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SOURCE: Austin American-Statesman

LITTLE GUY DATA CENTERS PROSPERING IN A TOUGH ECONOMY

By Kirk Ladendorf
Austin American staff
December 22, 2008

Success in the technology business doesn't always mean having a genius chip design or a killer software application.

Sometimes the homely virtues - reliability, responsiveness, nimbleness and attention to detail - make all the difference. And it doesn't hurt to have a good sense of timing.

Core NAP partners Kenneth Smith and Frank Bieser have the timing part down.

They sold their well-regarded Austin Internet service company, Jump.Net Inc., in 2000 - right before the Internet bubble burst - for about $25 million.

The buyer was Allegiance Telecom Inc. of Dallas, which within a few years was headed toward bankruptcy court.

As Allegiance was shedding assets in late 2002, Smith and Bieser bought back their Northwest Austin data center at a bargain price, and they soon began offering service to business customers.

"After Jump.Net, we sat on the sidelines for a couple of years and twiddled our thumbs," Smith said recently. "We decided that the recurring revenue model of a data center was very attractive.

"Stuff" - such as their old data center location on McNeil Road - "was coming on the market, and it was cheap and the competition was weak. We sold high and bought low," he said, "and our familiarity with the business allowed us to jump back in and bootstrap another company from ground zero."

Bieser said, "There were people saying, 'You can't do this again. You were lucky the first time.' "

Paul Stapleton, an investment banker with DH Capital who specializes in Internet service providers, says there is still plenty of room for savvy independent data center operators to compete with their bigger rivals. Stapleton has been involved in sales of many Internet service companies, including the Jump.Net sale in 2000.

"The independents want all the customers that IBM Corp. doesn't want," Stapleton said. "They are happy if you are spending $5,000 a month with them. Bigger data center operators want customers that spend $100,000 a month and more.

"But if you can get a few hundred customers that are spending $5,000 a month, you are talking about a good-sized business that throws out a lot of cash flow once you have paid for the basic costs" of network equipment, communications access and electrical power.

Core NAP is not the only former Internet service provider to graduate from delivering dial-up Internet service to consumers in the 1990s to focusing on business customers today. Two other home-grown companies, OnRamp Access Inc. and Data Foundry, have similar backgrounds.

Other larger companies in town have data center operations, including XO Communications Inc., which bought Allegiance's operations, and SunGard Data Systems Inc., which claims more than 25,000 customers in 50 countries.

But Core NAP's Smith says plenty of local companies prefer to keep their business-critical computers at Austin-based data centers.

Customers say they like Core NAP's technical savvy and its willingness to move fast.

RipCode Inc., a tech startup with operations in Dallas and Austin, chose Core NAP as the location for the key demonstration system of the video processing systems that it makes.

The demo system was a key part of the company's effort to sell its equipment to customers such as social networking giant MySpace.com. Potential customers needed to take test drives on RipCode's equipment, which meant the staff at Core NAP had to adjust quickly to make the demo system fit well with different companies' video communications networks.

"Big data centers are good, but you are not going to get fast turnaround time" on changes, said Dan Walsh, RipCode's vice president of operations. "We are challenging Core NAP to be nimble but not to drop the ball.

"We may need an increase in bandwidth literally in 24 hours, and I get that from Core NAP. They are very quick and very efficient."

The Austin data center has a few hundred business customers, from tech companies to law firms. It sells a variety of managed services that include network security, disaster recovery and specialized data storage and backup.

The 30-employee company is growing despite a slowing economy. It expanded its data center by a third to 10,000 square feet last summer.

"Growth has slowed a little bit, but we have some deals on the table that could reverse that trend," Smith said. "We are already successful and profitable. If we don't land any more customers, we just have to tighten our belts just a little bit.

"After nearly 14 years running a service provider business, it's still fun," he said. "With a few hundred customers, there is always new technology to learn and problems to solve, 24 by 7. It's a rare breed of employee who wants to be constantly challenged with new problems, but our people have an undying desire to learn."

kladendorf@statesman.com; 445-3622

Kirk Ladendorf covers technology for the American-Statesman.