The power of denial

The power of denial is particularly relevant this week, as we live through the crisis that is currently gripping Wall Street.

I’ve been an analyst for more than eight years, now, and during those years, I’ve seen some stunning examples of denial in action. From tightly held and untrue beliefs about the market and the competition, to unrealistic expectations of engineers, to desperate hopes pinned on uncaring channel partners, to idealistic views of buyers, denial is the thing that people cling to when the reality of the situation is too overwhelmingly awful to acknowledge.

I’m not a doomsayer, and I think that we’re living in a phenomenally exciting time for IT innovation. But innovation disrupts old models, and I see numerous dangers in the market, that my vendor clients frequently like to downplay.

For instance:

I’m not a believer in an oversupply of colocation space in the market right now (although this is still primarily a per-city market, so the supply/demand balance really varies with location); we still see prices creeping up. But I do believe that much of the colocation demand is transient, while enterprises who unexpectedly ran out of space and power ahead of forecast shove their equipment into colocation for a year or three while figuring out what to do next (which is often building a data center of their own). Overbuilding is still a very real danger.

I also warned of the changes that blades and other high-density hardware would bring to the colocation industry, back in 2001, and over the seven years that have passed since I wrote that note, it’s all come true. Most of the large colocation companies have shifted their models accordingly, but regional data centers are often still woefully underprepared for this change.

Moving to the topic of hosting, I warned of the perils of capacity on demand for computing power all the way back in 2001. Although we’ve seen a decline in overprovisioning in managed hosting over the years, severe overprovisioning remains common, and the market has been buttressed by lots of high-growth customers. But tolerance for overprovisioning is dropping rapidly with the advent of virtualized, burstable capacity, and an increasing number of customers have slow-growth installations. Every managed hoster whose revenue stream depends on customers requiring capacity faster than Moore’s Law can obsolete their servers still has some vital thinking to do.

Making that problem worse is that the expensive part of servicing a hosting customer is the first server of a type they deploy, not the N more that they horizontally scale. Getting that box to stable golden bits is the tough part that eats up all your expensive people-time. And everyone who is thinking that their utility hosting platform is going to be great for picking up high-margin revenues off scaling front-end webservers needs to have another think. Given the dirt-cheap CDN prices these days, and ever-more-powerful and cost-effective application delivery controllers and caches, scaling at the front-end webserver tier is going the way of the dodo.

And while we’re talking about CDNs: Two years ago, I warned our clients that CDN prices were headed off a cliff. Margins were cushioned by the one-time discontinuity in server prices caused by the advent of multi-core chips, but prices have spent much of that time in free-fall, and although the floor’s now stable, average selling prices continue to decline and the market continues to commoditize, even as adoption of rich media shoots through the roof. I’m currently writing a research note updating our market predictions, because our clients have had a lot of interesting things to say about CDN purchases of late… stay tuned.

If you’ve got anything you want to share publicly about where you’re going with colocation, hosting, or your CDN purchases, and your thoughts on these trends, please do comment!

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Posted on September 17, 2008, in Industry and tagged , , . Bookmark the permalink. Leave a comment.

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