1992-2004

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Colocation 2004 Executive Summary shim  
 

Over the past three years, prices for most telecom services have plummeted dramatically, some by as much as 90 percent. However, prices for colocation have remained relatively stable. Moreover, the negative gap between expenses and revenues has narrowed appreciably on some colo providers' income statements, as many facilities are now profitable. What explains this success?

The secret, paradoxically, lies in failure. While bankruptcy in most telecom industries reduced the number of suppliers but not necessarily the supply, consolidation in the colocation sector has done both. Many providers have shelved ambitious construction plans; others have exited the market entirely, converting facilities to warehouses and other non-telecom uses. With the colocation supply thus constrained, fill rates in the remaining facilities have inched encouragingly upward.

Colocation facilities occupy a crucial position in the telecommunications landscape, serving as the juncture for a diverse array of network providers, ISPs, content providers, and enterprises. In a sense, each colocation facility is defined by its combination of tenants. Consequently, colo providers are diverse, both in terms of the characteristics of their facilities and the range of services offered. Even so, the colocation providers profiled in this report may be grouped into three general categories: bandwidth providers offering colocation within their PoPs, real estate and investment companies providing basic space within carrier hotels, and colo specialists focusing heavily on colocation and hosting services (see Figure 1. Colocation Provider Typology).

Figure 1. Colocation Provider Typology
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Note: The basic colo services and managed services shown are meant to illustrate the specialty of each colocation provider type; they do not necessarily reflect the full services portfolio of the example colocation providers.
Source: TeleGeography research PriMetrica, Inc. 2004

At their most basic, colocation facilities offer customers housing for equipment, though many also offer the requisite systemsredundant power, air conditioning, and securityfor establishing a point of presence (PoP) quickly and easily. Typical colocation customers include carriers, ISPs, and, increasingly, private enterprises. Large corporations often opt to locate equipment in third-party sites, as the sheer magnitude and mission-critical nature of their data and networking needs may overwhelm internal resources.

Services

Colocation space is sold in a variety of configurations: racks, cabinets, cages, suites, vaults, and shell-and-core space (leased by the square foot or square meter). In addition, most colocation providers offer basic managed services such as installation and low-level maintenance (e.g., rebooting computers). Some colo operatorsparticularly bandwidth providers also offer connections to the outside world, including SDH or SONET circuits, Ethernet, optical wavelengths, and dark fiber. Most facilities also include Internet transit among their service offerings. Colo providers serving smaller enterprise customers offer more advanced services, including equipment monitoring, web hosting and load balancing, switch partitioning, and data storage, backup and disaster recovery.

Pricing

Pricing for colocation services has remained relatively stable compared to many telecom services. European rack prices in the cities surveyed averaged approximately $600 per month during the first half of 2003 while U.S. prices averaged $900 per month during the same time frame. These average prices mask the fact that prices can vary sharply, not just between these regions, but within individual metropolitan markets. The average rack price in European colocation facilities has dropped 25 percent since March 2000. In contrast, a 155 Mbps London-Paris STM-1 circuit lease in summer 2003 sold for only one-tenth of March 2000 prices (see Figure 2. European Bandwidth versus Rack Prices, 2000-2003).

Figure 2. European Bandwidth versus Rack Prices, 2000-2003
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Notes: STM-1 prices represent median quarterly lease prices. Both rack and bandwidth prices exclude installation charges.
Source: TeleGeography research and Band-X, Ltd. PriMetrica, Inc. 2004
 

Two factors help explain why colocation prices have resisted the precipitous erosion that has plagued services in other telecom sectors. First, the cost structure of colocation services is quite different from that of bandwidth services. Technological advances such as Dense Wavelength Division Multiplexing (DWDM), which enables carriers to send more than 100 wavelengths down a single strand of fiber, have driven down the cost of providing a circuit. By contrast, the two key cost inputs for colocation servicesreal estate and electricityhave remained firm.

Effective market consolidation represents a second factor supporting colocation prices. As with many telecom sectors, rapid expansion during the boom of the late 1990s and 2000 resulted in chronic oversupply for the colocation sector. Oversupply led to the insolvency of several providers, including Colo.com, Verado, and CityReach. In other sectors of the telecom industry (and in most industries that produce non-perishable goods), "consolidation" has signified a reduction in the number of players, with assets simply shifting from one player to another, rather than a reduction in assets supplied. Thus, while a bankrupt fiber-optic network operator may liquidate its assets, its deployed fiber does not disappear but remains buriedand, thus, potentially available for future use. Industry consolidation in this sense may reduce the supply and demand gap for provisioned services but rarely addresses the long-term supply overhang of potential services.

