Advances in technology have seen radical changes in the size of our computers, but the image of the room-sized supercomputers you may associate with the Cold War era is not entirely a thing of the past. Today, banks and telecoms businesses rely on large humming rooms of densely-packed computers to power their web servers and store vast quantities of customer information. But as these data centres become increasingly expensive to run, companies are relying more and more on specialist data-centre providers to house back-up facilities for them – which has seen the return of the ‘internet hotel’.
Internet hotels: will mistakes of the 90s be repeated?
Companies spent and lost a fortune on these internet hotels in the 1990s, as expectations of a ‘data tsunami’ saw them build large sheds of computers to centrally back-up data. But while the first wave of hotels went bust because of chronic overcapacity, today things look more solidly underpinned, says Nicole Lee on Breakingviews. Government rules forcing firms to back-up their data mean demand for data centres in London’s financial sector is booming. In 2006, 72% of UK firms surveyed by accountant PricewaterhouseCoopers said their websites were externally hosted, from 45% in 2004. And after the collapse in prices that hit internet hotels in the dotcom bust, the industry now has not over- but undercapacity.
Analysts predict that data centre capacity in London is close to running out. The Aperture Research Institute found that of 600 in-house data centres surveyed, 90% had IT equipment taking up 75% or more of available space. The report also found that nearly half of those surveyed are devoting 90% of available space to IT storage, which strongly suggests that firms will have to expand into internet hotels in the near future. Trying to squeeze more capacity out of existing space risks crashing the system. “Any sort of compromise on capacity, power or cooling could quickly lead to ‘rack and ruin’ for customers and providers alike,” warns Tom Howard of data-centre provider Qube Networks. It’s no surprise then that firms such as Telecity have hiked prices by 70% in recent months.
Internet hotels: why do companies use them?
But it’s not just about crash protection – there are lots of other reasons to use internet hotels. One is the cost of building a data centre – about £7,000 a square metre. Another is the spiralling cost of servicing such centres; consultancy Broadgroup reckons the annual cost of running the average UK data centre will more than double to £11m by 2010. By outsourcing, firms can save at least 30% over a DIY solution, says Michel Boussard, head of data centre Interxion. However, Breakingviews’ Nicole Lee worries that “it’s hard to see what will prevent a capacity explosion if prices continue to let rip”. The supply/demand balance looks good now, but competitors are sure to be drawn in by the profits.
However, given the cost and time it takes – typically two to three years – to construct suitable premises to power, cool and maintain the racks of servers in a data centre, there are still significant barriers to entry and Lee also acknowledges the pressing demand for data centres in London. In Canary Wharf in particular, much of the power infrastructure was installed a long time ago, to cater for technology that is no longer in use. London’s financial sector is gasping for space. Even if the current wave of investment in web technologies dies down, the more mundane factors of overheating servers and regulatory requirements will ensure demand for data centres remains steady, notes Tim Bradshaw in Investors Chronicle.
Internet Hotels: the best bet in the sector
The best bet in the sector After investing £450m in a network of data centres, Transco, a subsidiary of British Gas, had to sell them off cheap following the dotcom crash. All of which has worked in favour of Iomart (LSE:IOM), which has snapped up a majority stake in Easyspace Data Centres, the company holding the assets, at a very decent price. The 2,300 racks in London, Leeds, Glasgow and Northampton have been empty since the dotcom bust, but are ready for use. Iomart will also be using the data centres itself, which will cut running costs at its web services business in half. Andrew Darley, analyst at KBC Peel Hunt, tells Investors Chronicle that Iomart is a good alternative for investors who fear rival IXEurope’s recent growth spurt has run its course. The shares trade on a p/e of 10.2 and offer an attractive 5.77% dividend yield. 8 11 May 2007