Internap Network Services (INAP) said Thursday that it will expand its data center in Seattle as part of a broader effort to shift more of its colocation business from partner data centers into facilities owned by Internap. The Seattle expansion is expected to cost $22 million, or nearly half of the $50 million Internap has earmarked for its data center expansion.
The project will add 15,000 net sellable square feet of capacity to Internap’s current footprint in Seattle, with the new space expected to open during the third quarter of 2010. “Seattle was a compelling choice for expansion because of our multi-facility footprint, local market knowledge, existing sales and support infrastructure as well as our ability to leverage brand reputation,” said Internap CEO Eric Cooney. “We feel this market offers Internap a unique opportunity to expand with relatively low risk and relatively high reward.”
Seeking Improved Margins
The shift in data center strategy is driven by the opportunity to realize better profit margins. Internap’s data center revenue is about evenly split between in-house data centers and space leased from providers like Equinix. In Thursday’s conference call with analysts, Cooney said Internap sees a 50 percent margin on customers in company-operated data centers, as opposed to 5 percent in partner facilities.
“Going forward, we will continue to execute our data center strategy to focus on growth and company control data centers, while we proactively reduce our partner data center providers to a small number of mutually beneficial relationships,” he said.
How will that be accomplished? “We intend to proactively churn select loss making and or low margin partner colocation revenue,” said Cooney. “As most of these contracts are short term being less than 12 months in many cases we will simply choose not to renew these contracts. In other cases, we are seeking to renegotiate the contract and pass the customer directly to the data center provider. In both scenarios we expect to retain the Internap value added services such as IP transit or CDN which those customers are also taking.”
Internap said it expects this will mean a quarterly decline of about $5 million in partner colocation revenue by the fourth quarter of 2010, but will boost the profitmargins on the remaining partner data center space from the current 5 percent to about 20 percent.