Host Nation

Internet data centers are flocking to Japan, the world's second-largest Net market. With electronic and mobile commerce taking off here, they all want a piece of the action.

Enterprise or dot-com, every company has its own meltdown nightmare. The problem with these and other bad dreams is that they can and probably will become reality at some point. The complexity of Internet applications -- and the inevitable seaming together of operating systems, intranets, extranets, and security architectures that characterize taking businesses online -- present seemingly impossible balancing acts for IT administrators. Increasingly, companies large and small are choosing to outsource many of these systems.

An off-shoot of the data storage industry, integrated data centers (IDCs) were created to keep routers routing and servers up and running. Web-hosting, colocation, and disaster recovery are all served up in a secure environment with a 24/7 buffet of all-you-can eat managed bandwidth. US corporations and ventures have embraced the idea of outsourcing their mission-critical systems to providers like Exodus Communications, Global Crossing, AboveNet, and many others.

IDCs have taken off for a reason. "If you figure in the cost of buying and installing computer and network systems, plus maintenance and cost of both space and personnel for your mission-critical support, it would cost a business six times as much to do it themselves as to outsource it to an IDC," says Darren McKellin, director of sales and marketing at Technovox Corp. "IDCs can do it because of the economy of scale. We have engineers and systems analysts on staff."

With the North American storage utility market expected to approach $8 billion by 2003, according to research firm Dataquest, IDC services are now migrating across the Pacific to Japan and the rest of Asia as companies here discover just what a technical (and expensive) pain in the ass it is to run an ecommerce operation. "E-businesses here are climbing the learning curve for the Net very quickly," says Bob Weingarten, representative director of Exodus Communications, K.K. "When Exodus started in 1994 in the US, it was mostly with dot-coms outsourcing to us. Now it's progressed to enterprises as well. Here in K.K., we're seeing more of a mix right from the start."

Numerous US and a few key domestic players have rushed in to build Japan's IDC market from the ground up. The list is long, and getting longer by the month. (See sidebar) Not surprisingly, the market is developing here differently than it did in the United States. Foreign clients may find it strange, for example, that IDCs in Japan don't always have their own stand-alone facility. Several, in fact, may be clustered in a designated data center building on separate floors. With Japan's prohibitively expensive real estate, only the largest players are willing to invest in their own buildings.

"Finding a building in the right location with the right qualifications that's available is nearly impossible," says Brent Reichow, assistant manager of the International Sales Division at PSINet.

Japan is also witnessing a strange mix of companies that at first glance appear to be offering similar IDC services but actually differ dramatically. Swimming like remoras around the larger, more established firms, smaller IDCs without the right kind of expertise or backing nibble away some business here, a client there. Executives at established IDCs caution clients to look carefully both at the services that a data center offers and the needs of their firm over the next five or ten years before signing a contract.

"This year there are a lot of companies rushing around waving their arms shouting, 'Hey! We're a data center!'" says Glenn Inouye, managing director of the Japan operations for Digital Island. "But there's a tremendous difference between an office with a number of servers stacked up and a tested IDC." He gives us his spiel: "You need redundant power systems, which means you have to beef up electricity. You need back-up power, because if a server fails or power fails and you're not quick enough, the processor can go down. Though you lose power for just an instant, it will take time to get the servers back up, and you're losing customers and money every second. More electricity means more heat -- that ups your air conditioning needs. Have they got seismically braced racks? What's their fire control policy? All these and many more physical factors have to be figured into the construction and location of an IDC. Then there's the security architecture, not just firewalls but also active intrusion detection systems, 24/7 monitoring, and planned response in case of a DDoS attack [distributed denial of service]. Plus you have network access, peering arrangements -- the list goes on."

Because US companies got a headstart in data hosting, they're often seen as being more reliable than their local competitors. "Japanese companies are taking their first steps into IDCs," says Andrew Anderson, an account manager at PSINet. "There are many companies out there offering to host your Web site, get you online, and manage your backend systems. The danger of an inexperienced market like this is a client goes into a data center or a company that calls itself one, sees shiny rows of servers neatly racked up and thinks, 'Gee, doesn't this look nice.' The space is offered at a very inexpensive price. Only later do they find out it does not have the network they need as their business expands. There are a lot of data centers that don't have a network. It's hard to educate customers that they need to get fast traffic."

