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en Corporate Giants
Five
Five
Triumphs and Train Wrecks
When Big Companies Hit the Net.
pages 204 - 242
Doth Teach Management page 46
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COVER STORY 204
How smart is Enron? Want to see the dumber side
of Sears? We find the big hitters that get the Internet's
potential-and those who've dropped the ball.
Edited by Matt Beer and Kevin Hogan
THE PITCH:
BY INVITATION
ONLY
268
Encirq believes it can flip the online
direct-marketing model on its head
and quiet the privacy advocates.
Written by Susan Kuchimkas
SHELTER
FROM THE
STORM
286
Equinix is creating
James Bond-like bunkers to
keep data safe from natural
disasters. But the real mission
here is to help solve the
Internet's traffic problems.
Written by G. Beato
NEW POWER
BROKERS
248
Far away from Silicon Valley and Wall Street,
Houston-based Altra Energy is commandeering
the biggest online exchange of all.
Written by Andrea Orr
SCHWING SET
305
Looking for a profitable Web business?
Try selling real sex, not just randy pictures.
Written by Matt Beer
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8 JUNE 13, 2000 BUSINESS 2.0
to keep fires, floods, earthquakes, power outages, and
from co rate data warehouses.
commonplace evil: jammed Internet exchange points.
WRITTEN BY G BEATO
PHOTOGRAPHY BY ED KASHI
s
orne mishap on a recent vacation has left
Equinix co-founder Jay Adelson without his
glasses. But using his one good eye, the 29-
year-old chief technology officer steers his
Honda CR-V through highway traffic en
route (0 Equinix's Internet Business
Exchange (IBX) , a well-fortified, 133,000-
square-foot building in San Jose, Calif., that's designed (0 house
the various companies-carriers, ISPs, content providers, etc.-
that make up Internet infrastructure.
As Adelson drives, he talks about his days at pioneer ISP
etcom and the haphazard approach that characterized Net
infrastructure efforts in the early days of the Web. "Back then,
we'd lease a closet in the back of some guy's butcher s(Ore for
100 a month, and that was our point of presence," he says. "I
wonder how much of that stuff is still in place."
Equinix's new exchanges, on the other hand, are expected
Locked cages housing servers can be
accessed with the correct hand geometry.
to have a much longer shelf life. Indeed, they're built to with-
stand fires, floods, earthquakes, power outages, and even terror-
ist attack. But while their apocalypse-proof nature offers easy
fodder for journalists in search of a hook, what's most important
about them, in the long run, is the solution they offer to one
of the Net's most pervasive, albeit mundane, evils: namely,
super-congested exchange points.
Exchange points are the physical hubs where the various
networks that make up the Internet meet to share traffic with
one another. They connect via peering relationships-where
providers of similar size exchange data traffic free, or via tran-
sit- where a smaller ISP pays a larger one to transfer its traffic
to its final destination. This enables, for instance, an AOL user
to send an email to an Earthlink user.
Founded in October 1998 with a $12.4 million initial
investment from Cisco Systems, Benchmark Capital, and
Stanford University, Equinix now operates three such IBX
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exchanges. It opened its first
one in Ashburn, Va., in July
1999, and followed that with
one In Newark, N.J., In
December 1999. In November
1999, the company announced
a $1.2 billion project with con-
struction giant Bechtel to build
approximately 30 more
exchanges around the world over
the next four years. By year-end,
they hope to have at least 12 of
these completed. According to
Adelson, each one costs approx-
imately $20 million to $50 mil-
lion to build.
Investors like the concept, too. Equinix so far has secured
$315 million (including a $200 million bond issue). Its backers
include Cisco, Microsoft, AOL, Dell Computer, Reuters,
Benchmark, and Netscape Communications co-founder Marc
Andreessen, among others.
"There's a reason we have the investors we do," exclaims
Adelson.
"Without the neutral open marketplace that Equinix pro-
vides, the Internet can't grow. And then Cisco can't keep sell-
ing their boxes, and Microsoft loses out, and Dell loses out,"
he says. "So there's a lot of people who believe we're absolute-
ly required in order for the Internet ceiling to keep rising."
