Tech Center: Net Data Centers Feel the Heat Of the Dot-Com Wipeout in Asia
July 2, 2001
By ILAN GREENBERG
Staff Reporter of THE WALL STREET JOURNAL
Asia's dot-com wipeout has reached the shores of a sector at the core of the online industry: Internet data centers.
They are the climate-controlled, fortress-like facilities where Web sites locate computer servers to connect with Internet-service providers. In the U.S. and Europe, companies specializing in Web hosting have been financially stung by an oversupply of centers, a dramatic drop in the price of telecommunications bandwidth, and a sudden shortfall of expected customers. Now, it is Asian Internet data centers that are feeling the heat -- and trying to fight back by offering higher-margin services.
More than 700 companies provide Internet-data-center services in the Asia-Pacific region according to International Data Corp., a market research company. IDC expects that still-mushrooming number to collapse by as much as 40% this year and in early 2002, due to overheated competition.
"It's going to be a bloodbath," says Pratik Gupta, the head of Asia Pacific Internet research at Salomon Smith Barney, in Singapore.
Indeed, industry executives, customers and investors got a taste of what the troubles might mean last week when iAsiaWorks Inc., a high-profile panregional data-center operator, said it was liquidating its Hong Kong subsidiary following major layoffs. By midweek, movers were carting out office equipment from the company's business headquarters and customers were complaining of being left with little information and their calls to iAsiaWorks going unanswered.
"This will mean service interruptions for us," said one customer, a senior executive at a large U.S. Internet-service provider who said that, as of Thursday, $2 million of the company's equipment remained locked in iAsiaWorks's Hong Kong data center.
Some of iAsiaWorks's laid-off Hong Kong employees were rehired as consultants to assure a smooth transition for customers. Jon Beizer, chief executive of the California company, said in an e-mail interview last week that iAsiaWorks would do "everything possible" to treat its customers "the right way."
IAsiaWorks's difficulties may underscore the challenges facing the entire sector. "This market will evolve, but it will take three to five years," says Rajeev Gupta, executive director of Asia-Pacific research at Goldman Sachs in Hong Kong. By that time, he says, more Asian businesses will be prepared to make substantial Internet investments and need the services of data centers.
It's a tough market to succeed in. Each major data center typically costs millions of dollars to set up, providing high-capacity cabling, fail-proof power supply, fire-proofing, temperature controls and high-security. Over the past two years they were quickly built throughout Asia due to an anticipated surge in Internet traffic from corporate Internet projects and dot-com businesses.
But that demand didn't come and analysts expect a shakeout.
Parts of Asia with modest online activity but many new data centers -- such as Malaysia and especially Indonesia -- are poised for a contraction, predicts Phillip Sargeant, a research director at Gartner Group, a market-research company in Sydney. In addition to Hong Kong, other major Internet hubs aren't immune to the glut of data centers, such as Singapore, South Korea and Taiwan. Singapore, for instance, has 70 companies providing data-center services, which is unsustainable, says David Yew, an analyst with International Data Corp. in the city state. In Bangkok, more than $20 million is being poured into almost a dozen data centers, most of which are still under construction.
Around the region, companies behind Internet data centers range from real-estate companies such as iAdvantage in Hong Kong, to global technology behemoths such as International Business Machines, to telecommunications companies such as Japan's NTT, France's Global One and U.S. telecom companies and Internet-service providers.
The glut has smacked prices down. For example, a month's lease of a high-capacity circuit, called an SDM1 line, from Hong Kong to the U.S. dropped from $250,000 late last year to $200,000 in February. In early June the price sank to an unprofitable $100,000, according to one Internet data-center company. Further price pressure is expected when new undersea cables connecting Asia to the U.S. go into operation later this summer.
Taken together, for the data centers still battling for new customers, "business isn't so good," concedes Stanley Yu, a senior account manager at iLink Holdings Ltd., a Hong Kong data center subsidiary of Pacific Century CyberWorks Ltd.
Along with an oversupply of data centers and the fall in telecom prices are other factors that may force a consolidation in the industry. Those include a reluctance by Asian companies to house important corporate information outside company walls, as well as a miscalculation by data centers to focus on basic connectivity and server space rather than more profitable Internet-management services.
The way out for Internet data centers in Asia, say industry executives, is to find niche markets. That includes specializing in particular vertical industries, setting up shop in underserved or lower-cost places -- such as in certain regions in China -- and offering more tailored services. "If anyone has a really good niche, then there's always time to make it in this market," believes Andrew Pang, chief executive of Band-X (Hong Kong) Ltd., an online bandwidth exchange whose clients include Internet data centers.
Some centers have focused their efforts on adding as many extra sources of revenue as possible. For instance, iLink in Hong Kong is moving into Internet-management services such as building corporate firewalls and traffic measurement and analysis. Honolulu-based Pihana Pacific Inc. will open data centers across Asia that will offer higher-end services such as data storage and a broadband-trading exchange, says Simon Phoon, the company's vice president for Asia Pacific.
As for Peregrine Systems Inc., operating data centers is simply a means to attract customers for their software. The California-based company, primarily known for developing corporate inventory-management software, runs online exchanges between companies and their suppliers and operates data centers in the U.S. and Europe. It is looking to partner with local operators to open data centers across Asia because the company believes they may technically simplify the process for buyers and sellers to use Peregrine's exchanges, says Dominic O'Riley, the company's Asia-Pacific vice president, in Singapore.
Analysts give their cautious approval to the data centers' approaches. "It's too early to say how big the managed services market will be because the Internet in Asia is still in the early stages," says Mr. Gupta of Solomon Smith Barney. "But the alternative is just selling commodity bandwidth," he says, a model that isn't working.
Write to Ilan Greenberg at ilan.greenberg@awsj.com1
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