In the summer of 2000, the hottest real estate around New York City was the real estate nobody had wanted a few years earlier. In Newark, the old Bamberger's department store had been converted for the Internet. In Manhattan, the Rudin family bought 32 Avenue of the Americas, the building where AT&T once ran its manual switching center, and filled it with MCI WorldCom and Qwest. Across the Hudson, a developer named Argent had bought six to seven million square feet of buildings in a single year. Exodus signed up for 230,000 square feet at 300 Boulevard East in Weehawken before Argent had even closed on the purchase.
Morgan Stanley's real-estate funds put $1.25 billion behind two developers of these buildings, Global Gateway and MetroNexis. In July 2000, the New York Times captured the mood in a headline: "Web Gives White Elephants a New Life."
Argent's executives explained the hurry. "Anything that will not be ready for 18 months is a non-starter," said Mark Teitelbaum. His partner Andrew Penson put eighteen months in perspective: "But that is like 10 years in Internet time."
Ten years in Internet time. That was how fast everyone believed the world was moving. And everyone wanted the same thing inside those old department stores and switching centers: racks of servers, powered and cooled around the clock, wired to as many networks as possible.
This chapter is the story of the companies that rushed to fill them. Exodus, born in a Sunnyvale room with no ceiling, became the hosting company of the boom. Two veterans of the Palo Alto Internet Exchange, Jay Adelson and Al Avery, founded Equinix on the opposite bet: a building where networks could meet without any one of them owning the room. Digex became the prize in a bidding war that Bernie Ebbers won and later regretted. The carriers piled in: Qwest with IBM, my own Level 3, PSINet, Genuity with its Black Rocket, and Gary Winnick's Global Crossing with GlobalCenter. Behind them ran a pack of hopefuls, including Globix, Data Return, NaviSite, AboveNet and Terremark. And out of MIT came Akamai, which bet that the Internet's future belonged at the edge rather than in a handful of giant buildings.
Every one of them was chasing a forecast. Forrester said Web hosting would grow 76 percent a year through 2003. IDC said Web services would go from $696 million in 1998 to $10.7 billion in 2002. Salomon Smith Barney saw hosting tripling to $9 billion by the end of 2001. Other analysts said $35 billion by 2005. No two forecasts agreed. All of them went up and to the right.
Exodus—K.B. Chandrasekhar, B.V. Jagadeesh, and Ellen Hancock#
The first Exodus data center was a single room in a Sunnyvale office suite, packed with about forty servers. The machines ran so hot that the founders had to knock out the ceiling and roll in portable air conditioners to keep them alive.
That room was the whole business. Two engineers from India, K.B. Chandrasekhar and B.V. Jagadeesh, had started out in 1992 with a network-software design firm called Fouress, incorporated in Maryland. By 1995, the company had been reincorporated in California as Exodus, and the founders had stumbled into a better idea: keeping other companies' web servers running, cooled and connected around the clock. Exodus began hosting servers in late 1995.
In August 1996, a $25 million private placement paid for the first real Exodus facility, in Santa Clara. Exodus called it an "Internet Data Center." Customers' servers sat in locked "cyber vaults" behind palm scanners.Palm scanners were the boom's favorite prop. They showed customers that someone was guarding the cash register. Chandrasekhar had a simple way of explaining why anyone would pay for this. "This is our customers' cash register," he told the Wall Street Journal. If a retailer's website went down, so did its sales.
Here is what strikes me about that line. In the 1960s and 1970s, companies paid Tymshare and EDS to run their computers for them. In the 1980s, the PC convinced everyone they would never need to do that again. Now the most aggressive new companies on earth were handing their servers back to someone else's building. In May 1999, the New York Times put the trend on its front page under the headline "Computing Centers Become the Keeper of Web's Future." A Goodyear executive gave the newspaper the best explanation I've seen of why: "We're in the tire business… Why run the digital power plant ourselves?"
The glass house was back. This time it had palm scanners.
The Seasoned Hand
Chandrasekhar and Jagadeesh were builders. Wall Street wanted an operator. In March 1998, days before the initial public offering, Exodus hired Ellen Hancock as president.
Hancock had a résumé that would have made anyone else in Silicon Valley nervous. She spent twenty-eight years at IBM and became its highest-ranking woman, overseeing fifteen thousand people. Lou Gerstner pushed her out. She moved to National Semiconductor as chief operating officer, then to Apple as chief technology officer in July 1996. A year later, Steve Jobs returned and ousted her too. When the Wall Street Journal profiled her in October 1999, the headline told the whole story: "Fired From Two Jobs, A High-Tech Manager Gets the Last Laugh."
She would get a lot more laughs before the last one.
The IPO
Goldman Sachs priced the Exodus offering late on March 18, 1998, at $15 a share. The company sold 4.5 million shares. The next morning the stock opened at $24.75 and closed the day up 84 percent.
The fundamentals were tiny. Exodus had booked $12.4 million of revenue in 1997 and lost $25.3 million. But investors weren't buying 1997. They were buying Forrester Research's forecast that Web hosting would grow from $200 million in 1997 to $16 billion by 2002. That's eighty times in five years. In the Gold Rush, the forecast was the asset.
The two men who had knocked out the ceiling owned surprisingly little of it. Going into the IPO, Chandrasekhar held 6.3 percent of Exodus and Jagadeesh 3.6 percent. Venture funds held most of the rest, led by the Fleet funds at 16.1 percent.
