Demand for hosting services trails supply

With hosting capacity at application service providers (ASP) growing by leaps and bounds, ASPs are having to be creative to attract new users to their data centres. Despite this oversupply, ASP pricing appears to be holding firm.

Yesterday, Intel Online Services (IOS), a wholly owned subsidiary of semiconductor giant Intel Corp., introduced its AppChoice program to entice customers to one of its five new data centres. The company's parent has committed to spend $1 billion on data center infrastructure, an investment which could more than triple by the end of next year.

AppChoice constitutes a change in IOS's business strategy, which was to host high-margin custom applications for big businesses. The new package permits IOS customers to remotely manage their own programs, cutting IOS out of that part of the business.

"Today it's a little hard to choose your customers," said David Rowe, IOS director. He acknowledged that current customers use nearly 25% of the capacity at one IOS data centre for simple co-location, a business that was not part of the original IOS strategy.

Less than two months ago Exodus Communications announced an expansion of its target customers with a menu of managed service plans, changing its focus from its traditional, lower overhead co-location users. The company operates more than 1.5 million square feet of data center real estate that it plans to expand to 4 million square feet by year's end.

Filling these and other data centres with paying customers is the big challenge service providers face, observers say.

"Supply overwhelms demand," said Bill Martorelli, an analyst at Hurwitz Group. But he said he doesn't believe that users will be able to leverage that into cost savings.

"I don't think IT execs should try to squeeze every last dime out of an ASP," he said. "Rather, use them for new things."

Carlos Mendez started using Intel's AppChoice as a beta user in the spring, when he was vice president of Internet Services at CommerceRoute Inc. in Emeryville, Calif. Recently promoted to vice president of business development, Mendez said he chose IOS because he wanted his company's online digital-market operations to scale as needed, but he thought the company could have been more competitive in its pricing.

"They need to be more flexible. Not just in services, but in getting the business," he said.

Although IOS didn't negotiate on price with CommerceRoute, Mendez said continued investment in data center capacity and competitive services means "it's going to change."

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