amid the pain.

"This will be an exceedingly difficult process," he said. "This is the nasty stage of the New Economy. This is where you actually replace people."

If other analysts and economists disagree with Mandel - and many of them do - he's accustomed to it.

"My stock in trade is saying things people didn't believe at the time," said Mandel.

Deja Vu for Exodus

Cable & Wireless is about to disappoint someone. The big question: will it be the employees and customers of its Exodus hosting unit, or British investors who are bidding C&W shares higher on the expectation that the company will ditch its US operations?

C&W shares gained 5.7 percent Monday in London after an article Sunday in The Independent that treated the closure of Exodus as a done deal. That followed a series of speculative reports last week suggesting that C&W directors were leaking details of the coming shakeup. British analysts and investors have been critical of the company's US strategy, which the UK media links to the fortunes of C&W chairman Graham Wallace.

This must seem like deja vu all over again at Exodus, which spent much of last year trying to reassure investors and customers about its financial future before it filed for Chapter 11 protection in late September.

Cable & Wireless acquired most of Exodus' assets earlier this year, including 26 of its 44 operational data centers totalling about 4 million square feet of gross space. More importantly, the deal included 3,200 customers - down from more than 4,500 in the first quarter of 2001, but nonetheless an enviable entry point into the US market. Its US holdings also include the former Digital Island, with a content delivery and streaming services network that reaches more than 14,000 ISPs worldwide.

But even before the deal was concluded, C&W began to see Exodus as an asset that was deteriorating in value. The purchase price was initially set at $850 million last Nov. 28, with a mechanism to adjust the purchase price based on the value of Exodus' customer accounts. The price had already dropped by $100 million to $750 million by the time the deal was finalized in early February.

If bankruptcy court motions are any guide, that trend has continued. Cable & Wireless has asked the bankruptcy court for a refund of up to $135 million, of which EXDS Inc. has already paid $50 million. The two parties are negotiating the size and structure of the remainder of any refund, which could lower the final price of the deal to less than $500 million.

That erosion in the value of the US hosting business has no doubt complicated C&W's ability to defend the acquisition to analysts and investors on its UK home turf, who have seen the value of C&W shares fall from 350 pence when the deal was signed to 138 pence this week

The FUD Factor

Judging from breathless coverage in the Washington Post and Reuters, you'd think we dodged a bullet during Monday's denial of service attack on the Internet's DNS servers. "The heart of the Internet sustained its largest and most sophisticated attack ever," wrote the Post. Network operators saw the event a little differently.

"Yesterday's attack was only visible to people who monitor root servers or whose backbones feed root servers -- whereas the average person who just wanted to use DNS to get their work done didn't seem to notice it at all," wrote Paul Vixie, chairman of the Internet Software Consortium in a post to the North American Network Operators' Group (NANOG) e-mail list.

Other list members were similarly unimpressed. "We see this everyday ... this was nothing out of the ordinary except the destination," wrote one. Another dubbed the attack "pretty piddly and unintelligent."

Is the media that clueless about Internet attacks? Or are network professionals jaded about media coverage? I think it's a little of both. I have an interesting vantage point, as I worked in newsrooms for two decades, and now cover Internet infrastructure full-time. A few months back I used this space to examine the risks of an attack on the DNS servers.

It's important to remember that the news media and network engineers have completely different and competing interests. The media want folks to pay attention to what they're writing and saying. The "FUD Factor " (Fear, Uncertainty and Doubt) is an especially effective way to get an audience's attention. The "largest and most sophisticated attack ever" is much more interesting to read about than a heavy network traffic event that never endangered anyone's Web surfing experience.

Meanwhile, network professionals' success is measured by the uneventful operation of their network. The last thing they want is to be quoted in the national media about why their network was out of commission. Like anyone else, they'd like the media to have a clue about what they do, and understand the nuances that separate a major incident from an everyday event.

I'm not entirely unfamiliar with FUD. I covered the Y2K issue (the ultimate FUD event) for our local daily newspaper, and in late December 1999 wrote a story about the possibility of network attacks that might disrupt the rollover period. They never materialized, of course.

My editors thought I was an alarmist, and had wasted a lot of ink trying to explain this new threat called a "distributed denial of service." Two months later, when DDOS attacks put Yahoo and other major sites out of action, those same editors proudly noted how the paper had explained all this to their readers months ago. You never know.

C&W Cuts: How Deep?

Speculation about the future of Exodus is growing amid expectations of impending cuts in Cable & Wireless' Global division. That includes rumors that C&W may make deep cuts at Exodus or even exit the hosting business altogether, a possibility raised earlier this week in the British media, including the Financial Times. At first blush, the reports seem hard to believe. And yet, this has been a year in which the truth has often seemed stranger and wilder than any rumors.

The ominous reports about C&W's hosting operations emerged Monday, following active trading in the company's shares on the London exchange. The Financial Times attributed the activity to leaks about the outcome of a strategic review of Cable & Wireless' operations, which is expected to be announced on Nov. 13.

"C&W initiated the review last month and, according to market whispers, directors were presented with an outline of its most important conclusions last week," according to the FT story. "If you believe the talk, it will see a significant chunk of the group's Global unit, which includes all its Web hosting activities, shut down as it struggles to become profitable." If you have a FT Level 2 subscription, the full article is available here.