By late April, Hancock's stake was worth about $30 million on paper. Exodus already had sites in the San Francisco Bay Area, New York, Los Angeles, Seattle and Washington. When @Home took a $1.5 million stake to jointly market hosting services that same month, the Journal felt the need to explain the jargon to its readers: "co-location," or "co-lo in industry jargon." A new industry had a nickname.
The Rocket
Exodus spent 1999 doing what every Gold Rush company did. It built and it bought. It bought Cohesive Technology for $100 million in April. In October it paid $280 million in stock for Service Metrics, a website-performance company here in Boulder, Colorado.Service Metrics was backed by Mobius Venture Capital. In his foreword to Bandwidth, Brad Feld wrote that the Exodus sale "returned our entire first fund." By November, Exodus ran about a dozen data centers and expected to have twenty-two by the end of the year. It finished 1999 with nineteen, seventeen in the United States plus London and Tokyo, covering about 1.6 million square feet. A year earlier it had eight centers and 200,000 square feet.Exodus's 1999 10-K counts nineteen Internet Data Centers at year-end: four in Silicon Valley, thirteen more in eight other U.S. metros, London (opened June 1999) and Tokyo (acquired with Global OnLine Japan in December 1999). Its 1998 10-K counts eight U.S. centers, about 200,000 gross square feet and "over 800 customers." By the end of 1999 the company had "over 2,200 customers under contract" and revenue of $242.1 million, with a net loss of $130.3 million. Its Market Value in November was almost $7 billion. One analyst called it "an absolute rocket of a stock."
The Chorus
Wall Street had been cheering since spring. In late March 1999, David Levy of ING Baring Furman Selz started covering Exodus with a buy. The stock jumped 28¼ points to 150 that day, and InternetNews credited the note with sparking a rally across Internet stocks. One analyst's report had moved a whole sector.
By the end of the year, the cheering was unanimous. According to Zacks, fifteen analysts rated Exodus a strong buy and eight more rated it a buy. Nobody said hold. Nobody said sell. Thomas Weisel's James Linnehan raised his twelve-month target to $170 from $65. "Exodus has a dominant market position in what we believe is the engine of the Internet, Web hosting," he explained. By Media Metrix's count, Exodus hosted more than 40 percent of the top websites.
Twenty-three buys. Zero sells. As I wrote in Bandwidth, Jack Grubman became the highest-profile analyst of the fiber boom. Hosting didn't need a Grubman. It had a choir.
One voice was off-key. Joel Yaffe of Giga Information Group looked at the same stock and saw something else. "Right now, there's just a lot of speculation going on," he said.
Three months later, the rocket had tripled. In February 2000, the Wall Street Journal reported that Exodus had a Market Value of more than $20 billion. Chandrasekhar had already moved up to chairman and was launching his next startup. His Exodus shares were worth more than $700 million, and he had become one of the leading "angels" for a generation of South Asian founders in Silicon Valley.
That's a long way from a room with no ceiling.
I never met Hancock or Chandrasekhar. At Level 3 we were racing into the same business. By March 2000 we had about 4 million square feet across thirty facilities, and I'm certain we chased some of the same customers. I can't recall a single one.
Switzerland
By mid-2000, hosting had a clear leader and a clear runner-up. Exodus was No. 1. No. 2 was GlobalCenter, the hosting unit of Gary Winnick's Global Crossing. GlobalCenter hosted about three hundred websites, including Yahoo and eToys. By the count Exodus later filed with the SEC, it had more than six hundred customers, among them a young search company called Google.Exodus's December 2000 merger proxy lists GlobalCenter's customers as including Google, Yahoo!, Akamai, eToys, the New York Times, the Washington Post and VISA USA. GlobalCenter lost $269.0 million from continuing operations in the first nine months of 2000.
In December 1999, Global Crossing had named Leo Hindery chairman and CEO of GlobalCenter, with a plan to take it public within six months. Hindery had just left AT&T's cable business, and he was careful about his non-compete. Hosting was neutral ground, he explained: "This is Switzerland."
Switzerland was for sale seven months later. The merger proxy Exodus filed that December tells the courtship almost day by day. On June 26, 2000, Thomas Weisel Partners told Hancock that GlobalCenter "might be interested" in a combination. A week later, GlobalCenter handed Exodus a draft merger agreement. Exodus's board told management to keep talking, "but to pursue a lower valuation."
In July 2000, the Wall Street Journal reported that Global Crossing was in talks to sell GlobalCenter to Exodus for $6 to $7 billion in Exodus stock. Then the news leaked. Exodus shares jumped 49 percent. Since Exodus was paying in shares, the deal's value jumped with them, to more than $8 billion. Global Crossing's board approved terms on July 14. Exodus came back with a lower price, Global Crossing "rejected the price proposal," and the talks stalled.
On August 1, Exodus's chief financial officer, Marshall Case, called Hindery to say Exodus would do the deal only on the terms it had offered on July 22. Hindery "rejected these terms" and said he intended "to pursue alternative transactions with other companies." He put it in a letter to Hancock the same day.