That doesn't mean US IDCs here have their act together yet. "Many US services have set up here, but they've got terrible contracts," says Juergen Specht, a developer at wireless startup Nooper.com. "They just use the same form [for service contracts and NDA agreements] as they use in the US. I laughed when one made me sign an NDA and the very first line said that the agreement would be construed in accordance with the laws of California. I said to the guy: 'This is useless -- we're in Japan and I'm German. I don't care about California law.' He replied that I was the first person to point that out."

But Specht agrees that the local players haven't built up enough expertise yet. His startup Nooper.com, which will target the wireless Net in Japan, did extensive research on the available IDC services. "There's one common theme -- the level of knowledge here is quite low compared to in the US. The data centers all have excellent equipment and infrastructure, but the staff have very little technical knowledge. I think this is due to the newness of the Internet in Japan -- no one's had any time to build up expertise yet."

Photograph supplied by Internet Initiative Japan (IIJ)

Says a senior business development manager at a Tokyo Net startup: "We saw a lot of IDCs. They are mostly the same in terms of physical security. They've got the finger scanner and the hidden doors. They put on a good show. But I looked for the ones that keep the little rubber door stopper right near the door -- it's a dead giveaway. It shows which ones have real security and which ones just put on a show when customers are around."

But as most security analysts will tell you, the real threat is not going to be physical, but through the networks. "Security, especially in an Internet environment, is a very hot topic right now with many of our Japanese clients," says Teruhiko Kawashima of IBM Japan's communications department. Though IBM does not run any data centers in Asia itself, the company provides consulting services and helps with security systems integration for clients in the IDC market.

IDCs know it's in their own interest to maintain the highest security possible. Says @Networks CEO C.J. Chang, "If you don't have qualified people to understand what security issues are on the network, you're going to leave yourself wide open -- and your customers."

Of course, IDCs can also use security as an excuse to charge more. "One IDC had a guy come and talk to us about security -- he was basically trying to scare us into buying security consulting that we didn't need," says the anonymous business development manager quoted above. "If you're a new startup and you don't know what you're doing, you could end up paying a lot more. The guy used a lot of buzzwords like 'worm' and other viruses."

Another thing Japan is witnessing is a mix of integrated data centers with the older data storage centers, all calling themselves IDCs. There's a critical difference, though. Some of the Japanese centers coming online now from traditional corporations like Fujitsu are actually old legacy data centers built to house mainframes being refitted for the wired world. Such centers may not be the best choice for clients needing help with e-business -- they're more suited for companies that are in search of data storage, plain and simple. IDCs make their money by offering a slew of services besides basic storage, including network monitoring and management, global load balancing, disaster recovery, outsourced Web and Internet applications, designing sites, and a slew of other services.

"During the past half year or so, much of the market has centered on colocation," says Exodus' Weingarten. "What you're selling there is space. Space is a commodity, and prices will drop as companies rush to undercut competition. It will become a buyers market with negligible profit margins. It's imperative for the data centers that the market grow from colocation to selling managed services."

The IDCs setting up shop in Japan have been laying the groundwork for these and other managed services over the past few months. Global clients operating in Japan already understand the need and are coming to IDCs here with a shopping list in hand. "What they are looking to do here in Japan is what they already did two years ago in the US market," says PSINet's Reichow.

As a result, US IDCs operating here have a distinct advantage when it comes to winning business from international firms. "They want it now and they want what they have in the States," continues Reichow. "That means they come to us or a company like us. They're not going to NTT to say 'Give us what we have in the States!' We can adapt and move quickly. We don't need a crystal ball to tell us what kind of services companies will want -- we've done all this in the US and Europe already."

On the other hand, Japanese IDCs probably have an advantage in earning the trust of more traditional Japanese clients. A brand name like "NTT" goes a long way to earning trust in this country, and many Japanese clients prefer dealing with homegrown firms, even if they're not so well known.

The primary market here long term is, of course, Japanese companies, and this year will see the big push for these clients. Exodus anticipates that 90 percent of its business will come through Japanese clients. Though the market right now is focused on server space at inexpensive package prices, that is going to change. "With the expansion into wireless applications, video enabled handsets, GPS location systems, and increasingly complex m-commerce sites -- plus the growing needs of B2B auctions and aggregators -- companies will see their server needs expand from five to ten times across the board," says AboveNet Japan CEO Kanji Moriwaki. And as examples emerge of meltdown nightmares becoming horrifying realities for Japan's e-commerce and B2B providers, companies are going to turn to IDCs to manage their critical services.