Silent Partner

Boy where did the summer go? We just looked up and realized it’s the middle of August. Since August means lots of cool, rolling fog in San Francisco it’s sometimes easy to forget what summertime means to the rest of the country. Humidity and 100 degree temperatures mean that folks crank up the air-conditioner and use tons of electricity. In fact several states across the South and Northeast have recently warned of the potential for rolling brownouts should the current heat wave continue. 

Speaking of electricity use, datacenters have been the target of some startling predictions. According to a widely referenced EPA study released in 2007 the growth of the Internet and the continued digitization of society would cause datacenter power consumption to double between 2005 and 2010. The consumed capacity for US datacenters in 2011 was predicted to exceed 12 gigawatts. That’s enough power to serve over 14 million homes! 

That’s why we took special notice of a recent article from the New York Times that refutes the EPA study. Jonathan G Koomey, a consulting professor at Stanford University, was engaged by the Times to produce a report effectively auditing datacenter growth and comparing it to the EPA predictions. Surprisingly, despite the greatest period of datacenter construction on record, overall power consumption only grew by 56% globally between 2005 and 2010. In the US power consumption only grew about 36%. Mr. Koomey identifies two significant factors that limited power consumption during this period: the recession first and foremost but also the improved efficiencies of the facilities as well as the equipment inside of them. Still despite the good news analysts warn that the slowed rate of power use could be only temporary.

At Silent Partner we’re bolstered by the news in this study. It’s satisfying to note that efficiency and “green” efforts do pay tangible dividends rather than solely being used for marketing. Regardless if the recent activity in our financial markets is any indication we may see a continuation of these lower power consumption rates for some time.

Hello all you cloud heads out there… Greetings from sunny San Francisco where the city is enjoying a brief taste of real, summer-like conditions. Better yet, this week we host the fourth annual GigaOm Structure conference at the Mission Bay Conference Center. Structure is considered to be the most influential conference for cloud computing and its roster of attendees and sponsors backs that up. Amazon, Softlayer, Cisco, Terremark, Facebook, RightScale, and many others will be in attendance along with entrepreneurs, venture capitalists and IT and media professionals.

The topics and themes covered at this year’s conference include:

• Has infrastructure as a service come down to earth?
• The potholes that await platform as a service.
• What’s new in webscale infrastructure?
• What rights do consumers, customers, and providers have in the cloud?
• Making the case for cloud databases.
• Does the need for speed mean saying goodbye to disk?

Although we’re not attending this year Silent Partner is excited to watch the live stream. Of particular interest is Amazon.com CTO Werner Vogel’s “State of the Cloud” address that is taking place Wednesday the 22nd at 9:20am PST.

Check it out!

The New York / New Jersey area has seen a flurry of datacenter activity over the last few months as providers jockey to acquire more space and serve demand in one of the country’s hottest markets. Capacity has been largely a tale of two cities (well States actually) with New York seeing relatively scarce retail capacity while Northern New Jersey has an abundance of wholesale space from the likes of Digital Realty Trust, DuPont Fabros and Sentinel. Since their target customers are financial services firms the NJ wholesale offerings all reside within a 30 to 70 km ring outside the blast radius from New York City but still within the limits of real-time data replication.

Clearly demand was impacted in NJ over the last few years as a result of the economy and the health of the financial services sector. In December of 2010 DRT identified 28 megawatts of available supply in NJ after one of the lowest years of absorption at 13 megawatts. (For comparison, 2008 saw 58 megawatts of capacity absorbed in NJ). Still the outlook for 2011 is strong and analysts predict as much as 40 megawatts to be acquired during the course of the year.

The one outlier here is Sabey Corporation who just announced their $120 million acquisition of 375 Pearl Street in lower Manhattan. This news is interesting in that it’s Sabey’s first development on the East Coast but more importantly because it’s unique to see a wholesale facility in New York proper.

One significant factor that is shaking up the market and potentially driving demand in both the wholesale and retail segments is Google’s acquisition of 111 8th Avenue. Last December Google acquired the massive carrier hotel in downtown Manhattan ostensibly for use as office space. Based on the significant strategic value of this property many in the datacenter industry question Google’s true intentions and have speculated that perhaps they would build their own interconnection and peering hub.