Hancock didn't wait around either. The proxy says only that Exodus spent August in talks with "another company." The dates match Digex, the hosting company controlled by Intermedia Communications, whose auction we'll see from the inside shortly. By August 20, Exodus had agreed to pay 1.85 of its shares for each Digex share. Global Crossing, meanwhile, pitched Intermedia a different deal: put Digex and GlobalCenter together. Intermedia balked at the strings attached to the Exodus stock, and on August 30, Exodus formally withdrew its offer.WorldCom's S-4 tells the Exodus–Digex talks from Intermedia's side. The parties agreed on 1.85 Exodus shares per Digex share between August 17 and 20. Intermedia's bond indentures required it to turn at least 85 percent of any Exodus stock into cash within 270 days, and it said it needed to raise $2.4 billion in that window. Exodus's "final offer," on August 25, was $250 million in cash plus 1.70 shares. Press reports put Exodus's bid at roughly $120 a share, about $8.5 billion; the filing gives only the exchange ratios, and the "$120 per share range" in it was Bear Stearns's guidance to WorldCom. The Exodus proxy does not name the "another company"; the match to Digex is my inference from the dates. That afternoon, WorldCom called. Within forty-eight hours, Bernie Ebbers had agreed to buy Intermedia, and with it Digex, for about $6 billion. The deal was announced on September 5, 2000. Recall from Bandwidth that Ebbers was steaming. According to Sidgmore, Winnick had called Ebbers to say Global Crossing was going to buy Digex, and Ebbers resolved to get it first. Sidgmore's diagnosis, as he told the Washington Post in 2002: "He was afraid he was going to look bad from a testosterone point of view."In December 2000, Delaware Chancellor William B. Chandler III let the WorldCom–Intermedia deal proceed but wrote that "this Court seriously questions the integrity of the Section 203 waiver decision." Section 203 is Delaware's anti-takeover law. The settlement gave Digex's minority holders about $165 million of WorldCom stock. Sidgmore was blunter two years later: "That is the stupidest deal of all time. We paid over $6 billion for a company that's worth maybe $50 million." (Goodman and Merle, Washington Post, June 30, 2002. Bandwidth dates the article June 29; ProQuest shows June 30, page A1.)
Hindery had walked out on August 1. On September 1, the day Digex slipped away to WorldCom, he picked up the phone. In the proxy's words, "Mr. Hindery contacted Ms. Hancock to renew discussions."
The two losers went back to each other. On September 28, three weeks after the Digex loss, Exodus agreed to buy GlobalCenter for about $6.1 billion of Exodus stock. At announcement, Global Crossing would own about 17 percent of Exodus.The Journal's 17 percent was the figure at announcement. Because the number of Exodus shares floated with a formula, the December 2000 proxy estimated Global Crossing's stake at "approximately 20.3%," or 108.2 million shares, at November 27, 2000, prices. Exodus also signed a ten-year commitment to buy network capacity from Global Crossing, which the Journal reported might be worth more than $4 billion.The proxy gives no dollar value for the commitment. It says Exodus "committed to purchase at least 50% of its network needs worldwide other than Asia" from Global Crossing. Global Crossing in turn agreed to use Exodus as its exclusive Web hoster, to stay out of hosting for two years and to grant Exodus a $100 million usage credit.
Together, the No. 1 and No. 2 hosting companies had thirty-two Internet Data Centers and almost four thousand customers. Hancock's 3.8 million Exodus shares were worth $187.6 million. Hindery, whose company was disappearing into hers, summed it up: "I'm a broken man, she gets to run it."
Two and a half years after the IPO, the executive fired by Gerstner and Jobs ran the combined No. 1 and No. 2. The deal closed on January 10, 2001.
Hancock had won the auction. She had also just tied Exodus for the next ten years to a company that, as I wrote in Bandwidth, would forever be remembered as "Global Crashing."
Equinix—Jay Adelson and Al Avery#
Jay Adelson and Al Avery had already built one neutral meeting place for the Internet. They quit their jobs to build thirty more.
We met their first one in Chapter II. Avery was the general manager of the Palo Alto Internet Exchange, or PAIX, the exchange that Digital Equipment Corporation opened for commercial service in July 1996. Adelson was its operations manager, and before that he had been a founding member of Netcom. The two of them designed, built and ran PAIX. In June 1998 they left Digital and incorporated a new company in Delaware. They called it Equinix.The Equinix prospectus says the company was "incorporated in Delaware in June 1998." In December 1999 the Wall Street Journal called it a "16-month-old company," which would put the start closer to August 1998. I've used the prospectus date. Within a year, the exchange they had left behind would be sold to AboveNet, which ran an exchange of its own, as we'll see later in this chapter.
Their idea was the mirror image of Exodus. Exodus wanted to run its customers' servers. Equinix wanted to run the room where the networks met.
Here is why that mattered. By 1999 the Internet had plenty of exchanges, the places where one network handed traffic to another. But the existing ones were owned by carriers: MCI WorldCom, SBC and AboveNet. If you ran a network, exchanging traffic inside a competitor's building meant your rival was your landlord. It knew your traffic, set your rent and decided how fast you could grow. Adelson and Avery proposed a building owned by someone who sold no network at all. Any carrier, Internet provider or big website could move in, and any tenant could connect to any other by running a cable across the floor.That cable is called a cross-connect: a physical link between two tenants' equipment inside the same building. It is the smallest product in the data-center business, and it will matter a great deal in later chapters. The more networks inside, the more valuable the building became to the next one.
The pitch fit in a sentence. As the Wall Street Journal reported in May 1999, "Equinix's biggest attraction will be its neutrality." Cisco, Microsoft, Stanford and Benchmark Capital put up $12 million at launch, the Journal reported.Equinix's prospectus shows only Benchmark and Cisco buying Series A shares in September 1998, at 67 cents a share (split-adjusted). Microsoft came in with the Series B in late 1999, at $5.33. The plan called for as many as thirty-five private exchanges.