In the colocation sector, however, consolidation has had longer-lasting effects on the level of supply. Unlike fiber and similar telecom assets, a company can convert buildings for use in other industries. A warehouse remodeled for use as a data center in the mid-1990s, for example, can be reconverted for use as a warehouse. As a result, colo industry consolidation has removed assets from the pool of supply, resulting in a true reduction of space in some cities (see Figure 3. Total Space in U.S. Colo Specialist Facilities, 1999-2003).

Figure 3. Total Space in U.S. Colo Specialist Facilities, 1999-2003
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Note: Data show space in facilities operated by colo specialists in the ten US cities profiled for Colocation. Thus, while important for understanding relative trends, they should not be regarded as comprehensive regional totals. This chart includes space from all colocation providers, including those that have leased space from other colocation facilities already counted in the totals.
Source: TeleGeography research PriMetrica, Inc. 2004
 
 

A variety of mechanisms has removed real and potential supply from the colocation market:

  • Ambitious build-out plans were scrapped. An inventory of planned facilities suggests the total would have exceeded tens of millions of square feet. Had every planned conversion and construction taken place, the total floor space in major U.S. cities would have exceed todays supply by 50 percent or even 100 percent.

     
  • Colocation spaces were reconverted for use in other industries. For example, Tishman recast a 442,000 square foot department store distribution building in Washington, D.C. as the Union Station Telecom Center. The building proved commercially unviable as a carrier hotel, and by mid-year 2002, Tishman was exploring conversion of the building to government agency offices.

     
  • Colocation centers were sold to private, non-telecom enterprises. In three separate transactions, MCI sold three colocation centers to Wachovia bank, Citigroup, and DST Systems, a computer software services company.

     

Signs of Success

As of mid-year 2003, many colocation providers were still struggling against the widespread supply overhang. Equinix, Terremark, Redbus Interhouse, and TeleCity each reported negative EBITDA for the year 2002. Nevertheless, income statements from colo providers revealed that cost-cutting efforts were bearing fruit:

  • As of mid-year 2003, Redbus Interhouse operated three EBITDA-positive facilities. Operating loss in first-half 2003 for the company overall had narrowed to roughly one-half of the 2002 loss.

     
  • Both TELEHOUSE America and TELEHOUSE Europe reported EBITDA-positive results over the past several years.

     
  • Interxion reported 350 percent revenue growth in 2002 over the previous year and claimed to operate a number of cash-flow positive buildings.

     
  • Six of nine TeleCity facilities were EBITDA positive by year-end 2002.

     
  • Switch and Data reported it was EBITDA positive in 2002.

     

In the sixteen cities profiled for this report, colo providers had sold roughly 60 percent of the 45 million square feet of floor space available. Annual revenues from services provided in these facilities totalled approximately $1.1 to $1.7 billion.

Despite many prominent bankruptcies, service providers in certain telecom sectors have little to show for their pain. Particularly for providers of long-distance networks, the supply overhang remains vast and prices soft. For many of the survivors of the colocation real estate bust, the view from 2003 is decidedly less grim. Market mechanisms have had some effect: business failures have resulted in a true reduction in the aggregate volume of colocation space, improving the balance between supply and demand.

Figure 4. Most-Connected Bandwidth Providers, Selected Cities
  United States Los Angeles Miami New York San Francisco
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1. MCI 15 10 28 17
2. Level 3 16 9 21 10
3. XO Communications 10 12 21 11
4. AT&T 11 9 18 10
5. Qwest Communications 9 6 18 12
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  Europe Amsterdam Frankfurt London Paris
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1. COLT Telecommunications 10 10 12 9
2. MCI 8 6 10 5
3. Level 3 10 7 9 4
4. Cable & Wireless 5 3 11 2
5. KPN 11 2 2 1
Note: Companies connected to colocation facilities were not considered major bandwidth providers unless they offered capacity of at least 155 Mbps on long-distance or metropolitan area networks. Companies specializing exclusively as local access and Internet transit providers were thus excluded.
Source: TeleGeography research PriMetrica, Inc. 2004

A Look Forward

The first section of Colocation provides an overview of the entire colo industry. The analysis includes a review of colocation provider developments, examination of colocation infrastructure, and an investigation of services and pricing trends. The remaining pages of Colocation offer profiles of individual colo facilities. Organized by city, each of the 404 profiles provides contact and address information; data on total and available space; details on power provisioning, security measures, fire suppression, and climate control configuration; a list of bandwidth providers connected to the facility; and a review of the services (basic and managed) on offer at the facility. A metro-level map of the site's location accompanies each profile.

 

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 (C) 2001 Alexey Kondrashov