Strongest left standing after storm

28 Apr 2003

Ireland’s perceived overexposure to the ills of the European data centre and co-location market may eventually turn out in the country’s favour.

So says IDC’s head of research into internet protocol-based network and hosting services, James Eibisch (pictured), who has more than 12 years’ experience in researching the market and who was recently a guest speaker at an Eircom-hosted seminar on the industry in Dublin recently.

According to Eibisch, Ireland’s ability to weather the storm despite its overexposure in the form of one of the largest global concentrations of data centres in Dublin city, may actually turn out to be a material advantage as the industry reaches equilibrium in 2005.

IDA Ireland’s ability to secure major projects such as search engine operator Google’s decision to locate its first operations centre outside the US in Dublin, resulting in 200 jobs, and internet content developer Overture’s decision to expand with 250 new jobs may be attributed to the proliferation of data centres in Dublin.

“If there is one thing certain about the European hosting business over the past few years,” noted Eibisch. “It was that there was too much over-build. In Dublin, more so than in most cities in Europe.”

In the frenzied dotcom build up between 1999 and 2001, no fewer than 22 internet data centres established operations in Dublin, heavily funded by venture and investor capital. They were lauded as the engine rooms of e-commerce and, according to various pundits, were considered as vital to Ireland’s infrastructure as the factories of the Sixties and Seventies. Indeed, the frenzied build up caused consternation at the ESB as a shortage of electricity for these data centres was vaunted as an issue of national peril.

Since then almost a dozen of these engine rooms of e-commerce, including CityReach, WorldPort, 360 Networks, Exodus, Wolfe Group, Metromedia and Inflow, have shut down or been acquired.

The arrival of businesses such as Google and Overture into the market may provide the necessary stimulus in the local market, with Cable & Wireless, Level 3 and Esat BT competing aggressively for a share of Google’s business alone. As well as this, Hewlett-Packard’s (HP) decision in February to lease Metromedia’s 60,000sq ft date centre in Citywest Business Park to offer outsourced services indicates certain belief, when you consider HP’s recent win in running Bank of Ireland’s €800m IT infrastructure.

Before its parent firm fell into financial difficulties, Metromedia was close to completing a US$110m investment in Ireland, consisting of a US$75m data centre and a US$45m fibre ring that stretched for 100km around Dublin. “The concept of ownership is not important to us right now, but underwriting the solution set is. But if some time down the road the market seemed right for it, we would certainly consider acquiring the facility,” said Tom Carson, Ireland country manager, HP Services, at the time.

According to IDC’s James Eibisch, the market is slowly but surely righting itself. At present, he says, the market in terms of the existing data centres dotted around key European financial centres such as London, Frankfurt and Amsterdam, is currently at 25-30pc capacity – barely strong enough to sustain the existence of the remaining 70pc of state-of-the-art facilities. “Many of these could find themselves being used in alternative ways, some will end up as office blocks, other may even become nightclubs,” Eibisch averred. “However, by 2005 we anticipate that the data centre market in Europe will reach 75pc capacity, whether through the business maturing or consolidation.

“The data centre market was a victim of the hype curve that afflicted dotcoms and telcos. When sentiment changed it affected their funding and caused cash-flow problems and they weren’t able to get over the hump and invest in sales and marketing activities. Many projects were built with heavy debts and duly collapsed.

“But the collapse has not been as harsh as most people believe. It was a clearing out of the unnecessary over supply and those that were strong enough have survived to meet the anticipated market demand. In the past couple of months, you have seen AT&T establish new data centres in the south of France whilst Microsoft has begun taking space at Eircom’s data centre in Dublin,” Eibisch added.

“It is true that demand has been pretty flat for the past two years, but not completely flat. Demand in the right quarters is sufficiently strong. It is a long-term play and really a game for companies with deep enough pockets to hang around for when the market finally matures around 2005.

“A year ago, out of the existing infrastructure, there was only a 25pc utilisation rate of data centre space in Europe. Today that is at 30-35pc. In four to five years as space reduces, as the operators consolidate and as demand matures, utilisation will grow up to 70pc by 2006,” Eibisch said.

“For economies such as Ireland, operators will need to retain focus and develop a solid business that will see high-value clients that will go for long-term business rather than those that will do business for a year or less. It is really down to the quality of their business and the services that they offer,” IDC’s Eibisch concluded.

Eibisch’s comments were echoed in a recent advisory from telecoms analyst Ovum, which stated: “The hosted services market is an immature market facing both competitor consolidation and the disruption caused by the introduction of new business models. It is prone to the mood swings of early adopters and to the impetuous urges of suppliers introducing their own e-business operational changes. But, for those players who implement the right products and services strategy, the future looks bright.”

By John Kennedy