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The problem, however, is the market forecasts — predicting robust ASP and dotcom markets — that predicated the build-out of these new data centers were, for the most part, overly ambitious. These same predictions also attracted a bevy of new players to the hosting market, notably telcos.

This has resulted in excess data center space that, for the moment and depending on geographical area, is underutilized. There also has been a noted shift away from customers looking to simply house their servers somewhere in a co-location facility and towards the deeper services such as performance and accounts management, user and statistics reports, and other IT-type services offered by managed hosting providers.

"People are building ahead of the market," Roger Pilc, SVP and GM of the e-Business Solutions unit of broadband and managed hosting services provider Winstar, told ASPnews. "We view this as good news. I think there will be a number of players ... that will be trying to sell cheap data center space to folks like Winstar."

As a result, Winstar also has no plans to add additional data centers in the coming year. Indeed, in just the past week, Pilc fielded at least one call from a co-location provider offering to sell Winstar this cheap space.

The Two Faces of Data Centers
Data centers fall into two main categories: co-location providers, (called co-lo's) and managed hosting providers. Co-lo providers offer clients a secure environment with reliably clean power in which to house servers. Managed hosting providers (MHP) take the next step by adding IT support and hardware to the mix; basically offering clients turn-key hosting solutions up to and including the maintenance and troubleshooting of a client's hosted applications.

It is the former group — the co-lo's — that may be facing the biggest challenge in the coming months as data center space becomes more of a commodity, Andy Hunn, senior director of Business Development at MHP Digex, told ASPnews.

"The only problem is co-location is already getting commoditized," Hunn said. "All of the push is towards managed hosting. You going to see a lot more price pressure on co-location services."

Hunn's statement is backed up by Forrester Research numbers from May 2000, which predict managed hosting will account for 86 percent of an anticipated $12.5 billion hosting market by 2003. This is up from 60 percent of a $14 billion market predicted in February 1999. Co-lo services, on the other hand, nose-dived from 31 percent in the February 1999 predictions to just over seven percent in the revised May 2000 numbers.

Location, Location, Location
The problems facing co-lo's are two-fold. In order to add customers, co-lo's must build facilities within a reasonable drive from their client's offices. This is so clients, who maintain their own servers, can fix problems. The second problem is co-lo server racks do not generate the same, scalable revenue stream as their managed hosting competition.

On average, a co-lo can expect between $5,000 - $6,000 in revenue per-server-rack, per-month while a MHP can anticipate up to $20,000 revenue per-server -rack, per-month, Pilc said. That number is expected to grow as technological advances allow MHPs to offer more services utilizing the same data center space and servers. A co-lo provider, however, must build more space and add servers or move in the managed hosting direction to increase revenues.

Jenny Proctor, director of Ecosystems for AT&T's ASP and Hosting Services unit, is not quite as bearish on the market as Pilc and Hunn. But she does concede that market for hosting services is not what was predicted and is changing.

"Turning the corner on 2001 at the very minimum there is a match between supply and demand," Proctor told ASPnews. "But certainly the market has settled down."

AT&T has embarked on an ambitious data center build-out program for 2001 with plans to open eight new data centers. In fact, AT&T announced today (February 26) the opening of a new data center in Atlanta. Two have already opened in the US (in Dallas and Washington, D.C.) and others slated for the UK, Europe and Japan are in the works. By the end of 2000, the company will have 15 centers up and running.

Because many of AT&T's co-lo clients are asking for more managed hosting services, these new centers will support both co-location and managed hosting services. In 2000, 70 percent of AT&T hosting clients wanted co-lo services only. In 2001, Proctor said the line between the two had blurred to the point that she could not reliably offer percentages.

"Most co-lo customers ... still end up buying managed services from us," she said.

Although the company is experiencing customer wins (of note is a $450 million deal with IBM for hosting e-business services announced in September 2000) that are filling its data centers, the shift towards managed hosting services, is causing AT&T to look for innovative ways to sell its hosting services as the year progresses, she said.

"Right now we are trying to figure out where we will be most effective to the industry," she said. "I think we will be taking a very careful look at what the market is doing."

This shift towards managed hosting services also is causing many co-lo providers to expand their offerings but, according to Digex' Hunn, this will be a difficult task.

"Most of these guys are underestimating the complexity of building managed services," he said. "Co-lo providers are in a bit of a bind. (They) see this tidal wave coming and they're trying to swim up stream in the value chain."