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LOCATION, LOCATION, LOCATION
With space shrinking in RBOC facilities, carrier-neutral colocation companies are stepping into the breach.By Stephen Hardy
While debate continues over whether the local-access competition spurred by the Telecommunications Act of 1996 has delivered on its promises, there is one group that has undoubtedly benefited-real estate developers.
The act mandates that the incumbent local telephone companies-in most cases, the regional Bell operating companies (RBOCs)-enable competitors to connect to their networks. In most cases, that has led competitive carriers and Internet service providers (ISPs) to move their equipment right into the local RBOC's central office. Needless to say, some central offices are bigger than others-and with the growth of competition in the local-access market, few central offices are proving to be big enough. Add to this equation the fact that the RBOCs require more space to house the new equipment necessary to fight off these emerging competitors, and suddenly the competition for floor space has become almost as sharp as that for customers.
With no room left at the central-office inn, carriers and ISPs have cast about for alternative space. Here's where the real estate developers come in, offering new uses for abandoned warehouses and factories. Some carriers with deep pockets and the expertise to convert an empty building into a viable telecommunications facility have proven willing customers. However, not every carrier has the money or experience necessary to perform such "redecoration." Entrepreneurs who have already made an investment in the same abandoned warehouses and factories may offer space in "carrier hotels." This alternative decreases the amount of refurbishment that a carrier may have to perform, but it proves to be far from a turnkey solution to the problem. Other carriers or ISPs may offer space in their facilities but usually require their new tenant to use their infrastructure for outside connections.
A relatively new alternative, the "carrier-neutral" colocation facility, may offer the best alternative to emerging carriers and ISPs whose budgets, expertise, and patience are too limited to find other alternatives adequate or appealing. Such facilities are slowly making their way from Tier 1 to Tier 2 markets and may prove ideal for telecommunications companies just getting their feet wet in a growing market.
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| The need for colocation facilities has created a new market opportunity for entrepreneurs. "Carrier-neutral" facilities provide all the basic infrastructure for carriers and ISPs looking for a home. How these clients fill their spaces is up to them. |
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Two companies, WCI LightPoint (Beaverton, OR) and CO Space Services LLC (Somerville, MA), are representative of the emerging carrier-neutral facilities industry. Both companies offer not only floor space, but also equipment monitoring, power (uninterrupted and backup), fire suppression, HVAC, and security. They will also provide connections to the carrier of their tenant's choice and varied packages of turnkey services to help carriers and ISPs get their facilities up and running.
Soup to nuts and bolts
CO Space was created out of the consulting experiences of its parent company, RTE, according to the company's president and CEO, Gabriel Cole. RTE first acted as an agent between real estate companies and telecommunications carriers with space needs below 5,000 sq ft. Such spaces proved hard to find and expensive, says Cole, so RTE set up what Cole calls "lights-out" facilities that offered space but little else in the way of added value. The unmet needs of the company's new tenants led Cole to start CO Space Services in September 1998. The company currently has facilities in Somerville and Waltham, MA: Houston; and Jersey City, NJ. It also has space under lease in Chicago, Denver, New York City, and Brea, CA, as well as another facility under construction in Atlanta. At least 11 additional facilities are in the planning stages.WCI LightPoint was founded in August of last year and quickly gained 360networks (formerly Worldwide Fiber) as a client in its Seattle facility. A member of the WCI Group, the company has focused its efforts in such cities as Anchorage, AK, Las Vegas, Phoenix, and Portland, OR, as well as Seattle, with additional facilities on the drawing board. According to Pat Edwards, the company's executive vice president, the carrier-neutral approach provides several advantages.
First, colocation is the main business for these companies, so tenants have their landlord's full attention. The facilities are top-notch, providing easy access, scalability, and security as part of the base package. Carrier-neutral companies generally don't require the use of certain types or brands of equipment, nor do they demand that a certain amount of bandwidth be maintained. And as the name implies, they don't require their customers to connect with favored carriers.
"We do not make recommendations about who the customer should connect to. We simply hand off a connection to a provider and to our customer," says Edwards. "Of course, if the customer feels that they are capable of handling that element for themselves, they're very welcome to."
If there is differentiation among the emerging carrier-neutral players, it is in the amount of additional services they'll provide to customers in addition to a habitable environment. For example, CO Space Services provides four areas of service, says Cole. Installation and coordination of equipment into their facilities is the first. The company insists on this for control and security. "[Tenants] don't want another customer's contractor or network vendor running around willy nilly, risking damage to anything that is in place," Cole explains. This coordination can include the acquisition of equip ment, a service that ISPs unfamiliar with the nuts and bolts of tele communications find very appealing, he says.
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| With bandwidth demand showing no signs of slowing down, facilities should fill up quickly. Carrier-neutral facilities remain a relatively new concept, but aggressive growth plans should make these resources more readily available in the near future. |
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Network connection services include a digital crossconnect within the facility to handle connections to the outside world. The company will also provide assistance with basic network design, negotiate agreements with outside carriers, aid in the provisioning process, monitor network connections, and provide trouble ticketing and problem-resolution assistance. Telecommunications companies and, increasingly, data-communications tenants find these services of great help, says Cole. ISPs, who tend to pick one or two carriers and stick with them, do not need this kind of help on an ongoing basis, he explains.
