Sorting through data centre debris

5 Dec 2002

Three years ago, data centres were considered the harbingers of wealth in the dotcom and communications age, the so-called ‘engine rooms of e-commerce’.

IDA Ireland, telecom firms and an influx of new pan-European players overburdened with millions of euro in venture capital were all eager to play the game. In the space of a year, some 22 companies invested between them some €500m in building these capital intensive ‘engine rooms’, kitted out with all the latest hi-tech gadgetry and enough covert security to make even Saddam Hussein feel confident of avoiding UN weapons inspectors.

The plan was simple – Ireland’s positioning as a European e-commerce hub would make it the perfect home for hosting internet content and a myriad of e-commerce transactions for US and European businesses.

The devastation visited on the technology and telecom markets in the intervening period wreaked havoc on these firms and their flimsy business plans, and even longstanding international telecoms carriers got hurt in the crossfire. The list reads like a litany of the dotcom dead – CityReach, Exodus, Worldport, Wolfe Group, Inflow and 360 Networks are just a few – and many, after building enormous data centres capable of withstanding a plane crash, hadn’t even succeeded in getting a single customer into the facility.

In the inevitable liquidation sales of the assets of these expensive centres, many of these centres with an average investment of some €25m each, saw the value of their assets fall by approximately 90pc.

At present, there are less than six independent data centres left operating in the State, and if TeleCity, which operates a data centre in Citywest Business Park, is to be believed, within a year less than three will be left operating in Ireland. Why then is TeleCity, a pan-European operator of data centres in principal European cities that last year faced a crash crisis of its own, so confident about its future?

TeleCity’s CEO Ricky Hudson (pictured) states that the London-listed firm at present is now fully funded and expects to be EBIDTA (earnings before interest, taxes, depreciation, and amortisation) positive by Q2 next year – the first European internet data centre company that will turn a profit.

Last year, it posted a turnover of £32.6m sterling, a 131pc increase on 2000. TeleCity was the first large web-hosting firm to establish a data centre in the Republic as part of a public private partnership with the Government and connects Irish customers to Global Crossing’s international fibre network.

This week, the company unveiled research it commissioned from Ovum that claims demand for outsourced data centre infrastructure in Ireland will grow year-on-year by 20pc through 2004. Ovum valued the Irish hosting market at €9m this year, growing to €13m by 2004.

Compared with the €500m invested two years ago, this should leave a few red faces at IDA Ireland and in the boardrooms of a couple of reputable telecom firms. However, TeleCity expects the overall market to be actually worth €26m once inward investment opportunities are factored in. The sizing of the Irish market by Ovum was based on 40pc of domestic businesses operating in the IT and telecoms services industries that currently consider outsourcing the management of network or system servers.

Hudson believes that only three internet data centre players will exist in the Irish market in a years’ time: TeleCity, Data Electronics (a home-grown data centre business with a 25-year track record, which is responsible for running the internet neutral exchange for Irish internet service providers [ISPs] and the data hosting assets of a local telecoms firm he wouldn’t name.

“Over 75pc of data centre capacity planned for Europe never happened. Out of five million sq ft of data centres planned for Europe, some 500,000sq ft now exists, because the proponents of so many plans went bust,” he said.

So, why then is Hudson confident that TeleCity and only a few survivors can make it? “The companies that survived did so for a few reasons. The timing of their entry into the business, the seriousness of their proposition, their offering was clear and unambiguous. The companies that failed had attracted millions in venture capital, yet when it came to the crunch they had no customers to fill their data centres and their service offerings were very unclear. As you can see from the situation in Ireland, many had underestimated the size of the market. Many companies believed that they could build loads of data centres for a demand that never happened,” he said.

“Our solution was to focus on 11 key centres and keep an eye on achieving the lowest unit costs and a realistic share of each market. We also floated TeleCity at the right time and enjoyed first mover advantage. Our ambition is to take 35pc of the Irish internet data centre market. We currently have just over 10pc of the market today,” Hudson added.

In terms of reaching such a goal, Hudson was upbeat. “Irish companies, we believe, will require €9m worth of data centre capacity this year. Ovum predicts this will grow to €13m by 2004. This will happen, I think, because in a more cost-conscious business world, firms want to keep capital expenditure to a minimum and this especially rings true for telecom firms and ISPs. Of our 50,000sq ft capacity in Dublin, 22,000 is server space of which one third is currently contracted out to customers such as the Global Crossing point of presence for the Irish Government and content firm MoneyMate, which hosts the content for the Financial Times from our centre. We have recently taken control of JobsOnline for the Irish Times. We also believe there is enormous potential for business from inward investment coming into Ireland, ranging from tech firms to IFSC companies,” he said.

On a closing note, Hudson said: “At present there are only six true carrier-neutral co-location and data centre operators in Europe. Europe doesn’t need six.”

By John Kennedy