Peer 1 Experiences Strong Growth in Colocation Market

Rawlson King, theWHIR.com

February 14, 2003 -- (WEB HOST INDUSTRY REVIEW) -- Unlike many of its competitors, Peer 1 Network (peer1.net) is succeeding in developing a profitable business model for the delivery of bandwidth and server colocation services to large enterprises.

Over the past three years, the Canadian-based, publicly traded company has deployed a series of data centers across North America, and in the process has built its own seamless network.

Operating via private peering connections and public network access points (NAPs), Peer 1's redundant network is designed to offer an alternative to the existing network options. Peer 1 utilizes multiple major upstream providers and more than 200 peering partners to ensure continuous Internet connectivity, greater route diversity, and ultimately, enhanced Internet performance. This strategic combination allows customer traffic to be routed over the best available connections.

"Peering is the arrangement of traffic exchange between networks. Peer 1 strategically utilizes private peering in its facilities because it allows for more flexibility, always providing our clients with an alternative way out to the Internet," said Geoff Hampson, President & CEO of Peer 1 Network, in an exclusive interview with the Web Host Industry Review.

Peering allows networks to virtually extend their reach with lower incremental costs. Peer 1 Network has increased the amount of traffic that goes directly to its peers from 27 per cent a year ago to 35 per cent today. The company expects that its peer traffic will grow by over 50 per cent by this time next year when the Peer 1 Network is extended to London, Virginia, and San Jose. Currently, the company has data center deployments in Seattle, Chicago, New York, Montreal, Toronto and Vancouver. These facilities are typical utilized by application service providers, managed service providers and Internet service providers.

"Because we don't offer managed services, we don't compete against our customers," stated Hampson.

Peer 1's customers include: FatPort (fatport.com), a wireless broadband solutions provider; ONet Networking (onet.ca), a high-speed IP network for educational institutions and research organizations; and NetNation (netnation.com), a top-ranked Web host and domain registrar.

Peer 1 services also appeals to large enterprises that rely heavily on the Internet for communication between clients and partners. By utilizing a peering strategy, enterprises can heighten their levels of redundancy and connectivity. Concurrently, by leveraging a peering strategy, Peer 1 has been able to create a low-cost, high connectivity network, based strictly on facility and carrier interconnect costs.

"Because those costs are mainly fixed, growth levels are constant and encouraging."

Hampson reveals that by utilizing the peer-networking model, Peer 1 Network has been able to build out a tremendously extensive connectivity outlay at a rather inexpensive price.

"While competitors such as Telus and GT network built out and maintain networks for hundreds of millions of dollars - our network has as much scalability and was only built at a cost of $10 million."

Hampson notes that Peer 1 utilizes a "flexible, disciplined and opportunistic" strategy to build out its network: "We take advantage of our competitors' problems and the turmoil in the telecommunication sector to build out our network. We acquired a robust infrastructure by purchasing the best equipment and the best facilities on five or six cents on the dollar."

According to Hampson, the acquisition of inexpensive and/or bankrupt assets, in conjunction with strong monthly recurring revenue and predictable growth patterns as new cities come online, will lead to the firm's profitability and to greater value for shareholders.

The company expects to be cash flow positive in January 2003 on monthly recurring billings of $975k. The firm increased revenue 323 per cent from approximately $1.4 million in fiscal 2001 to $5.9 million in 2002. By the end of this month, Peer 1 Network expects to be profitable on monthly recurring billing of $1.1 million.

The company notes that once profitable, it will reinvest some of that revenue as capital investment into the business. The firm expects to add more staff to strictly to strengthen it customer support needs. Peer 1 Network presently employs only 30 people. Despite employing such a small number of employees, the company's ratio of revenue to employee increased to $350,000, versus $148,000 a year ago.

Peer 1 continues to expect strong growth as it expands its operations. "The appetite for broadband connectivity continues to grow despite the turmoil in the telecom sector," reveals Hampson. The major challenge he identifies is the ability to compete against network and telecommunications operators that have re-emerged from bankruptcy. Because such firms have emerged from bankruptcy without costs or debt, they need not worry about creating a rate-of-return for their investors.

While this factor makes the colocation marketplace more difficult for Peer 1 to operate in, Hampson still expects the company to grow by leveraging its strengths. By employing a peering strategy, the firm's overhead remains low, enhancing the firm's financial viability, while optimizing customer connectivity and redundancy. Further, by operating in Canada, Peer 1 can offer its American customers services in cheaper "sixty-cent" dollars due to the present rate of currency exchange. These characteristics make Peer 1 a strong candidate for Web hosting firms seeking to colocate their servers.