Two weeks ago Google formally announced that all remaining datacenter space at 111 8th was off the market. This news sent shock waves through the carrier neutral sector and most certainly will drive up the price of retail colocation not only within the building but also in similar carrier hotels like 60 Hudson and possibly 165 Halsey in New Jersey. The obvious short to mid-term beneficiaries of this news are Telx, Telehouse, CoreSite and newcomer zColo who operates space at 165 Halsey and 60 Hudson.

Just recently Telx leased an additional 53,000 square feet at 111 8th from Digital Realty Trust. Also in February Telehouse opened their newest facility at 85 10th Avenue. Thanks to its location two blocks away from 111 8th the Telehouse site should see an uptick in demand from displaced customers.

Speaking of displaced customers other carrier neutral operators inside 111 8th must be wondering what will transpire when their leases come due. This list includes Equinix (legacy Switch and Data), Internap and Qwest.

Silent Partner has learned that the same day Google made their announcement about removing available space in the building Qwest was also notified that their lease would not be renewed on a 2000 square foot suite. Adding insult to injury we’re told Google’s intent is to build a cafeteria in this space?!

Perhaps Qwest and others will look across the Hudson to the readily available wholesale space in New Jersey. After all it was similar conditions in the past that led Equinix, Switch and Data and others to deploy in the Garden State.

2011 has thus far produced a bevy of acquisitions in the cloud computing sector. The epic buzz around cloud has driven many Telcos to revisit build vs. buy calculations with a renewed appreciation for the economics of buying their way to cloud relevance. Apparently the carriers have realized that the time to market and customer acquisition benefits of purchasing colocation companies (who operate a cloud) outweigh the economic impacts. As a result we saw three significant acquisitions in the first quarter including Terremark purchased by Verizon, NaviSite by Time Warner Cable and most recently Savvis gobbled up by CenturyLink/Qwest. 

Okay, what gives? Didn’t we just suffer through two setbacks in the adoption of cloud computing? Yes. Last month AWS had a prolonged outage as result of problems with their Elastic Block Storage systems. Sony Online also took a big hit as two separate phishing attacks compromised over 100 million users’ confidential data. So clearly uptime and security will continue to plague the adoption of cloud-based services by the enterprise, yes?

Well no, not according to the analysts. Recent studies point towards the continued adoption of cloud by business users. In fact Gartner projected global revenues for cloud computing to reach almost $150 billion by 2014. (The 2011 market is already estimated at ~ $68 billion globally).

Despite some perception hiccups thanks to AWS and Sony, enterprise IT is drawn to the efficiency and economic benefits of cloud. Flexibility and pay-for-use models are particularly appreciable given the uncertainty of the global financial system the last few years. The carriers are looking to capitalize on this shift in enterprise IT while leveraging their existing assets and personnel. At Silent Partner we find this wave of acquisitions reminiscent of the late 1990s / early 2000s when AT&T, Qwest, Sprint and others scrambled to build an application service provider (ASP) strategy.

At a high level, there are some obvious commonalities between the ASP boom of the previous decade and the current cloud computing frenzy. In a client-server world, the appeal of outsourcing your IT requirements is the same for software functionality (ASP) as it is for computational and storage needs (cloud). Thus we find cloud computing companies built in a similar fashion as their ASP predecessors:

• ASP/Cloud providers own and operate the software application(s) 
• ASP/Cloud providers own, operate and maintain the underlying equipment (servers, routers, switches, firewalls, load balancers, etc)
• ASP/Cloud providers make services available to customers via the Internet
• ASP/Cloud providers bill on a “per-use” basis 

In addition, many of those looking to jump on the cloud bandwagon are the same folks who tried their hand in the ASP market during the dot-com boom. These include telecom companies like Verizon, Qwest and AT&T; software companies like Microsoft and Google; and of course hardware manufacturers such as HP, Dell and IBM.

So, what happened to the ASP market during the previous decade? Didn’t things end badly? Yes, they did and carriers would be wise to revisit their history to make sure they don’t make the same mistakes. There are numerous examples:

Qwest spent heavily to build datacenters and launch its CyberSolutions brand in 1999/2000. The idea was to host ASPs in their facilities as well as offer their own ASP service. After seeing their stock fall by more than 50% in 2002, Qwest sold this division to Corio for a mere $15 million. By 2005, struggling Corio was swallowed up by IBM.