Adjunct services include data backup, primary data storage, and firewall and security services. CO Space provides most of these in cooperation with outside firms, says Cole. ISPs find these services particularly appealing.
Finally, CO Space will provide certain equipment operation services such as service turn-up, system monitoring, and maintenance. These services are used by every category of client, Cole says. Some of the equipment customers might require comes pre-installed, like those supporting virtual local-area network, storage-area network, and local-area and wide-area networking, particularly within the facility. Thus, customers just have to buy the equipment that goes in their cabinets, including switches, routers, and multiplexers.
Cole says that CO Space will buy equipment for its tenants when necessary but won't provide financing. WCI LightPoint provides similar project-management functions as CO Space but stays out of equipment purchases altogether, according the Edwards. The company will manage a common "meet me" room in which access to local carriers can be provided, however.
Flexible space
In addition to being flexible in terms of carrier connections, carrier-neutral facilities also offer a variety of leasing terms. CO Space offers 1-year to 10-year "licenses" on its space. Different types of service providers tend to have different term requirements, says Cole. For example, ISPs tend to have "a short fuse," according to Cole; the longest license the company has sold to an ISP is three years. Telecommunications companies generally have more equipment, require more space, and therefore are loath to move around. Many of the company's telecommunications tenants have 10-year licenses, although some have a license as short as five years.Similarly, WCI LightPoint will rent enough space to house a single cabinet for a year or 100 cabinets for 10 to 20 years, says Edwards. The company's most popular lease seems to be a five-year agreement with the option for an additional five years.
Most of CO Space's clients need 5,000 sq ft of space or less. Carriers with additional space requirements might be best served by building their own facility, Cole suggests. However, carriers should look at the infrastructure already in place within carrier-neutral facilities before overlooking them for bigger spaces, he warns. "What we find a lot of times is that somebody that would go and buy or lease 10,000 sq ft to build a facility can actually fit in 3,500 sq ft of our facility because we're providing all of the backup services and the digital crossconnect and the battery plant and all of the things that they would be fitting in their space," Cole explains.
Most of CO Space's facilities contain around 30,000 sq ft of floor space, although larger facilities are under construction. Cole says that the ideal scenario for the company is to license half of these facilities to anchor clients who require anywhere from 1,000 to 5,000 sq ft and leave the rest to incremental customers who may only need enough room to house four or fewer racks of equipment. The anchor clients generally want some extra room around them so that their customers can colocate with them.
Multiple customers in carrier-neutral facilities provide economic benefits to the tenants. "By having multiple numbers of customers come in and take up all of our space, we spread the amount of risk out in one space," says Edwards. "And since we build the spaces to be scalable, we can scale them up or scale them down."
As is the case in other areas of the telecommunications industry, carrier-neutral tenants can receive price discounts with volume purchases. WCI LightPoint also offers rebates to clients who bring in other tenants. That said, carriers looking to rent space should be prepared to deal with the realities of a seller's market. "We've noticed that on the front end, [potential tenants] look at it and they say, 'That's a little pricey for that little piece of space you're offering me.' And then they go out and explore the cost of doing this themselves," says Edwards. "The turnaround time is about one week."
According to John Wright, a strategic planning advisor at WCI LightPoint, the price of space includes the base colocation rental charge over terms ranging from 12 months to 120 months, a non recurring charge, and then charges for cabinets and cages with terms similar to the space arrangements. Power charges also would be added. The total charges will generally prove to be smaller than what a carrier would pay to set up its own space. But the charge is by no means small in the abstract.
"What we do is not cheap. I'm not just throwing up [equipment in] cities," says Edwards in explaining the bottom line. "We've not had a problem with telling customers we're sorry, but we just can't budge on the price."
Future is bigger and smaller
To ensure that they keep pace with the needs of the customers, carrier-neutral facilities can be expected to offer increasingly large pipelines out of their buildings. For example, CO Space is positioning itself as a "broadband" facilitator by offering DS-3 pipes and dark fiber to its clients. Meanwhile, companies such as WCI LightPoint are establishing new facilities as quickly as possible to match the nationwide footprint of their emerging carrier customers.With the demand for bandwidth not expected to slow in the near future, the number of carriers looking for space should remain equally robust. This factor should ensure a continued demand for the services of colocation facilities in general and carrier-neutral enterprises in particular. "The history of a tele com munications company that deploys equipment is one of a long-term deployment of their infrastructure in one place," says Edwards. "To pick up and move their equipment down the street-across the hall, for that matter-is a very large undertaking. They move into these spaces, and although their requirements may [change] going down the road in time, they're moving into these spaces and plan to occupy them for a very long time."
Even with long-term client commitments, the future should test the flexibility of the carrier-neutral concept. Equipment vendors are working hard to decrease the footprint of their equipment, which means that space requirements could change dramatically in the next few years.
Edwards, for one, isn't worried. "We recognize that their equipment is going to be getting smaller in the long term. So the need for having very large spaces to accommodate large switching equipment [will diminish]," he says. "Since we recognize that telecommunications equipment in our age today is getting smaller, we recognize that building these spaces to accommodate customers' needs today and tomorrow, considering the smaller space requirement that they will have, there will come a point where we'll say that we'll stop building 'here.' But the spaces will always be occupied."