288 JUNE 13,2000 aUSINESS 2 ~ O
Top secret
As Adelson pulls into the park-
ing lot of the San Jose IBX,
Bechtel construction workers
are still busy retrofitting the
building. "By the time we have
our official launch," he says,
"this whole area will be lined
with concrete bollards to pre-
vent car-bombs."
Equinix makes a big deal
about not publishing the
address of the exchange for secu-
rity reasons. But this is more a
PR gimmick than anything else;
eventually, after all, hundreds of people from other companies
will be going there on a regular basis to maintain their servers
and other equipment. And, in truth, the building's not that hard
to find, especially since in April a reporter located its address on
a City of San Jose Website and then published it in the San
Francisco Chronicle.
Along with the concrete bollards, Equinix has insulated
the exterior walls of the building with Kevlar. Such precau-
tions may seem designed to offer irrational comfort to CEOs
anxious about less tangible hackers, but Adelson insists
they're all absolutely necessary. He cites the 1996 IRA bomb-
ing of London's Docklands as proof of the potential danger:
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there is another set of doors and another hand geometry read-
er, but even if you have the right hand and the right code,
they won't open until the first set of doors close completely.
This allows the guards to do a visual check of exactly who's
in the man trap, so visitors who haven't yet passed inspection
t:n--, ...... can't bum-rush their way into the Equinix inner sanctum.
Standing in the bluish, subterranean glow of the man trap,
it feels as if you are about to enter that weird alien bar from
Star wars, or at least, say, Paul Allen's super-suave bachelor
aquarium. Which is to say, it's a definite step up from the
makeshift aesthetic of first-generation network access points
like MAE East, which was built on the top floor of a parking
garage and probably has a security system consisting of some
The biometric hand reader keeps out the sticky fingers of hackers and other evil.doers. old rent-a-cop sitting on a stool and reading a newspaper. (See
11-------------------------1 "New Power Centers," Jan. ' 00, pI36).
Several companies lost millions of dollars worth of computer
data as a result of the blast.
In any case, the biometric hand geometry reader near the
front doors is admittedly pretty cool. To gain entry to the build-
ing, you have to place your palm on the reader and then punch
in the keycode that matches your personal hand geometry. Once
inside the building you find yourself in a small lobby with aqua-
marine and brushed metal walls, purple carpeting, and a large
video screen that displays your company logo.
But that was the old academic-experiment Internet. This is
the new New Economy Internet, the Internet of II-digit
market caps and mission-critical IPOs and thick, icy-looking
Australian glass.
"I really need to stress that all of our design reflects a customer
functionality factor," Adelson insists. "Sure, there's a Wow! fac-
tor here, if you will. But that's a functional requirement, some-
thing our customers asked us for."
On the other side of the man trap, the functionality gets
Keeping the Internet infrastructure cool:
" There are air-conditioning ducts big enough to svvallovv
a bravvny Bechtel construction worker whole. "
At this point, you must present a photo ID to a guard sit-
ting behind a window, who matches it with a photo ID kept
there on file. In other words, if you plan to gain access to
the building by cutting off someone's hand and using it to fool
the reader out front, you'd better pick someone who looks a
lot like you. "Our customers said this is what they're looking
for," Adelson says. "Financial-grade security. To develop our
system here, we used the same company that did security for
the Federal Mint. "
Once the guard has determined that you are who you say
you are, and taken a photo of you, you access another set of
doors, once again using the hand reader. Adelson says the hand
readers were chosen for their user-friendliness. "We don't want
the security to be inhibiting," he explains. "That's why we chose
hand readers over retinal scans. There aren't many people
who like to put their jaw on a yoke so the retinal machine can
take a look at their eye."