Then there’s the confusing tale of GTE. At one time the largest independent phone company outside of the Bell System, GTE agreed to join ‘em by merging with Bell Atlantic in 2000. Of course, this union produced Verizon and much later the dreaded “can you hear me now” guy. In 2000, GTE Internetworking was re-branded as Genuity. With much fanfare (and a $20 million marketing budget) Genuity launched their Black Rocket managed hosting or ASP platform. By 2002, Genuity struggled to service a massive $2 billion line of credit and as a result filed for bankruptcy protection in November. Level3 ended up acquiring their network and assets for $242 million later that same year.

We could go on with stories of Global Crossing, Cable and Wireless and others but you get the point. 

Luckily quite a bit has changed over the years in order to create a better environment for the carriers. As mentioned above enterprise demand for cloud is there and it’s getting stronger. The “build it and they will come” mentality of the last decade seems to have burst along with the dot-com bubble. Furthermore technological advances in networking, processor speeds and datacenter technologies make for a more viable proposition when it comes to outsourcing your IT requirements. The economics are better but so is the overall level of functionality (security and uptime not necessarily withstanding).

Finally, those carriers making acquisitions are in pretty good financial standing. This means strong balance sheets with low debt ratios and cash reserves. That being said Telcos are also being realistic about the state of affairs in their legacy product suites. After all, competition is fierce for IP services and the price points have been significantly eroded over the last two years. Adding to this problem is the saturation of the residential markets and the continued disconnection of landlines as more people use only cell phones. In summary the major carriers have realized that they must build for the future even if this means through acquisition. To remain relevant and financially viable long-term means you must have a cloud strategy. Here’s a quote from Adam Lowell, Verizon’s COO:

“Every time we see a paradigm shift in computing, we see the number of users go up by a factor of 10. The global presence positions us to be a big player in the next generation of computing, as well. And where everything we do—media, communications, personal data, network intelligence, security protocols and many more—will be stored in the cloud and then delivered around the globe.”

There is still a long road ahead of the Telcos since integrating acquired assets is never an easy task. Recent history has also shown that providing outsourced IT services to the enterprise can be too far removed from the carrier sweet spot. Still the conditions are favorable for cloud and legacy telecom companies must change in order to remain viable in the face of shrinking core revenues.

Monday April 11th arrived with confirmation of one of the longest running rumors of the telecom mill. Level3 has agreed to acquire its competitor Global Crossing in a tax-free stock swap valued at $3 billion. Deal terms specify that Global Crossing shareholders receive 16 shares of Level3 for every common or preferred stock held at closing. Speculation of just such an event has been circling the telecom campfire for years now so this week’s news came as little surprise.

Should regulators give the deal a thumbs-up the combined entity will represent a dominant force amongst Tier 1 networks. As previously discussed in this blog, Renesys shows Level3 to be the largest global network as measured by the sheer amount of IP space transited on their network. Based on this same ranking schema Global Crossing is the third largest network behind Sprint. Put the two together and you’ve got a massive operation with significant reach in terms of geography, route miles and access.

Based on this information executives on either side of the deal were quick to point out the economic efficiencies to be gained by merging networks. Consolidated operations will definitely help to reduce costs in terms of sharing network access and settlement free peering arrangements as well as eliminating overlapping support personnel and systems. There is however another and less favorable side to consolidation in our opinion.

Level3 has already struggled to integrate the 31 companies it has acquired since 1992. This list includes some rather sizeable operations such as Genuity, Williams and Broadwing. Silent Partner has experienced firsthand the difficulties of managing such a huge, disparate asset base. Capacity requests show no availability only to change 24 hours later. At other times buildings with legacy Williams or Broadwing fiber demarked come back as “off-net” according to L3. This confusion leads long provisioning intervals, messy support during outages and a general sense of frustration from the customer perspective. Integrating a network as large and far-reaching as Global Crossing’s will clearly present problems for the new entity.

While most analysts were quick to discuss the network implications of Level3 gobbling up Global Crossing, Silent Partner is curious to see what effect if any there will be upon the datacenter industry. Last summer Level3 conducted a detailed strategic assessment of its colocation business that led many to believe they were considering selling this unit. Traditionally L3 datacenters suffered from low power density since most were built in the telco colo style of the late-90s. L3 often uses these sites to house their own equipment therefore selling off excess capacity was essentially gravy on top of their core business. Obviously getting customers to colocate within a L3 datacenter guarantees control over their network spend onsite. By November of 2010 however Level3 had committed to upgrading 10 facilities in the US in order to deliver better power density. Thereafter a renewed push was made to sell colocation through direct and indirect channels. 

