COMMENTARY >> TECH SAVVY A Host of Big Players Compete for Data-Hosting Supremacy
By Jim Seymour
Special to TheStreet.com
9/30/99 8:36 AM ET
Everybody's doin' it, doin' it, doin' it.
The Web-hosting/data-hosting business must be a great one. Why else would everyone else be jumping in? Longtime players such as Frontier's Global Center operation, and relatively longtime players such as Exodus (EXDS:Nasdaq), which I am long, have recently been joined by Intel (INTC:Nasdaq), Qwest (QWST:Nasdaq), which I also long, and a host of smaller players.
(Make sure you read Spencer Ante's piece Tuesday about Intel's refocusing, now including a push into the big-company market Exodus has been claiming as its own.)
Wednesday, a day after Intel said it was actually open for business at the Santa Clara, Calif., hosting center it began building in April, Qwest and Hewlett-Packard (HWP:NYSE) announced their plans to build and operate a total of 14 big data-hosting centers, under Qwest's CyberCenter brand.
This isn't just piling on; there's more to the Qwest-Hewlett plans than yet another Web-site hosting program. As opposed to only Web-site hosting, the Qwest-Hewlett partnership is going after a broader definition of "data-hosting" services, and more far-sighted markets.
The plans are a strong play into the outsourcing market in general, and look like they have a good chance to capture corporate IT dollars early on. One appealing idea, for example, is real-time simultaneous backup of critical data not only to a company's local storage facilities, but also to one or more of the CyberCenter facilities. That way, in Qwest Internet Services CEO Lew Wilks' example, a currency-trading firm could buy an extraordinary level of security for its critical data by simultaneously piping data to its own servers and also to a couple of CyberCenter's banks of H-P servers.
The whole idea of live, real-time, outsourced backup is an immensely appealing one for corporate management. See it as a kind of disaster-recovery service for the new millennium, and you get the idea. This is not a business proposal that is going to require much "missionary selling" to Corporate America.
On the conference call Wedensday, Wilks underscored this broader focus on data-hosting, not just Web hosting. He forecast $1.5 billion in revenue to Qwest from this move over the next three years; H-P officials on the call said that was only a guess, and the figure could be even larger.
For H-P, the immediate payoff is in hardware: The Qwest/H-P venture will employ, according to H-P VP Nick Earle, "several hundred million dollars" worth of H-P equipment in these centers. This is also a tight fit with H-P's much-discussed "e-services" initiative.
Indeed, the Qwest-Hewlett deal could begin to refine the notion of "hosting." The Web-site-focused markets Intel and Exodus have been concentrating on are big and still growing, with nice margins -- though their battle alone is likely to put pressure on those margins. But the whole notion of "storage" has become a big IT/Internet buzzword, and if the CyberCenters can stake out a chunk of this turf for Qwest and Hewlett-Packard, this could be an important piece of business for both.
Certainly as the corporate IT world moves over the next few years toward making the overwhelming majority of its stored data accessible, in some form, to selected audiences, over the Web -- some analysts say that in five years, more than 90% of all corporate legacy data will be available on the Web -- a service such as that Qwest and H-P announced Wednesday becomes essential.
Meanwhile, what about the presumed war coming between Exodus and Intel? Will plucky Exodus CEO Ellen Hancock's ship be sunk by those mean old Intel-trained pirates (remember Andy Grove's dictum: "Only the paranoid survive"), led by Michael Aymar, at Intel Online Services?
Sounds like soap opera? Don't be surprised to see it played that way in the press. Conveniently forgetting the rest of the hosting industry, of course. I think we'll see a lot of straw-man stories about this match-up.
Don't be distracted.
Exodus has lots of momentum behind it, an operating history, great management, a good reputation for uptime and security. Intel has ... money, a nice physical plant, and the Intel brand name. Will "Intel Somewhere Inside" branding really be that important here?
Intel will certainly grab some accounts -- wouldn't you like to be Intel's business partner? the line will inevitably go -- but I don't think Exodus is in deep water here.
Exodus was originally targeted at big accounts, and Intel originally said its Online Services operation would aim at the great middle market. Now Intel's moving up, and Exodus is moving down, so inevitably there will be conflicts and bloody contests for accounts.
But Exodus is likely to get its share, maybe more than its share, of wins in these contests. Intel has to be sensitive to Justice Department antitrust threats, so predatory, low-ball pricing to steal business from Exodus is unlikely. Competing heads-up on the merits, I think Exodus will be fine.
Along with Qwest's Cyber Centers, Exodus and Intel seem likely to form the big three in the outsourced-hosting business a year or so from now, with Frontier losing ground as it fends off Intel. Intel is also likely to be in last place in that little contest for some time to come.
I wonder how that will sit in Santa Clara?
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For investors, a data-storage play is complex. A company the size of Intel is unlikely to see revenue material to its bottom line from a venture like this for years -- though it helps buy insurance against chip-demand worries in the meantime, and is a smart deployment of the cash now being thrown off by Intel's chip business.
Similarly, Hewlett-Packard is so large that while this chunk of its e-services push will produce nice returns, it will be hard to see those returns in H-P's bottom line.
For Qwest, newly bloated by the misguided U S West (USW:NYSE) acquisition, revenue from moves such as this are essential to offset the slower growth inevitable from marrying a phone company. Whether Qwest can recover its reputation among investors will depend both on how well it manages the U S West revenue base, and on how many of these higher-margin new businesses it can roll out. This storage alliance with H-P hardly seems a reason to buy Qwest, though it should help calm, at least a little, those Qwest holders who felt blindsided by the U S West deal.
Finally, in plotting storage-play strategies, consider the two big hardware shops, EMC (EMC:NYSE) and Compaq (CPQ:NYSE). EMC has been on a tear, up 40% since May -- and I think it has a lot of climbing left.
Compaq? In the big-time storage business? The beat-up Houston PC maker I keep dissing? One and the same. It's easy to forget that thanks to the Digital Equipment acquisition last year, Compaq has become a big player in data storage hardware -- and is aggressively pushing its storage products as an important, and hugely profitable, part of its product mix.
I don't take much comfort from what new Compaq CEO Mike Capellas has done since taking over in Houston in July. His reorgus interruptus still feels stop-start, too little, maybe too late. Elvis has left the building.
But that storage business is a semihidden gem, a powerful engine for profits. At some point Capellas is going to have to address shareholders' demands for better returns, and maybe, just maybe -- I'm not starting rumors here, just speculating -- spinning the data storage business off to shareholders will be a way of calming them.
That said, and as much as I like EMC, I think the big money in data storage over the next few years will be made not in hardware, which is really just an enabler, but in creating and operating reliable outsourced services for the new era of Net computing.
Qwest, Hewlett-Packard, Exodus and Intel all look strong in that game.
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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Exodus and Qwest, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at jseymour@thestreet.com.
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