Finding the right data center is something like deciding whether you want to spend a luxurious night at the Ritz or you need just the basic shelter afforded by a Super 8 Motel.
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There are many different types of data centers out there today, with varying levels of services and amenities, and it's important for businesses to know what they're getting and what they will be paying for before they put in the equipment that is vital to running their e-business infrastructure, says Michael Rolnick, a partner at ComVentures (www.comventures.com), a Palo Alto, Calif.-based venture capital firm that specializes in the communications industry.
Rolnick, who was one of the early executives at E*Trade and helped build the company's private data center, has been watching the explosive growth in the number of data centers and the increasing interest in outsourced solutions. He recently spoke with xchange editor in chief Gail Lawyer about challenges businesses have in finding the appropriate outsourced data centers and the issues operators of those facilities face in keeping up with the rapidly changing technology.
X: Obviously the growth in the Internet has been the major impetus behind the proliferation of data centers. What is driving the need for outsourced solutions?
Rolnick: I think it's complexity. If you look at it from an E*Trade perspective, E*Trade had to understand how their stuff worked. But if you look at it from a Merrill Lynch perspective, somebody who competes with E*Trade, they have a completely different business model. E*Trade would say that their value proposition is that they understand the technology, and financial services is a byproduct of that. Whereas with Merrill Lynch, their main knowledge is financial services, not technology. It's very hard for large enterprises to understand [not only] all the nuances of how all this new economy stuff works, but also how complex this stuff is.
Data centers are the aggregation point not only for the real estate where you store your server and connect them to the Internet, but for people who are doing everything from software to security services to make sure their sites are secure. Every new company that comes down the pike wants to have a data center as a channel partner to sell their product through.
X: Do you still see many companies building their own private data centers, as E*Trade did early on?
Rolnick: I think one of the reasons you're seeing less and less people do that is because the cost of capital to build that heavy-duty infrastructure has gotten very expensive. In 1996-1997, E*Trade built their own data center because 1) there wasn't a lot of data center space for them to go contract, and 2) the cost for them to go do it themselves was relatively cheap compared to what it is today.
X: Who are the winners and/or losers in this business?
Rolnick: If you look at companies like Exodus [Communications Inc., www.exodus.net] and other behemoths in this space, their challenge [is], now that they have these people packed in, what other services that have higher margins can they offer? You saw a whole series of companies, such as SiteSmith [Inc., www.sitesmith.com] and Loudcloud [Inc., www.loudcloud.com], that believe it's not only about having people rent your space, but actually letting you operate their equipment for them, instead of having their own people do it. It's a very high margin business because you're renting people out at $300 an hour and paying them $30 an hour.
It's a lot different than the business data centers started with, which was just basically as a warehouse that had access to the Internet.
X: Are businesses comfortable with the outsourced model, where they give control of everything over to a third party?
Rolnick: It depends. If you want someone, like Loudcloud in particular, that has partnerships with specific vendors, but if you don't use Oracle or Sun, they won't support you. There are other competitors in that space that are agnostic, and will support you.
I think the whole idea is that [for] this category of companies, called managed service providers, it's their business to understand the emerging technologies, and they're going to make sure that their customers are on the latest and greatest platforms that have the lowest cost and the highest service level. It's very hard for a CIO, who is reading all of the popular market research, to stay ahead of the curve. They'll always be behind the curve. That's the value these people provide.
Also, with companies such as SiteSmith and Loudcloud that are doing this on an outsourced basis, their value proposition is that whatever your business footprint is, we can mirror your technical footprint to that. So if all of your customers are in Europe, we'll set your boxes up in facilities in Europe. For companies like Exodus, that's a barrier because it takes them a couple of years to build a data center. They can't very easily and concisely mirror somebody's business footprint with a technology footprint.
Loudcloud customers might have some of their equipment in an Exodus data center, some in a Level 3 data center, based on where that customer's business might be. That's a very compelling value proposition.
X: Is there going to be a data center glut?
Rolnick: A few things are going to have to happen to create a data center glut. One is that the explosion of the Internet is going to cease or decline. I don't see that happening, and I don't think that people are going to become less Internet- oriented. In fact, people are trying to get this stuff out harder than they were before, whether it's a mom and pop store, or a large enterprise.
The other thing that's having an impact is that there are a bunch of people who are developing faster, quicker, cheaper products, with a smaller footprint.
I think there's a lot of room for data centers. That's not to say that the margins data center operators have, and the pricing they have, is going to remain stable. But if you look at it from a pure supply-and-demand perspective, I think there is still some data center growth that will go on.
X: What do businesses need to be concerned about when they're seeking an outsourced data center solution?
Rolnick: The key here is like with anything else: You better know what it's for, how it works, and what you're buying. There are a lot of things you can find [in data centers] that you probably don't need, or there are a lot of ways that you might get into buying things that aren't right for you.
It goes back to my concept that data centers have become the aggregation point for a whole bunch of services that people who want to be web-enabled need. What happens is that this creates situations where there's a host of other relationships that might drive people to purchase things that they may or may not want. For instance, a data center operator may have one resale relationship with one vendor, and a more profitable resale relationship with another vendor. If you don't know that, then the operator of the aggregation point might have you buying something that you don't want. But there might be a better solution for you that might be lower revenue producing for [the data center operator].
X: What kind of questions should companies be asking when they explore using outsourced data centers?
Rolnick: There are some very basic things: Internet security, disaster recovery, service levels, operational procedures. There's a quality issue ... what do people know, [and] how skilled are the operators of the data center?
Here in California, where we have energy problems, one of the big questions would be, how do you roll over to backup power, what's the source of that power, what's the pricing of that power?
Most people think that all data centers are the same, but the fact of the matter is that the data center market is segmented. Some specialize in small and medium-sized businesses, and others specialize in large enterprises.
X: What other big issues are affecting the hosting space?
Rolnick: [One thing] that is going to come up is [trying to understand] it from the data center operator's perspective. These [facilities] grew like a cancer. I don't think they ever had any degree of visibility about how these buildings would evolve in terms of what is going on now. I think the data center guys have gotten very wise and innovative about what the data center of the future should look like.
There used to be the situation where a customer rented space and tried to replicate their entire operation in a single cage. Now you hear about things like storage-area networking, where web servers and database servers are in the cage, but your storage would be a shared-storage facility in the data center.
It becomes a beast. A data center that is built this year better look significantly different than data centers built the year before because of the significant changes that are going on in services.
