Can Equinix equalize the Internet?
By Vanessa Richardson
Redherring.com
December 8, 1999
You can find this article at: redherring.com
Officials at a small company based in Redwood City, California have convinced a group of Internet heavy hitters to write them a $280 million check. Equinix, which set up shop last year, has raised its second round of funding from original investors Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO), and Benchmark Capital.
Other investors include America Online (NYSE: AOL), equipment leaser Comdisco (NYSE: CDO), Dell Computer (Nasdaq: DELL), global power supplier Enron (NYSE: ENE), ETrade (Nasdaq: EGRP), News Corporation (NYSE: NWS), Northpoint Communications (Nasdaq: NPNT), the Reuters Group (Nasdaq: RTRSY), and Netscape cofounder Marc Andreessen.
NEUTRAL TERRITORY
Equinix builds Internet Business Exchanges (IBX), which are high-security physical buildings where ISPs, electronic commerce companies, search engines, and other entities needing to pass data up and down the Internet can store their equipment. Al Avery, Equinix's CEO, says the sites will be neutral, meaning that no one phone company will have total control of the traffic.
Mr. Avery says most company officials currently believe they're being held captive because they can only buy circuits from the phone company that owns the nearest exchange. "We plan to build IBXs with multiple phone companies, allowing ISPs to choose who they lease circuits from, pick the best price from phone companies bidding against each other, and change services anytime they need to," he says.
Mr. Avery and Equinix cofounder and Chief Technical Officer Jay Adelson have had some experience in this area. As former engineers for Digital Equipment, the two built the Palo Alto Business Exchange (PAIX), the first neutral IBX focusing on Silicon Valley traffic. After 18 months in operation, PAIX was the third largest exchange of its kind in the world, says Mr. Avery. Although no longer "neutral" (PAIX is now owned by hosting service Abovenet [Nasdaq: ABOV]), 65 networks, 12 content providers, and eight traffic carriers use the exchange. Mr. Avery and Mr. Adelson opened Equinix in 1998 and raised $12 million from Cisco, Microsoft, Benchmark, and Stanford University this May.
Customers who have already bought the pitch and signed on include content delivery service Akamai Technologies (Nasdaq: AKAM), MCI Worldcom (Nasdaq: WCOM), and Concentric Network (Nasdaq: CNCX). Mr. Avery says it can market its services to a broad range of companies -- telecom providers, ISPs, and any company doing e-commerce or B2B services -- since they're now all irrevocably linked together.
This latest round of financing brings Equinix's total funding to $315 million, a pretty hefty amount even for an Internet infrastructure builder. But every cent is necessary, argues Mr. Avery. "We have to find buildings that meet our specifications (specifically, being near a phone company) and bring them up to our standards in terms of security, power backup, etc.," he says. Because its customers place such a premium on their Internet traffic, they require high security. Equinix buildings will have readers at each access point, 24-hour guards, closed-circuit TV, five levels of security, and top-trained technicians on call at all times.
KINGS OF THE WORLD
Besides Benchmark Capital, all Equinix's funding comes from strategic investors who Mr. Avery hopes can help the company reach its goal of building IBXs worldwide. "One of our strategies is to gain a first-mover advantage on a global basis. We were fortunate in being able to pick and choose, so we went for United States companies who wanted a global presence in Europe and Asia," Mr. Avery says.
Equinix opened its first IBX facility in July near Washington, D.C. Another opens in New Jersey this month, followed by Los Angeles and San Jose in early 2000. By the end of next year, Mr. Avery hopes to have 12 operational IBX in the U.S., Europe, and Asia.
RED INK IS RIGHT
To get the IBXs up and running, Equinix is paying construction firm Bechtel Group $1.2 billion to build 30 IBXs over four years.
But there's a big gap between $315 million in funds and $1.2 billion in bills, creating a lot of red ink for a still-small startup. Mr. Avery agrees but says it's necessary. "Anyone who wants to be a first mover is going to get red ink. We're confident in our business model; our investors wouldn't have given us money otherwise. They believe this is possible," he says. But to help shore up funds, Equinix officials also announced a $200 million debt offering, managed by Salomon Smith Barney, and they expect to go public in 12 to 18 months.
Jeanne Schaaf of Forrester Research (Nasdaq: FORR) supports Mr. Avery's spending plans. "Yes, the Bechtel contract is pricey, but it's a contract that will essentially build revenue-generating locations," she says. "Equinix will appeal to anyone who wants to move traffic."
Mr. Avery claims Equinix has no direct competition. He shrugs off hosts like Exodus Communications (Nasdaq: EXDS), calling them "carrier hotels" that equip their buildings with only the basics. As for telecom giants MCI Worldcom and Sprint (NYSE: FON), they welcome Equinix's entrance, says Ms. Schaaf, since it allows them to move cash from unclogging congested networks and invest it in new Web host cybercenters. |
