The idea of building an Internet data center would have been considered lunacy a couple of years ago.
The industry had overbuilt significantly during the dot-com boom, and service providers would have been hard-pressed to give them away. Hosting ceased to be hot. Collocation was considered toast. Even now, some observers view U.S. outsourcers' data center commitments a burden as they face lower-cost, overseas providers.
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But not everyone views the data center with scorn. Equinix Inc., which provides collocation, interconnection and managed services, has been snapping up data centers of late. Earlier this month, the company purchased one in Los Angeles that was originally built for Exodus Communications but was never brought to market. Exodus filed for bankruptcy protection in 2001 and it assets were sold to Cable & Wireless and reconstituted as Cable & Wireless America. That unit followed Exodus into bankruptcy in 2003.
But two years later, some markets are seeing quite a demand for data center real estate. Equinix officials said they scoured Los Angeles for a data center that met its standards and faced competition as they searched.
Peter Van Camp, Equinix's chief executive officer, said large enterprises, looking to purchase a data center as an in sourcing option, were showing up in the Los Angeles market. So, the company had to "move quickly" to snag the data center, Van Camp explained during a recent conference call.
Equinix paid $34.5 million for the Los Angeles center and will do about $15 million in improvements. The center's Exodus-era price tag was $80 million. Equinix will open the doors to new customers during the first half of 2006, according to the company.
Van Camp said Equinix will continue to acquire existing data centers through leasing or purchase arrangements. But in the strongest and most profitable markets, the company will consider the possibility of building new centers, he added.
"Our demand, market pricing and anticipated returns now make this a very viable option in our long-term plan," he said. That plan calls for expansion as Equinix seeks to hit the $500 million revenue mark; the company generated revenue of $163.7 million in 2004. Equinix discussed its need for additional capacity earlier this year.
As the company eyes expansion, it does so with certain financial metrics in mind. A new acquisition's ability to generate a strong cash flow is a key emphasis, Van Camp said, adding that the company seeks a cash flow break-even in 12 to 18 months for its new data centers. The centers also are expected to hit EBITDA margins of between 45 percent and 50 percent as they are fully utilized.
Equinix expansion experience may not be an anomaly. CI Host, a Web hosting firm, this month enlarged its Dallas-area data center and opened a Newark, N.J>, data center in April. IDC predicts that the U.S. Web hosting market will grow in the low double-digit rate during its five-year forecast period that ends in 2009.
Some companies believe demand is sufficient to make expanding, even building, data centers an attractive move.
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