The Race
Equinix signed its first customer in April 1999 and opened its first exchange in July, in Ashburn, Virginia, near Washington, D.C. Part of the build-out was financed with loans from Comdisco, the disaster-recovery company we met in Chapter I. Newark and San Jose were next. By November the tenants included MCI WorldCom, Concentric and Akamai, and the Journal was calling Equinix "the first independent manager of Internet data exchanges."
That same month, Equinix announced the real plan: about $1.2 billion over four years for thirty centers, built by Bechtel. A few weeks later, the company lined up $80 million of new venture capital and $200 million of senior notes.The $200 million of senior notes were due in 2007. Salomon Smith Barney led the deal, with Morgan Stanley and Goldman Sachs. AOL, Marc Andreessen, Pacific Century and Reuters joined as investors. The Journal called Equinix a "16-month-old company." It had raised $315 million in total.
Do the math. A $1.2 billion plan, $315 million in the bank and almost no revenue. Equinix didn't start recognizing revenue until November 1999, and its revenue for the whole year came to $37,000.The prospectus contradicts itself on the start date. Its summary says "we began recognizing revenues in November 1999"; its business section says December. Where would the rest of the money come from? In 1999, nobody asked that question twice. The answer was always the same: the public markets.
Adelson was not worried about money. He was worried about the clock. When the Journal wrote about Bechtel's dot-com business in March 2000, under the headline "Venerable Builder Bechtel Gets a New Lift From the Dot-Com Boom," Adelson explained why Equinix had hired the company. "Our biggest competitor is time—being the first to market with this product—and that is exactly what Bechtel gives us," he said.
Bechtel had taken stock warrants in its deals with Equinix, Webvan and iMotors. When a builder the Journal called "venerable" starts taking warrants from Webvan, you know where you are in the cycle.
Grown-Ups and an IPO
Like Exodus, Equinix brought in a seasoned operator before going public. In May 2000, Peter Van Camp became CEO. He came from UUNET, where he had been president of Internet markets and the Americas. Avery moved over to president and chief operating officer. Adelson kept the title the Journal used for him: founder and chief technology officer. The prospectus gave the buildings a name of their own: "neutral Internet Business Exchange, or IBX centers."In June 2000, Equinix also assigned its purchase of eighty acres of land in San Jose to iStar. Its customers ranged from AT&T, WorldCom and my own Level 3 to Enron. And it was candid about the bet at the heart of the company: "the neutrality aspect of our business model is unique and largely unproven."
The timing was not kind. The Nasdaq had peaked at 5048.62 on March 10, 2000. Equinix went public five months later, on August 11, 2000. Goldman Sachs sold 20 million shares at $12, the top of the $10-to-$12 range. The stock rose 12 percent on its first day, to $13.38. Benchmark Capital, which had bought its first shares at 67 cents, went into the offering owning 16.1 percent of the company.
Twelve percent. Exodus had jumped 84 percent on its first day two years earlier. Akamai, as we'll see shortly, jumped 458 percent. In August 2000, twelve percent counted as a good day.
Equinix had raised its money and broken ground just as the music was slowing. Whether it could finish building before the music stopped would define its next three years.
Digex—Bernie Ebbers#
Digex was the hosting company that everyone wanted and almost nobody could buy.
We saw the Digex auction from Exodus's side of the table. Here it is from the other side. Digex was based in Beltsville, Maryland, and its public shares traded on their own. But Intermedia Communications owned 54 percent of its equity and 92.5 percent of its voting control. Intermedia was a debt-laden regional phone company in the Southeast with ninety thousand customers in fourteen cities. Earlier in 2000, it had cut its revenue guidance and put itself in play.
The arithmetic was strange. In September 2000, Digex had a Market Value of $5.3 billion. Intermedia, its parent, was worth $1.24 billion. Intermedia's Digex shares alone were worth $3.3 billion. The tail was worth almost three times the dog. Anyone who bought the dog got the tail.
The dog came with a catch: more than $3 billion of debt that would come due if anyone bought the company.
Bear Stearns ran the auction for Intermedia. It contacted twenty-four companies, and ten signed confidentiality agreements.The count comes from Intermedia's account in WorldCom's S-4. The Delaware opinion says six parties signed confidentiality agreements. The court also has Miller's call coming between 6 and 7 p.m. on August 30, offering "$120 a share or more." Three serious bidders emerged. Global Crossing offered $22 a share for Intermedia, and it offered to contribute GlobalCenter, which it valued at $8 billion, to a three-way combination. Exodus offered its own stock for Digex, then walked away on August 30, when Intermedia's bond covenants and the limits on reselling Exodus shares couldn't be reconciled.
That afternoon, a representative of WorldCom called. Bear Stearns told him any offer for Digex "would have to be in a $120 per share range." WorldCom's banker, Scott Miller of Salomon Smith Barney, didn't flinch. According to the Delaware Chancery Court, he said WorldCom "would outbid anyone for Digex." Global Crossing, which had a deal nearly done, said it "would not compete with such an offer" and set a deadline of 5 p.m. on September 1. Late on August 31, Ebbers changed the target. Rather than buy Digex, WorldCom would buy all of Intermedia and leave Digex public.
The deal was signed at about 5 p.m. on September 1. As the Delaware court later put it, "Almost exactly forty-eight hours would elapse" from WorldCom's first call to approval.
On September 5, 2000, WorldCom announced that it would buy Intermedia for $39 a share in stock, close to $3 billion, plus the debt. "The total cost of the transaction could be double that," the Journal noted. It was WorldCom's first big deal since its $115 billion Sprint merger fell apart.
