Best of the ISP-Lists

Strategic Colocation

Members of the ISP-Colo list discuss the steep decline in the price of colocation. As prices drop precipitously, what business strategies will bring success to colocation providers?

[July 19, 2001]

On the ISP-Colo list in June, RW queried,

"I'm seeing colocation prices discounted as much as 60 percent from a year ago. How low do you think colocation pricing will go?"

BP claimed it's just a matter of balancing pricing and service:

"I see the smaller colo providers competing more on price, which seems to coincide with the fact that many of these players have a smaller overhead. The larger companies have moved somewhat on price, but seem to focus on services. They can package services to give each customer more options from which to choose."

Others suggested that this means it's best to cautious about who you colocate with:

[ER warned] "Do you want to trust your colocation business to a vendor that is cutting rates so low that they are going to have a hard time making a profit? Are you sure your low-cost vendor will be in business in six months or a year?

Look beyond the low price. This is your business we are talking about: what will happen to your company if your colocation vendor announces bankruptcy because their sources of funding dried up?"

[DZ agreed] "The Wall Street Journal projects that 78% of all available space in North America will still be unsold by the end of the year, with an estimate of 2% to 5% annual growth in demand over the next four years. If those numbers are even close to accurate, there will be more casualties than success stories over the next four years.

If you are looking at a company that is completely dependent on rack/bandwidth sales to survive, you may want to look twice at the discounted rate, unless you don't mind moving your gear."

Two respondents offered very different views on what a colo company should do in this market:

[CJ offered] "The company that will succeed and grow will be the company that owns, manages, and provisions their own network capacity, and understands how to offer complete wraparound professional services in house. Today's hosting providers are starting to realize that to prosper and grow, they will need to capture every dollar of revenue available.

Are there companies out there today that meet this criteria and realized these things a year ago? You better believe there are, and they are well positioned to withstand the current conditions and capture what few customers are out there."

[AG disagreed] "Many of these services are expensive to provide: expensive hardware, expensive IT resources, and no guarantee that your investment will ever pay out.

Do what you do well. Don't try to be everything to everybody, and give your customers the options they need. Many a company has gone under chasing that last dollar. We are sticking to our business model, which is to grow slowly and steadily, and to stay small."

BN contended it's really all about solid business sense:

"The entire industry is not struggling. We have had some of our strongest months recently.

Yes, there were bad business plans out there, and many providers leased buildings and installed billions in infrastructure, only to watch those buildings sit there empty. But not all of the companies out there have this mentality. Some of them know how to properly manage a company."

—End