Trading Desk: Collocation Finds a Market on Bid-Ask Bulletin Board

Posted: 11/2001

Trading Desk

Collocation Finds a Market on Bid-Ask Bulletin Board
By Josh Long

Neutral telecom exchange Band-X reports the largest quarter-on-

quarter growth in the number of collocation postings on the exchange. Nearly a quarter of the offers represent the majority of transactions in the world’s largest cities, the firm’s report states.

Band-X Quarterly Rack Report
Source: Band-X (www.band-x.com)

With the telecommunications tsunami washing away many web entrepreneurs and competitive carriers, remaining companies have embraced alternative distribution channels to fill what a year ago seemed as desirable as the beach homes on Cape Cod: their collocation space.

“We have definitely seen an increasing interest in using the online marketplace as a route to customers and this obviously reflects the current tough market conditions,” says Tim Anker, vice president of collocation at Band-X.

The collocation trading floor, introduced in April 1998, is run as a neutral and independent bid-ask bulletin board. Band-X is the only capacity exchange to offer such a service. Many companies that participate in the collocation exchange are involved in other aspects of Band-X’s business such as the exchange of routed IP and minutes, Anker says.

The number of offers on Band-X’s neutral exchange has increased 60 percent since the first quarter, with 231 separate offers made Sept. 13. Ultimately, 75 percent of the transactions are made through about a quarter of the offers posted, mostly in tier one sites, says Anker.

Only half the 16 million-square-feet of carrier-neutral collocation space in the world’s 50 most wired cities is used, reports Washington D.C.-based TeleGeography Inc., an independent subsidiary of Band-X.

TeleGeography profiled 287 carrier-neutral facilities in 50 world cities in a 450-page report, “Colocation (sic) 2002.” A key discovery: Collocation is not a commodity, according to Tim Stronge, director of research of TeleGeography.

Despite the increased collocation postings, the rack space price has decreased marginally and collocation is far from representing a product that is indistinguishable from one place to another, says TeleGeography.

“We found pricing does vary widely not only from city to city but within the same city,” Stronge says.

Other experts agree that renting out space in a collocation facility is not the same as leasing storage for your residential needs: as long as there’s enough space and it’s safe, it makes little difference where you put your mountain bike and used furniture. This is not the case in the complicated world of telecommunications.

“A square foot does not equal a square foot in the collocation business,” says Paul Harris, marketing director of Tampa, Fla.-based Switch & Data Facilities.

Among some factors influencing price: the number of bandwidth providers connected to a building, the number and type of customers and the scope of collocation services offered.

One TeleGeography finding: Most collocation sites employ high-tech fire suppression systems, but 16 percent still use traditional water sprinklers that can damage equipment.

Band-X’s Anker says lowering prices on racks and cages, particularly for lower-end buyers, will not throw a curve ball into demand because price is only one consideration in choosing a facility.

Now, more than ever, collocation providers are trying to further differentiate themselves by providing managed services through alliances as a means to compensate for fewer customers and lower prices on space.

Some major collocation providers in the United States and Europe have run out of money. COLO.COM, based in the San Francisco Bay area, filed Chapter 11 bankruptcy protection in May.

In mid-September, the U.S. Bankruptcy Court was set to give BJK Investments the green light to purchase 22 of COLO.COM’s sites for $44 million, says Jeni

Paltiel, a spokeswoman for BJK Investments, a California-based holding company. Simon Cooper, a main investor of BJK, is a co-founder of Global Switch, a collocation provider based in Luxembourg, according to Paltiel. But Global Switch was not involved in the COLO.COM transaction, she says.

Pan-European collocation provider CityReach International has gone into receivership, the equivalent of Chapter 7 bankruptcy in the United States. The company has appointed global accounting firm KPMG to sell off its assets, according to sources. The company’s U.S. operations closed down Aug. 31.

“I think most of us thought there was money to last out this hard time,” said a former employee. Other service providers like global carrier Level 3 Communications, whose executives complained last year of not being able to build fast enough to keep pace with demand, have shelved future development plans as part of a company-wide restructuring to reduce capital expenditures.

Band-X executive Anker anticipates more consolidation will follow in the collocation sector, but he says additional providers are adopting a carrier-neutral model, a strategy that Band-X hopes will fuel more trades.

Anker also expects that more transactions will be made on the exchange in secondary markets in the long term.

Meanwhile, researcher Stronge says collocation providers still are operating a viable business model.

“Demand for services [is] real, growing,” he says. “People do need collocation space and, in fact, at a time when there are capital constraints you could make the argument they are actually in a better position,” because more service providers need to outsource their collocation needs.