The market didn't like it. WorldCom shares fell 9 percent.The Wall Street Journal reported on September 6, 2000, that WorldCom shares fell 9 percent. In Bandwidth I wrote that WorldCom's stock dropped 17 percent when the deal was announced. I've used the Journal's same-day figure; the difference should be checked against the trading record before publication. Digex shares fell almost 20 percent, to $67.88. Digex's minority holders had just watched Exodus's bid for their company disappear, a bid the press had valued at $8.5 billion. A PaineWebber analyst said Digex fell "in part because of the way Digex minority shareholders were treated."
The Waiver
How Digex's board handled the deal invited a lawsuit. Five of its eight directors had ties to Intermedia. A special committee set up to protect the minority holders advised against the deal. The board granted WorldCom a waiver from Delaware's anti-takeover law anyway. The vote, on September 1, was four to three. Every yes came from an Intermedia director or officer. The special committee's members and Digex's own chief executive voted no. "Minority shareholders aren't getting much respect these days," the Journal observed.
TCW Technology LP, which owned about 4.3 percent of Digex, sued on September 20. Delaware's Chancellor William B. Chandler III found the claims "sufficiently viable" to fast-track. In December he let the deal proceed, but as noted earlier, he questioned the integrity of the waiver and warned that damages could reach $2.5 billion. By then WorldCom's stock had fallen far enough that the whole deal, debt included, was worth about $4.2 billion.
It was WorldCom's second legal setback in a year. "They used to do these things just rapid-fire," a CIBC analyst said.
Ebbers settled. In February 2001, WorldCom agreed to give Digex's minority holders about $165 million in WorldCom stock and Digex itself another $15 million. Intermedia's shareholders took a haircut, with the exchange ratio cut from as much as 1.1872 WorldCom shares to one. When Chandler approved it on April 6, 2001, the New York Times called it a "$420 million settlement" on a "$4.1 billion purchase." Along with the stock, it included up to $250 million in concessions and $900 million of loans for Digex.
What did Ebbers want with Digex? He planned to fold it into WorldCom. He had won the auction. As Sidgmore would later make clear, winning was the problem.
The Carriers—Joe Nacchio, Jim Crowe, Bill Schrader, and Paul Gudonis#
If hosting was where the money was going, the carriers figured it should go through their buildings.
Their logic was simple. Every hosted server needed bandwidth, and the carriers owned the bandwidth. Why let Exodus resell your fiber at a markup when you could build the data center yourself and sell the customer both? MCI WorldCom planned to spend $1.2 billion in 2000 alone on facilities in fifty markets. Sprint planned eleven data centers by the end of 2001 and eighteen by the end of 2002, in a market projected to pass $20 billion by 2005.
IBM
The oldest name in computing was in the hosting business too. In May 1999, the New York Times opened its front-page story on hosting inside IBM's server farm in Schaumburg, Illinois, which ran the websites of about four hundred companies. Hosting, the Times reported, was "a billion-dollar business, doubling annually." AOL was spending $520 million on its third server farm. IBM, AT&T, Exodus and Verio were the names IDC listed in its forecast.
IBM's Walt Grom described his company's new role with a straight face: "We're happy to do the plumbing."
Think about that for a moment. IBM, the company that built the glass house in Chapter I, had watched the PC empty it out. Now it was renting the glass house back to the companies that had left. When Qwest decided it needed data centers in a hurry, it called the plumber.
Qwest
Joe Nacchio had wanted hosting from the start. As I wrote in Bandwidth, his vision for Qwest in 1997 was a full-stack phone company that rivaled AT&T, including voice, data storage, consulting and website hosting.
In March 2000, Qwest made it real with IBM. IBM would design and build twenty-eight U.S. Internet data centers for Qwest within three years, on top of four that Qwest was already building. About $2.5 billion would flow each way between the two companies over seven years. Each center would cost about $90 million to build and run. IBM already managed about 133 data centers. Analysts projected hosting would be a $35 billion business by 2005.
"We have been in a demand curve that has basically been insatiable," said Qwest's Lew Wilks.
Qwest called the buildings CyberCenters. By November 2000, it was leasing 500,000 square feet at 555 Tuckahoe Road in Yonkers, a former Western Electric and Saks building, and putting more than $100 million of equipment inside. "We are in 11 sites now and we expect to do three more by the end of the year," said Qwest's real-estate vice president, John McGuire. Qwest's marketing director had a forecast ready: "Projections are that Web hosting will be an $11 billion business by 2002."
Notice the number. In March, analysts had said $35 billion by 2005. In November, Qwest's own marketer said $11 billion by 2002. Nobody stopped to ask why the forecasts were so far apart.
Level 3
I was in the middle of this one.
As I wrote in Bandwidth, the years from 1997 through 2000 are a thick Gold Rush fog for me. We were building fiber networks across the United States and Europe, metro networks in most of the big cities and a tier-one Internet Backbone. We also built data center facilities in most of the big cities. We hired Kiewit as our general contractor. The initial estimate for the nationwide build was $3 billion. We spent in the vicinity of $5 billion. As I mentioned in the Exodus story, the Wall Street Journal reported in March 2000 that Level 3, "since its founding two years ago... has gone from nothing to four million square feet in 30 facilities."
The same Journal article contains a quote I find remarkable. Jimmy Byrd, Level 3's senior vice president for global Internet protocols and gateway services, held a title that covered those buildings. In the middle of the boom, he warned, "There are too many [data centers] coming online at the same time."
In the same article, John Sidgmore of UUNET said the opposite: "All of us combined can't fulfill the demand."