This latest hand reader allows you to access the "man trap,"
a narrow passageway lined with thick, icy-looking, back-lit
panels of Australian glass. At the other end of the man trap,
290 JUNE 13, 2000 BUSINESS 2.0
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even more impressive. Here one finds the "Customer Care
Area, " with fancy lighting and chic aluminum wall panels. To
the right, there's a bunch of cubicles equipped with Gateway
computers and Aeron chairs. To the left, there's a conference
room shaped like a submarine, with ISDN videoconferenc-
ing, more Aeron chairs, and glass walls that feature
retractable privacy screens. In the middle, there's a big red
silo rising up to the dark rafters of the exchange; it houses a
kitchen and a small videogame arcade. The kitchen features
a vending machine that comes stocked with little bags of
connectors and cables as well as candy. "We ask the customers I=='!!!!!!!!!
in each area what sort of videogames they want," Adelson enthuses John Coons, vice president of ebusiness infrastructure
says. "In D.C., they picked things like golf and fishing. Here, research at the GartnerGroup. "Because if an ISP had said,
they picked racing." 'Hey, wait a minute, my data's going over my competitor's
Beyond glass doors and one more hand geometry reader cage, ' they might have walked out."
lies the co-location area. Lit with only a few blue lights and Hundreds of video cameras continuously monitor activity,
humming with the sound of air conditioners, this is the true and archives of all footage are kept for 30 days. Each cage is
heart of the exchange. Here there are dozens of empty chain- protected by a hand geometry reader. A trouble ticket system
link cages, and inside the cages, hundreds of empty 84-inch x allows you to go back six months and see exactly who was
22.5-inch cabinets. Adelson says Equinix's capacity to house working on what when. "They couldn't find software even
equipment here is virtually limitless, because if they run out from the Defense Department that could track where some-
of cages, they can just build more. "We've secured millions of one was in a secure facility by where they slapped their
square feet in San Jose," he says. "I can build as much as I hand," says Coons. "So Equinix had to add that themselves.
need to. I can handle all the new businesses that cross through I'm not aware of anyone else who's gone to such an extent to
our door." do that kind of stuff."
Multiple cable distribution systems run above the aisles Adelson says that when the building specifications for an
that separate the cages. Higher up, there are air-conditioning IBX are printed out, they take up four feet of shelf space.
ducts big enough to swallow a brawny Bechtel construction
worker whole. Airflow, temperature, and humidity are close-
ly controlled. There are redundant power systems, back-up
generators, fire protection systems. Anyone who runs fiber
into the building must do so from at least two different paths,
to protect customers from novice backhoe operators. There
are no raised floors-a traditional data center feature-to
ensure that all cables are visible at all times. "They've even
routed the fibers and wires inside the site so that no cus-
tomer's data goes over the top of any other customer's cage,"
NAP time
In the early '90s, NSFNET, the major IP backbone that the
National Science Foundation (NSF) created, began to evolve
into an entity with more and more potential commercial
applications, prompting the NSF to privatize it. A nonprofit
called Merit Network proposed allowing private backbone
operators to haul traffic back and forth across the United
States and around the world. When they needed to talk to
each other, they would connect to each other for free at desig-
nated network access points.
Initially, four network access points (NAPs) were estab-
lished. Pacific Bell ran one in San Francisco, Ameritech ran
one in Chicago, Sprint ran one in New York, and Metropolitan
Fiber Systems (MFS) ran one in Washington, D.C. When
one ISP needed to exchange traffic with another, they would
connect at, say, the Pacific Bell NAP in San Francisco. They
would both pay Pacific Bell for their connections to its ATM
network, but they'd talk to each other free.
This solution worked well at first, but as telcos started
getting more directly involved in the Internet, contentions
arose. MFS bought UUNet, then Sprint built a backbone
called Sprint Link, and Ameritech and Pacific Bell started to
292 JUNE 1:), 2009 B U S I ~ E S S '2 .0:
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sell Internet services, too.
Another problem afflicting the NAPs was their growing pop-
ularity. As an increasing number of ISPs connected to them in
the hopes of peering with others, they were simply getting
more traffic than they could efficiently handle. Packet loss
started occurring, leading to longer download times for users.
