Hosting Outlook: From leasing space to managed services

As more and more organizations gravitate towards a click-and-mortar business model, they realize that their IT infrastructure has to be ready to support this new game plan as well. While some companies choose to build from scratch, others will look to outsource this function to IDCs and focus instead on their core business, thereby providing growth opportunities to the hosting industry with its inherent concept of reducing costs while increasing reliability with additional managed services.

Although a bit of an oxymoron as IDC services are originally outsourced, some IDCs also outsource part of their services to another service vendor because of unique demands by customers or they don’t have the expertise in-house. Companies which used to host their servers in-house will know the myriad levels of expertise required to maintain a large application serving a wide group of users located in different countries.

Managing multiple suppliers has always been a difficult task. Customers now seek a partner that can provide a one-stop service with best-of-breed network, system and applications solutions.

Your place or mine?

According to Sam Lin, CEO of NetTasking Inc., the over supply of hosting services is propelling the industry into the maturity phase whereby the hosting service offerings have become commodities. Supply is outstripping demand so fast, creating intense price competition in the hosting industry. IDCs really have to look at how they can differentiate themselves from the competition and find out how they can make their voice heard amongst the noise. The provision of a set of services and value propositions beyond that offered by any other competitors is the key. The IDC that can quickly scale to provide customers with a unique service offering will emerge as the winner of the race.

This view is also borne out by Roger Lim, CEO of Webvisions Pte Ltd who sees the influx of IDCs forcing the early movers to provide global offerings and strong value-added services such as managed services and high service levels in order to survive. It is inevitable that these IDCs will then form partnerships with other players to quickly boost and complement their company’s capabilities. Partnerships will ensure the fastest speed to market in the most cost effective manner. IDCs will look for infrastructure management service and solution providers with the resources and right technology to help them boost up their service offerings quickly.

Gregory Chia, COO of 1-Net, while agreeing that IDCs will be more competitive with attractive prices feels that we may soon see a number closing their doors or failing to reach profit expectations as they drop prices, sometimes below cost, to build a reasonable customer base. He also sees the proliferation of the ultra dense servers (1U) will result in higher demand for power and cooling.

Dennis Muse, President and COO of iAsiaWorks has seen a continued and strong demand for world-class hosting services in the Asia-Pacific region despite the economic slowdown in world markets. Although some companies may expand their online businesses more slowly than they might have anticipated a year ago, he believes that as they move forward, quality and reliability will be foremost in their minds.

He has seen increased competition in the low-end of the market, from what he calls the “mom-and-pop server farms” that offer very basic services. But he feels that because high-end IP infrastructure is very capital-intensive, there will be less near-term build-out than some earlier estimates predicted, and that a few early entrants in that market will be the major players for the next few years to come.

Arthur Leung, General Manager, Hutchison GlobalCenter and Y C Lee, Senior Manager, Data Center Technology both see a consolidation trend happening in the data center business. They perceive data centers changing focus and drifting in their directions looking for survival and it is not unlikely to see them competing with their own customers, e.g. IDCs turning into ASPs themselves.

From a technology perspective, improvements in technology mean that many IDCs are going to begin upgrading their infrastructure. Some are not properly equipped to handle mission-critical applications and are going to have to adapt quickly in response to demand for better performance. The market for IDCs is fairly new in Asia. As it matures, we should see a shakeout, with IDCs that have cut corners on design and technology losing out to providers that can offer greater security and reliability.

NetTasking’s Sam Lin thinks that infrastructure management software will become an increasingly important element that the hosting industry will tap on. As the perimeter of control and coverage of IDCs expand with the increasing customer database, infrastructure management software will be hailed as the Holy Grail for helping IDCs manage their customer networks.

The more powerful the software, the more extensive the capabilities and services the IDC can in turn offer to its customers. Using global content routing software from NetTasking and Unitech Networks, IDCs can provide accurate Internet traffic management for multi-sites to serve requests, improving service availability as well as response time.

On the other hand, not all IDCs will be drawn into purchasing expensive management software, considering the implementation and costs requirements. Let alone, being able to charge end-users competitively, and IDCs will be hard-pressed to pass on these capital investments to their customers for fear of pricing themselves out of the market.

J. Josef Versl, Managing Director Triaton Asia Pte Ltd concurs, but cautions that IDCs may soon find themselves crowded out of their niche market as hardware vendors are also entering the market. They often have a lower cost of hardware and, in most cases, already have established outsourcing data centers.

Mr Lau Soon Liang, Assistant Chief Executive at National Computer Systems Pte Ltd anticipates the accelerated increase in the demand for managed storage services. With the liberalization of the telecommunications market, charges will be very competitive and this will lead to more demand for hosting. The worldwide shortage of skilled IT workers will also be another factor to increase the demand for outsourced hosting services.

Overall, Lehman Bros believes that these challenges are creating increasing barriers to entry, which should accrue to the long-term benefit of incumbent providers. As soon as the industry revenue growth picture stabilizes, the hidden value of the industry's real estate position and the associated pricing power gained is likely to be increasingly appreciated by investors, a recent report said. This would have the effect of limiting new entrants.

This view is supported by Raymond Choong of iSTT who cites the fact that Telco players are not coming into Asia in a big way due to the fragmentation of the market. Rather, many of them, like AT&T, have scaled back operations. Quest has no presence in the region and will not move in due to the current business slowdown. Even companies like WorldCom are running their HQ out from Sydney and in Singapore through their nodes here, to support the whole Asia region.

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