Both men were right. They were just looking at different calendars.
PSINet
Bill Schrader never met a growth market he didn't want to own. As I wrote in Bandwidth, Schrader committed $100 million for the naming rights to the Baltimore Ravens' new stadium during the Gold Rush, and PSINet's enterprise value soared to $10 billion. By December 2000, it had fourteen hosting facilities.
Schrader sold hosting as part of the package. In February 2000, he said, "We have exactly what the largest telephone companies want—network, hosting, expertise, and customer base—but at this point, we're not for sale." When he bought Metamor Worldwide for $1.9 billion a month later, he explained, "What we had before this deal was the best long-haul fiber carrier and also the best [data center] facilities." He also launched a $1 billion program to take equity from dot-com startups instead of cash for PSINet's services. What could possibly go wrong?
Genuity
Genuity started life as a hosting company. Late in 1997, GTE bought a small San Francisco web host called Genuity, whose biggest customers included Microsoft and Excite. In 2000, GTE stuck the name on a much bigger business that combined BBN, its Qwest fibers and the original Genuity.The two Genuitys were connected in another way. Sam Mohamad, the vice president of sales at Exodus when it went public in 1998, came from the original Genuity.
Genuity went public in June 2000. Verizon, which was absorbing GTE's phone business, kept about 10 percent with the right to convert to about 80 percent later. The offering priced at $11, below its range, and raised about $1.91 billion. The stock opened at $10.75 and closed its first day at $9.4063. The Journal pointed to the losses: Genuity had lost $647 million in 1999 on revenue of $706.5 million, and AOL alone accounted for 52 percent of that revenue.
In September 2000, Genuity unveiled Black Rocket, a bundle of managed hosting, Internet access, security and e-business tools, backed by a $20 million marketing campaign and a tagline asking, "Do You Want to Change the World?" CEO Paul Gudonis declared, "We have created an entire new industry category: Network Services Platforms." He added, "And now here comes Genuity with a complete solution."
As I wrote in Bandwidth, many of us thought it was nonsensical.
Global Crossing
We already met Global Crossing's hosting play in the Exodus story. GlobalCenter, run by Leo Hindery, hosted about three hundred websites, including Yahoo and eToys, and was the No. 2 hosting company before it disappeared into Exodus. Global Crossing also signed on as the anchor tenant of a big new building in Miami, which we'll come to shortly.
Broadwing bought the web hosting company SmartNAP and built its own data center and hosting business. Sprint, Dell and even Intel tried their hands at it.Dell formed a unit to market to Web hosts in February 2000 and later ran its own hosting business, DellHost. Intel shut its Web-hosting operation in June 2002.
Every carrier wanted to be in hosting. The question nobody asked was whether there were enough customers for all of them.
The Rest of the Field—Globix, Data Return, NaviSite, AboveNet, and Terremark#
Behind the leaders and the carriers ran a crowd of smaller hosting companies. Each had its own angle. Each raised money on the same forecasts.
Globix
Globix had a Market Value of almost $1 billion in 1999. It was building a data center at 415 Greenwich Street in Manhattan, and as late as June 2001 it said its centers were 95 percent full.The 415 Greenwich Street detail comes from an April 2001 New York Times article by Jayson Blair, whom the Times later found to have fabricated and plagiarized stories. Globix's own 10-K confirms that it bought the building in September 2000 and opened it to customers in June 2001. Keep that number in mind. Full buildings, it turned out, were not the same as a healthy company.
Data Return
Data Return was founded in August 1997 by three former Microsoft engineers. It was backed by Compaq and by Level 3.
Data Return went public on October 28, 1999, at $13 a share. It raised $81.2 million for 18 percent of the company, which valued the whole thing at nearly $450 million. A few days later, the Journal reported that Microsoft had invested $5 million in the company too.
NaviSite
NaviSite was the hosting company controlled by CMGI. In June 1999, Dell and Microsoft each bought minority stakes in it. By February 2001, NaviSite was cutting staff.
AboveNet
The name AboveNet will be familiar to Bandwidth readers, but in this story it means something different. The original AboveNet was a San Jose company that, as I described it in Bandwidth, sold higher-layer network services that reduced Internet congestion by steering traffic onto the Internet Backbones. It also ran one of the carrier-owned exchanges Equinix was competing against. It went public in December 1998, and its stock more than quadrupled in six months. Along the way, it bought PAIX from Digital's owner, Compaq. The exchange Adelson and Avery had built now belonged to a hosting company.
In June 1999, Metromedia Fiber Network, the fiber company I wrote about in Bandwidth, agreed to buy AboveNet for 1.175 MFN shares for each AboveNet share. The Wall Street Journal valued the deal at $1.76 billion. The New York Times said $1.55 billion.The two newspapers used different share prices for MFN to value the same exchange ratio. MFN's Howard Finkelstein explained, "We will be able to extend the reach of our 'carrier's carrier' business." As I wrote in Bandwidth, it was a departure from MFN's fiber strategy, and investors marked MFN's shares down 11 percent.
Years later, MFN would emerge from bankruptcy under the AboveNet name, and Zayo would buy it. In 1999, nobody could have imagined that.
Terremark
Terremark came at the boom from real estate. By March 2000, its T-Rex unit, run by Preminger, Mulroy and Manny Medina, was buying twelve properties for telecom tenants.
Then Medina went bigger. In June 2000, a consortium called InternetCoast proposed a network access point, or NAP, in Miami. Terremark and the owners of the Miami Heat were building a 700,000-square-foot, $100 million building to house it. Global Crossing and its hosting unit would take about 250,000 square feet.
