Cheap servers for everyone By

Cheap servers for everyone
By: Hosting Tech

With the backing of Everyones Internet, people knew RackShack was a reasonably stable company, but they were still skeptical about the offer. Competitors assumed the bandwidth quality was poor and claimed substandard parts were used in the servers. None of that mattered; people flocked to RackShack’s dedicated server offer in droves. In less than eight months, RackShack has leased more than 7,000 servers and became an industry leader in the dedicated server market.

There are a lot of reasons why the $99 server market has become viable over the last year, but the two primary reasons are cheap hardware and cheap bandwidth. A single website, even a busy site, can be served more than adequately by hardware that costs less than $400. A quick survey of Price Watch (www.pricewatch.com) shows a company can put together an Athlon 1.3-GHz server with 128 MB of RAM and a 40-GB hard drive for $274. Purchasing in bulk quantities would theoretically reduce the cost even further.

Low-cost hardware, combined with abundant low-cost bandwidth, has helped make it possible to profitably offer $99 servers. RackShack is clearly the leader in this field, bringing more than 1,000 new servers online each month. Compare that to Rackspace Managed Hosting (www.rackspace.com), arguably the leader in the managed server market, which brings 300 to 400 servers online each month.

Low-cost bandwidth

Cheap hardware is not enough. If a company is going to offer 300 GB of data transfer, cheap bandwidth becomes a necessity. Enter Cogent Communications (www.cogentco.com). Cogent made a big splash at the end of 2001 by offering resellers a 100-Mb connection for $1,000– $3,000 — a fraction of what major ISPs typically charge for a T3 connection (i.e., 45 Mbps). Cogent used an Ethernet connection, so the typical local loop charges involved in a traditional connection were not necessary. The combination is a potent business model.

Of course, cheap bandwidth from a single provider, especially one as untested as Cogent, can make customers skittish; however, the recent decline in the fortunes of telco companies has increased the big telecoms’ interest in making deals. Still, there are some good prices to be had, even from Tier 1 providers, such as AT&T and Sprint. What is the secret to RackShack’s success? According to Robert Marsh, president and chief executive officer of RackShack, it is in the behind-the-scenes processes. When it comes to bandwidth, RackShack does not put all its eggs in one basket. In addition to its Cogent connection, the firm has established connections through Savvis (OC-3), Time Warner (Gig-e), Verio (2 Gig-e), Williams (Gig-e), and ELI (DS-3) — with a recently added Allegiance Gig-e link. When it is all said and done, RackShack’s network will have a total capacity of 6.2 Gbps.

“We have designed and implemented a network that is very efficient and allows us to offer incredible amounts of bandwidth,” says Marsh. “Our automation of sales and sign-ups is also critical to our model and has yet to be duplicated in the market. Start to finish, it is possible to select a server, create an account, arrange payment, and then have that server assigned to you and be up and working in a matter of minutes.”

Bursting on the scene

Of course, RackShack is not the only $99 server company in the market. Other companies have come to the same conclusion that $99 servers can be profitable. In June, BurstNET Technologies (www.burst.net), already a strong player in the shared and dedicated hosting market, opened a new subsidiary, NOCSTER (www.nocster.net). NOCSTER offers a Celeron 1- GHz server with 512 MB of RAM and 300 GB of data transfer for $99 per month. In the first month alone, with limited advertising, NOCSTER leased more than 200 of these servers.

What made BurstNET decide to jump into the $99 server business? Matthew McCormick, customer service manager, says, “NOCSTER is unique in that it is a managed server at the same low prices that other companies are offering for an unmanaged server. We felt that we could meet the growing need for a low-priced, high-value managed server and control panel — becoming a very competitive force in the industry.” BurstNET distinguishes its services by connectivity and the type of support offered. A multi-homed network serves BurstNET, with connectivity through AT&T, Sprint, WorldCom, and Cogent, although McCormick says the NOCSTER servers are limited to usage of the Sprint OC3 and Cogent Metro Fast Ethernet lines only.

Customer support

Support is often cited as a problem with the $99 server market. Some argue it is not possible to offer $99 servers and provide good customer support. Marsh and McCormick disagree.

“In any high-growth business, there will be a few hard knocks along the way and RackShack has certainly had its fair share,” says Marsh. “However, we’ve listened to our customers and made changes based upon what they have wanted to see.”

To keep costs low, NOCSTER realizes that customer service resources must be managed appropriately. McCormick says, “…NOCSTER only provides emergency phone support for servers that are down or not responding. Support is offered by means of AOL Instant Messenger, a ticket system, and e-mail only.”

McCormick adds that customers sometimes pick a server company based only upon the low price, and fail to “ask the other necessary questions that anyone selecting a host should before making such a decision.” His company tries “to work with each individual client prior to them selecting us as a provider to make certain we have all aspects of their business plan covered from the beginning.” Not surprisingly, Patrick Condon, founder and vice president of customer care at Rackspace, disagrees, “I think it’s the difference between shopping at Nordstrom versus shopping at K-mart — you can get a pair of socks at either store, but your experience is completely different.” Marsh argues Condon’s “quality of experience” point by saying, “Others might say we provide less and charge less. The facts support that we provide more bandwidth, memory, storage, and software all while charging substantially less than our competitors — as much as $1,000 per month less.” Despite the difference of opinion, companies like Rackspace are very aware of the $99 server market and its impact on hosting.

“Although gross number of servers is an interesting metric, we’ve moved more toward looking at gross revenue numbers instead to fully see where we fit in the market,” Condon says. “Considering that the average Rackspace customer spends around $1,000 per month, you are really comparing apples to oranges if you compare us against companies like NOCSTER. It’s clear that the discount dedicated server space has gotten some traction. But today, the real players in this space are either already profitable or will be shortly. As Rackspace goes into its second year of profitability, I’m curious to see how well these companies are doing financially.”

If the trends in low-cost hardware and bandwidth continue, there is no doubt the lower pricing for dedicated servers will continue as well. This is still very much a growth market.

“Even if the hosting market were to contract, the discount dedicated continues to draw business from the mid- to higher-end shared hosting, traditional resellers, lower-end managed offerings, and the like,” says Marsh. “Discount dedicated will continue to grow while other markets stagnate or slightly decline.”

McCormick concurs, “The $99 server market is here to stay. As with all industries, customers ultimately dictate expected needs and desires, and we, as providers, must always strive to meet these criteria. It’s the trickle down theory in reverse.”

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