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Energy, market demands drive up price of hosted data centers

By  Shamus McGillicuddy

25 Oct 2007 | SearchCIO.com

The cost of outsourcing data centers to hosted or colocation providers is skyrocketing, and CIOs are getting burned.

The biggest challenge the last five years has been the cost of power.
Mario Cruz
CIORewards Network Inc.
Bill Martorelli, principal analyst at Forrester Research Inc. in Cambridge Mass., observed in a new research note that Forrester clients with expiring data center colocation contracts are experiencing "sticker shock" as vendors double their fees.

"Companies that have been under contract these last three or four years, there has been so much change during that period," he said. "It's not necessarily a new phenomenon, but since they're renewing their contracts now, they're coming face to face with it. I haven't heard anyone being brought low and completely destroyed by it, but it makes for some difficult choices."

Martorelli said two factors are driving the increased costs.

"A lot of it is [the rising cost] of power," he said. "But it's also the leading vendors in popular geographies are exerting their market power. Their data centers are almost full, and this gives them the ability to fulfill a long-standing ambition to do more managed services and to get rid of the revenue-per-square-foot-of-space model."

Martorelli said many vendors are trying to force CIOs to include managed services as part of colocation deals. And if CIOs balk, the providers tell them there are two or three other CIOs willing to take the deal.

Reading the fine print

Richard Ridolfo, CIO of New York-based aviation consultancy Simat, Helliesen & Eichner Inc. (SH&E), said he got severe sticker shock in midcontract in September 2006 from his colocation provider.

"Our provider had, without warning, sent us a notice that essentially the cost of electricity was going to double, and they gave us 30 days' notice," Ridolfo said. "As we read the contract there was no provision to make this increase so we got locked into a dispute with them. And in the end we determined we weren't responsible for this. They continued to push, and it came to the point where either we were going to have to discontinue our service with them or be evicted from this space."

Ridolfo said his firm opened a disaster recovery site several years ago. As it grew, SH&E started using the space as its primary data center and opened a new disaster recovery site in another location.

When Ridolfo got the notice of the cost increase, he was paying between $5,000 and $6,000 a month to host his data center. He was facing a $2,000 monthly cost hike with the new power charges. He said the increase in itself wasn't so unmanageable; he disliked the precedent it would have set.

"The problem is if we accepted this precedent of allowing them to increase the cost beyond what was in the original contract, then we opened ourselves up to accepting increases at a later date," Ridolfo said. "They could come back six months later or two months later and double it again. So we voided the contract."

Ridolfo said in the space of a month he had to relocate his data center with 100 servers to a new provider. He said it was disruptive to the business and extremely labor intensive. It cost him about $25,000 to move into a facility with AT&T. He said the move forced him to delay and reprioritize about four months' worth of project planning and execution.

In his new three-year contract with AT&T, Ridolfo inserted specific language that capped power cost increases at 3%. The contract also specifies that these increases have to be reflective of direct costs to AT&T, rather than an increase to improve profit margins.

Ridolfo said finding a new provider was tough.

"Every provider I talked to said they have plenty of space," he said. But the increase in fuel prices and the migration to blade servers creates the big problem, he noted.

"When these data centers were designed, no one ever imagined that you'd suddenly be able to double the number of servers you could fit into that space," he said. "So, naturally, the things that feed these facilities, not just the power, but the systems that bring the power to the servers, are designed with only a certain amount of growth capacity."

The price of power

Mario Cruz, CIO of Rewards Network Inc., a Miami-based provider of consumer loyalty programs such as credit card reward points and airline miles, runs his entire data center in a hosted environment.

"The biggest challenge the last five years has been the cost of power," Cruz said.

He said the cost of power in his hosted data center has probably doubled in the last two and a half years. But he has a good deal in his current contract with his provider, Miami Data Vault, he said -- his original contract includes power as a package deal. As he adds more square footage to his footprint, the fees he pays for power associated with that floor space are subject to increases, but Cruz negotiated a ceiling for those increases that will shield him from prevailing market rates.

"You can lock in that original rate [as you add more square footage]," he said. "I'm adding equipment as the company grows. We're adding more power for that equipment. Paying market price for everything would be impossible."

Cruz said the rising cost of power is just the price of doing business. He said it hasn't affected his ability to deliver new projects to his company, but the future is uncertain.

"If you told me [energy prices] would double again in 24 months, then I'd have to start looking for alternatives," he said.

Not everyone is feeling the squeeze just yet.

Larry Bonfante, CIO of the United State Tennis Association in White Plains, N.Y., said he works with a couple of colocation providers.

"I've seen no price increase the last few years," he said. "If anything, it's gone down the last couple years due to economies of scale. We're using more servers, so the price per server has gone down. Plus we're using blades, which takes up less space. I could certainly see it going up and becoming more of an issue in the coming years, but as technology becomes more efficient it might not become an issue."

Martorelli said he isn't predicting Armageddon for customers of hosted data centers. But CIOs need to be prepared for what's happening in the market.

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He said CIOs might want to revisit alternatives that once appeared cost-prohibitive, such as data center renovations or expansions. Even new data center construction might be more attractive now.

Building a new data center might still be too expensive, Martorelli said. But there are some other things CIOs could do -- they could reconfigure what they're doing. Perhaps they could pull some servers back inside the business, or consolidate servers with virtualization.

No matter the solution, he said, CIOs need to be aware that more and more companies are turning to colocation data centers to help with disaster recovery, online commerce and Web 2.0 technology. This is creating a sellers' market that, when combined with rising energy prices, is putting a squeeze on CIOs' budgets.

Let us know what you think about the story; email: Shamus McGillicuddy, News Writer

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