Was Medina worried about filling the rest? "My concern regarding the potential use is zero," he said.
The building became the home of the NAP of the Americas. Its anchor tenant, Global Crossing, would be bankrupt within two years.
The Landlords—Argent, Max Capital, and the Telecom Hotels#
All of these companies needed buildings, and a new kind of developer showed up to supply them.
The trade distinguished two kinds of building. A telecom hotel, or telco hotel, was where networks put their switches and routers and connected to one another. A data center was where companies put their servers. Developers wanted to build both, and in March 2000 the Wall Street Journal summed up their new product in a headline: "Buildings Become Centers For Switches and Servers, But Some See a Glut." That was the article in which Level 3's own Jimmy Byrd worried about too many buildings coming online at once.
The developers didn't wait for tenants. In September 2000, the New York Times reported that a firm called Max Capital was building a 240,000-square-foot data center in Newburgh, New York, on speculation. The same article reported that DoubleClick had gone looking for 100,000 square feet at $20 a foot. In New Jersey, Global Gateway and MetroNexis had Morgan Stanley money behind them. In Miami, Terremark had its 700,000 square feet. In Yonkers, Qwest had its old Western Electric plant.
Here is the question nobody seemed to be asking. The developers built with borrowed and invested money. The hosting companies signed the leases. Their customers included Yahoo and eBay, and also dot-coms like eToys, whose ability to pay depended on investors' willingness to keep funding them. If the investors stopped, who would pay the rent?
Argent's Andrew Penson had said eighteen months was like ten years in Internet time. Eighteen months from that summer would land at the end of 2001.
Akamai—Tom Leighton, Danny Lewin, and Paul Sagan#
Everyone else in this chapter was building bigger buildings. Akamai built a smarter network.
Danny Lewin was born in Denver and raised in Jerusalem. He served as a captain in an elite unit of the Israeli army, studied at the Technion and worked for IBM in Haifa before landing at MIT, where Tom Leighton was his professor. In 1998, Lewin, Leighton and Jonathan Seelig founded Akamai.
Their insight was about distance. A popular website served from one building, however big, had to send every page across the Internet to every visitor. When a million people showed up at once, the site choked. Akamai's answer was to put copies of its customers' content on servers all over the world, close to the people asking for it. "The whole name of the game here is to push content to the edge of the Internet, very, very close to the end user," Akamai's David Goodtree told the New York Times in April 1999.
Akamai had competition. The same Times article sized it up against a rival called Sandpiper Networks. But Akamai had MIT's math and a seasoned chief executive.
That was a different bet from Exodus's. Exodus wanted every important server in its buildings. Akamai wanted copies of every important website in as many places as possible. As it happened, many of those places were other people's data centers. Akamai was one of Equinix's earliest tenants.The Journal listed Akamai among Equinix's tenants in November 1999. Akamai does not appear on the customer lists in Equinix's 2000 prospectus or its 2000 10-K.
Grown-Ups
Akamai brought in its grown-ups early. In 1999 it hired George Conrades as president and CEO. Bandwidth readers know him as the BBN chief who sold his company to GTE. I never met Conrades, but as I mentioned in Bandwidth, Akamai later became one of Zayo's largest customers. Paul Sagan, forty years old, came from Time Warner, where he had worked on NY1, Road Runner and the Pathfinder website. He joined as president and chief operating officer and paid $533,100 for nearly three million shares.
Sagan had a crisp view of how badly the Web measured itself. "You have 'hits,' which don't really mean anything," he told the Times. "So you were always grabbing at clouds."
The Fourth-Biggest Pop Ever
Akamai went public on October 29, 1999. The shares priced at $26, opened at $110 and closed at $145.1875. The 458 percent first-day gain was the fourth-largest in history. At the close, Akamai had a Market Value of more than $13 billion. Its sales over the previous nine months totaled $1.3 million. Its network ran on 1,475 servers.
Thirteen billion dollars, on $1.3 million of sales. That's ten thousand times nine months of revenue.
By December, Sagan's $533,100 was worth $617 million. Days before the IPO, the Journal had already run the headline that told the rest of the story: "Professor Stands to Reap Windfall in Akamai IPO."The New York Times article on Akamai's first trading day said the company sold 9 million shares "to raise more than $1.3 billion." That can't be right: 9 million shares at $26 comes to about $234 million. I've left the figure out.
Akamai had one of the best technology stories of the boom, and one of the most expensive stocks. Both would be tested soon enough.
Four Bets#
Step back from the names, and the hosting Gold Rush comes down to four bets about where the Internet's computers should live.
The first was Exodus's bet, shared by Digex, Globix, Data Return and NaviSite. Put the servers in our building, and we'll keep them powered, cooled, connected and watched. The customer bought peace of mind, and the hosting company bought the building, the generators, the air conditioners and the people. It was the glass house, rented by the rack.
The second was the carriers' bet. Qwest, Level 3, PSINet, Genuity, Global Crossing, Sprint and MCI WorldCom all reasoned that the customer needed bandwidth anyway, so the data center should belong to whoever sold the bandwidth. Hosting was a way to sell more of the network.
The third was Equinix's bet. Don't run anyone's servers, and don't sell anyone's bandwidth. Own the room where the networks meet, and let them meet each other.
The fourth was Akamai's bet. Don't put the website in one building at all. Spread it across many buildings, close to the people reading it.