On the other side of the fence Global Crossing’s strategy has been largely the same in that most of their facilities are telco grade with the exception of a few key strategic markets where they operate more modern sites and in some cases offer hosting. Global Crossing has been a dominant player in Latin America wherein they operate 15 datacenters including sites in Argentina, Brazil, Chile, Columbia, Ecuador, Peru and Venezuela. This meshes well with L3’s datacenter footprint that is stronger in Europe and North America. Should the combined entity be able to update facilities to more current power densities they could become a player in the space. Carrier neutrality is of course a concern but Silent Partner believes that for certain network-intensive customer verticals like content and gaming the strength and reach of their networks provides a compelling reason to colocate with the new Level3 (access to peering notwithstanding).

Whew, what an adventure! South by Southwest was an epic week of inspiration, networking, incredibly smart people and delicious meats. Back and finally rested, we figured we’d take a minute to recap a few highlights from our trip to Austin. And while we’re at it we’d like to give a few shout outs to the people who made it happen in 2011.

First off the inspiration: Austin itself is such an amazing town and the friendly vibe there has a way of permeating the conference. This atmosphere complements the fascinating intersection of tech, film and music to make SXSW a special event where creativity and collaboration are encouraged. The open environment in Austin stands in stark contrast to so many other tech conferences where one-way communication and heavy corporate marketing rule the day. It’s refreshing to attend a conference where things don’t feel sales-y and transactional.

From our experience, we believe that SXSW attendees arrive in Austin looking to fill needs for themselves and their businesses. Whether the need is simply to educate yourself on the latest trends and hear from industry icons or find an audience for your new, killer app everyone who attends SXSW comes prepared to get out there and mix it up with the community. Again this atmosphere is in contrast to other conferences where people tend to have their guard up and stand behind their corporate mask (or booth). We found ourselves meeting and interacting with so many talented and motivated people we couldn’t help but walk away feeling pumped.

Speaking of the people, SXSW Interactive has become such a huge part of the conference. Almost twenty thousand people attended this year’s Interactive and as a result huge talent from across the industry came out to participate. Amongst the speakers we saw Seth Preibatsch stood out for his keynote on the game layer. If you’re interested you can read a good summary of his talk. We also enjoyed Tim Wu’s talk on the long-term prospects of net neutrality and Barry Diller’s keynote as well. Thanks SXSW for bringing together so many smart, engaging people. We had a blast!

Also a huge thanks goes out to Jason Schnurr and Cedar Street Courtyard, our home away from home. Kyle and the Dyn Inc. crew were amazing too. Here’s to pulling off the most amazing recovery of the conference by moving your party to Symphony Square at the 11th hour. You guys deserve the Energizer bunny award for keeping it going all week! Last but not least congrats are in order for Fraser Campbell and Eventseekr. Here’s to your new launch. Keep up the good work!

Once again we’re off to Vegas for the annual Channel Partners show. This is the first year it’ll be hosted at the Aria Resort and Casino and we’re eager to see what new excitement this might bring!

This event is one of the many things that helps keep us ahead of the curve and stay connected to the ecosystem. As usual we’ll be taking the opportunity to meet new people in the agent community and of course catch up with many of our fabulous long-term partners.

It’s already looking to be a jam-packed time but if you’re hoping to connect with us and haven’t reached out yet, give us a holler. 

Well howdy folks!  

We just wanted to let ya’ll know that we’re fixin’ to head down to Austin, Texas for South by Southwest. Silent Partner is tickled pink to attend this year’s conference and we look forward to checking out the newest, freshest crop of tech companies from across this great land. 2011 marks the 25th anniversary of SXSW and so we’re anticipating big things at the show.

It seems like just yesterday that Twitter was the toast of the conference even though that happened back in 2007. Of course 2009 witnessed the launch of Foursquare at SXSW and as a result the explosion of geolocation products and apps. What’s on tap for this year and who will be the next killer startup? If you’re like us—you’re dying to find out.

So if you plan on attending the show and you’d like to hook up, give us a shout. The schedule is absolutely jam-packed but we’d love to catch up (preferably over a big ‘ole mess of BBQ.)

Adios for now, partner.