Similar reports appeared in the Times of London, which reported that Investec Securities "suggested that the telecoms carrier is likely to announce its withdrawal from the US at its first-half figures on November 13. The broker believes such a move would entail restructuring costs of £800 million, but would pull its key C&W Global division back into break-even in the UK and Japan."

Speculation about Cable & Wireless is a major sport in the British financial media. But the reports come on the heels of C&W's rapid exit from many North American Internet access contracts (which were sold to New Edge Networks last week) and persistent rumors of large job cuts.

Just another wild rumor? Stay tuned.

Signs of Life

It's easy for telecom survivors to be jaded about data suggesting that the market is on the road to recovery. The industry has hitched its hopes to such reports before, and yet the pain persists. With that caveat in mind, this week I came across three different reports of reversals of problematic telecom trends. None of these, taken by themselves, is enough to set champagne corks popping. But taken together, these reports offer support for the notion that a bottom may be forming.

First came news from from market research firm TeleGeography that long-haul bandwidth prices are stabilizing, and even rising in some markets. This uptick follows years of steep decline in bandwidth pricing.

Meanwhile, Sage Research's monthly survey of 104 Internet service providers found a modest uptick in sentiment about industry business conditions. More than half of the respondents reported that their revenues were up slightly since July.

Finally, there was the welcome news telecom layoffs are tapering off, as tracked by the executive placement firm Challenger Grey & Christmas, which found that the number of layoffs in the telecom sector fell 52 percent from the second to the third quarter this year. As it turns out, September 2002 had the fewest telecom layoffs since November 2000.

More Free Colo

It didn't take long for Cogent's offer of free colo space for bandwidth customers to prompt a response from other providers. On Sunday, network services provider LayerOne extended a similar offer, and yesterday regional colo player OpticFusion followed suit.

"We see the larger companies doing this, and we thought the smaller customers could benefit from this as well," said Rick Shanaman, President of Optic Fusion, which operates out of the Perkins Building in Tacoma, Washington. The company is offering customers a choice of a free cabinet with the purchase of 2 megs or more of bandwidth, or 1 meg of bandwidth free with the purchase of a rack or half cabinet.

"Let's face it, things are very competitive right now," said Shanaman. "We take pride in designing services to achieve each customers' need. The big guys are not the only or best option."

Last week I wondered aloud whether Cogent's move was a reflection of the company's business model or the realities of the marketplace. What's clear is that the current market dynamics - featuring lots of vacant or underused floor space, an IT spending slump, and fierce competition for customers - make it harder for providers to ignore competitors' aggressive pricing.

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.

Openings, Closings And Sales

It was a busy week on the data center front, with a mix of facility openings, closings and proposed sales. Several media outlets reported that Tech Commons LLC is working on a deal to sell its underutilized telecom hotel site in Natick, Mass. to the nearby Natick Mall, which plans a major expansion, according to The Boston Globe. The 283,000 square foot site was previously a Wonder Bread factory. None of the stories had details on the proosed deal. In other news ...

Calgary, Canada was a hotbed of activity this week with the debut of two new data centers. Q9 Networks unveiled a new 22,000 sf center in Calgary while Zoolink Communications also launched a newly-acquired facility.

Sears Roebuck is planning to close or sell a data center in Boise, Idaho that provided It support for the chain's stores. The Idaho Statesman's story doesn't mention the square footage of the facility, which employs 120 workers, primarily IT staffers.

Inflow Turns Five

Today I opened my e-mailbox to find a press release from Inflow noting that the company has reached its fifth anniversary. It was the latest in a flurry of recent press releases by the Denver-based managed hosting provider, each touting the success of an individual data center or the continuation of a customer contract. I've resisted writing about most of these, as the information was interesting but not necessarily new (a critical component of "news"). But sometimes getting older can be noteworthy, and so it is with Inflow as it turns five.

Anniversaries aren't always newsworthy. Back when I worked at a daily newspaper, I once debated this point at length with a church secretary who believed the paper absolutely needed to write a front-page story (with a photo!) about her church's 223rd anniversary. "Ma'am, the least you can do," I advised, "is offer me a round number. Something ending with a zero or a five."

But in today's data center industry, remaining independent and solvent after five years is an accomplishment. And while Inflow's releases don't always contain news, they relect the company's belief in the satisfied customer as a marketing tool. Virtually every Inflow release contains a customer testimonial, or perhaps two, as in today's anniversary release (quoting Fuddruckers and Wizmo Inc).

The industry's failures have created a credibility crisis. Many companies shopping for data center services are more likely to trust recommendations from other businesses than promises from providers. After all, I'd wager that none of the hosting and colocation providers who've filed Chapter 11 or "migrated" customers mentioned either of those potential outcomes during their marketing pitches. Inflow has satisfied customers, and it's leaning on them as it tells its story.

"Over the last five years, the market has seen drastic change," said Art Zeile, chief executive officer for Inflow. "Only the strong have survived and we are thrilled to continue to support our growing list of customers." And get support from them, as well.