Mr. Salberta: I'm very bullish on the long-term prospects of this industry. I think network-neutral colocation services are important to the speed of the Internet, and it's a viable business model. On the other side of it, we have managed hosting, which I think is getting increasing interest by companies. I think in part because they don't want to spend the capital; they want to shift it to an opex model, and they're finding that they can do that. They can lower the entry costs to add computing capacity to launch new projects, and I think right now we're seeing increased interest and increasing demand from an enterprise outsourcing standpoint for managed hosting services.
TWST: What about managed hosting versus the "colo" business model? Does one
represent better prospects for future growth?
Mr. Salberta: The way I look at it, the managed hosting is a little bit more
cyclical. There was more downward pressure on demand through the recession on
the managed hosting side of it. Companies postponed projects, they went through
existing hardware they had and made it more efficient, they reduced the number
of employees, they eliminated some applications. Demand never really declined,
but the growth that the industry had enjoyed was kind of put on hold. Now we're
seeing that reverse. So when we're coming out of this recession, I think we're
going to see more of an acceleration in revenue, more of an acceleration in
demand in managed hosting relative to colocation. Colocation is a little bit
more tied to Internet speeds, things like video downloads. The shift in
Americans spending more time online has really driven the underlying demand for
the colocation model, so the customers that colocation companies are getting
their demand from has held up well and continues to. But I don't see a big
second derivative of revenue and demand in colocation kicking in. So continued
strong growth, but then we have the potential to see much better near-term
growth as things get better in the managed hosting business model. Managed
hosting requires less capital, so value-oriented investors that want to see free
cash flow, I think they're going to find it better in the managed hosting
business models. There are lower barriers to entry in the managed hosting
industry, so the potential for price aggression exists and, long term, we could
see operating margins, EDITDA margins, pressured just from competition. But I
think we're so early in the industry that I'm not seeing that right now.
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