Each bet had a different exposure. A hosting company needed a constant flow of new customers to fill expensive buildings. A carrier needed its hosting business to pull traffic onto a network it had borrowed billions to build. A neutral exchange needed networks to show up, and they only showed up where other networks already were. And an edge network needed websites willing to pay for speed.
Which of these bets depended on dot-com startups that might not exist in two years? Which depended on carriers that might not exist either? And which one got more valuable every time a new tenant walked in the door?
The market didn't ask those questions in 2000. It priced all four bets as if they would all win.
The Grid—PG&E and Silicon Valley Power#
The first warning came from a direction nobody in this chapter was watching.
In February 2001, Qwest wanted to open a 45,000-square-foot data center in Sunnyvale, a few miles from the room where Exodus had knocked out its ceiling. Pacific Gas & Electric told Qwest it couldn't have the power until 2002. "They told us they couldn't get power until 2002," Qwest's Rick Weston told the Wall Street Journal.
Qwest wasn't alone. PG&E had requests from more than one hundred server farms, asking for 1,200 megawatts in total. California was in the middle of its electricity crisis, and statewide power use had risen 6 percent in 2000. In Santa Clara, the city-owned utility, Silicon Valley Power, had forty requests for large new loads. Eighty percent of them were server farms. If all of them were built, they would double the utility's peak demand of about 450 megawatts.
"They're using enormous amounts of power," said PG&E's Keith Reed.
The same story was playing out on the East Coast. One project proposed for the South Bronx would draw 180 megawatts at its peak.The 180-megawatt Bronx figure first appeared in Jayson Blair's April 2001 New York Times article and is confirmed by the Wall Street Journal. The same Blair article compared it with 87 megawatts for the World Trade Center; I've left that comparison out because no second source confirms it. According to the Yankee Group, U.S. server-farm space had grown from 3 million square feet in 1999 to 9 million in 2000, and was headed to 25 million.
This was the first time the data-center industry ran into the power grid. In 2001 the collision didn't last. Within months, as the next chapter shows, the demand behind most of those requests evaporated. Remember the numbers, though: one hundred server farms asking a utility for 1,200 megawatts, and a single building asking for 180. Two decades later, single AI campuses would ask for many times that, and utilities would once again tell data-center builders to wait.The AI-era power figures are covered in Chapter VIII. To take one example, the three gas plants Entergy is building for Meta's Richland Parish, Louisiana, campus will supply about 2,200 megawatts.
The Power Myth
The request lists made the problem look enormous. So did a forecast with a following. In May 1999, Peter Huber and Mark Mills published an article in Forbes headlined "Dig more coal—the PCs are coming." A widely cited claim put computers and networking at 13 percent of U.S. electricity.
On February 2, 2000, Mills took the argument to a House subcommittee hearing titled "Kyoto and the Internet." Every piece of information technology, he told the members, had "two plugs, one for bits, one for power." Joseph Romm of the Center for Energy and Climate Solutions testified at the same hearing and did not hold back. "It is rare that we know so conclusively that someone is as wrong as Mr. Mills," he said, and he put the error at "at least a factor of 8."
The scientists at Lawrence Berkeley National Laboratory went out and measured. Jon Koomey put computers and networking at about 3 percent of U.S. electricity, not 13. In July 2002, the lab published its findings on hosting. America's hosting data centers in 2000 covered about 9.5 million square feet, close to the Yankee Group's count, and their computer rooms averaged 50 watts per square foot or less. All of them together drew under 500 megawatts, about 0.12 percent of the nation's electricity. Five facilities with billing data all came in below 40 watts per square foot. Actual loads ran three to four times below what the buildings had been designed for.
Compare that with the request lists. PG&E alone had been asked for 1,200 megawatts. Every hosting data center in the country was drawing less than half of that.
The lab's Jennifer Mitchell-Jackson explained the gap. "Rated power is typically several times greater than actual power use," she said. "Unfortunately, it is often this maximum power density that is cited in the media." Her verdict: "Many reports of data center energy use are exaggerations."
The first boom's power forecast was the data-center version of the traffic myth: a real trend, projected far past the evidence. Mills would testify to Congress again in April 2025, forecasting another surge in power demand. That time, as we'll see, the meters moved too.
Before Midnight#
At the peak of the Gold Rush, the hosting companies were worth fortunes.
Exodus topped $20 billion. Akamai was worth more than $13 billion on its first day of trading. Global Crossing valued GlobalCenter at $8 billion. Digex was worth $5.3 billion, and the press valued Exodus's bid for it at $8.5 billion. Ebbers paid about $6 billion for the parent company to get it. Genuity raised $1.91 billion in its IPO. MFN paid $1.76 billion for AboveNet. Globix was worth almost $1 billion. Data Return, a two-year-old company started by three engineers, was valued at nearly $450 million.
The founders and executives did fine on paper too. Chandrasekhar's Exodus shares were worth more than $700 million. Hancock's were worth $187.6 million. Sagan's $533,100 had turned into $617 million.
Underneath the Market Values sat the debt. At the end of 1999, Exodus owed about $1.53 billion in senior and convertible notes. Its stockholders' equity was $17.6 million. The company that hosted more than 40 percent of the top websites was built almost entirely on borrowed money.
In Bandwidth, I tallied the fiber companies the same way. AT&T, Qwest and WorldCom each topped out near $100 billion, and Global Crossing and Level 3 each passed $50 billion. Soon the combined Market Value of all those companies would tank to $15 billion. The hosting companies were about to take the same ride, and they were about to take it faster.
Eighteen months after the peak, Exodus would be trading for less than a dollar a share.