The situation got so bad in the mid-'90s that the Big Five
backbone providers stopped peering at the public exchanges
and started doing it privately.
Around this time, Digital Equipment (DEC), which
manufactured the GIGAswitches that several of the NAPs
were using on their internal networks, created an exchange of
its own in the basement of a small building in Palo Alto,
Calif. DEC's exchange, which is now known as the Palo Alto
Internet Exchange, or PAIX, included a couple of key differ-
ences from the original NAPs. First,
it allowed non-ISP customers to co-
locate in the facility along with ISPs.
And because DEC was not itself a car-
rier and therefore had no proprietary
reason to monopolize the fiber com-
ing into the building, it could invite
GIGAswitches
The GIGAswitch system is
a highperformance pack.
etswitching platform used
commonly in workstation
farms, high-energy physics,
and LAN backbones.
multiple carriers to bring their networks to this hub. The
DEC exchange opened in July 1996 with two telco carriers,
"I see Equinix very much as a utility. A very high-tech
leading-edge utility, providing the ultimate platform
for network connectivity and folks who want to host things. "
MFS Telecom and Pacific Bell.
In other words, DEC had created a neutral exchange. Not
surprisingly, Adelson embraced the concept, and when AI
Avery, the general manager of the DEC exchange, offered him
a job there a few months later, he readily accepted. Soon, the
relatively small exchange had reached capacity, but unfortu-
nately, DEC was slow to move on the promise of this new
business.
By June of 1998, "I knew that we basically had no choice but
to take this on our own," says Adelson.
Neutral territory
Today, in addition to facilitating traffic exchange amongst
ISPs, Equinix's IBXs also serve as co-location facilities for
companies that require features such as unlimited bandwidth
access, financial-grade security, redundant power, and round-
the-clock staffing, but don't want to build their own data
centers. That means Equinix falls into the burgeoning Web-
hosting market, too. According to Forrester Research, the
$3.5 billion-a-year Web-hosting business will grow to
$14.7 billion by 2003, so not surprisingly, there's a lot of
competition here. AT&T and British Telecom, for example,
recently announced plans to build 44 data centers in 16 coun-
tries. Qwest Communications International, in a partnership
with IBM, is building 28 of its own Cybercenters over the
next three years. GTE
Internetworking, which is chang-
ing its name to Genuity, plans to
increase the number of facilities
it operates from 10 to 17. Intel is
investing $1 billion in 10 data
centers devoted to full-service
Web hosting. Other companies
such as Exodus, Digital Island,
and Level 3 Communications,
among others, are already well-
Genuity
Under Bechtel's ownership,
ISP Genuity expanded its net
work of data centers from one
to six in an effort to increase
its Webhosting business. But
the Genuity data centers were
relatively small-the five that
Bechtel built totaled only
33,500 square feet. Bechtel
ended up selling Genuity to
GTE Internetwarking only 13
months after purchasing it.
294 JUNE 13, 2000 BUSINESS 2.0
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established in the space.
What distinguishes Equinix from the
pack, however, is its commitment to neu-
trality. "All the other exchanges, whether
you call them NAPs (network access points),
hosting facilities, or whatever, they all have
revenue models based on their own branded
stuff- some kind of connectivity or man-
aged services," says Adelson.
In other words, if you're an ISP and you
want to set up a router at Pacific Bell's San Francisco ".II.' "l1dL111;,"1
point, you can only purchase fiber into the building
Exodus
Several carriers provide
fiber at each Exodus faci li-
ty. So while Exodus doesn't
offer the choice Equinix
does, it does offer automat-
ic carrier redundancy. That
is, if an Exodus carrier goes
down, it simply switches to
another. To ensure similar
carrier redundancy at
Equinix, you must purchase
connectivity from at least
two carriers.
Pacific Bell. And if you're an
merce company and you want to
locate your servers at Exodus,
can only purchase your
out of the facility from them.
Equinix, on the other hand, .
really selling bandwidth. It
own its own WAN. It doesn't
fiber into its own building. It
offer complex Web-hosting services.
Instead, it focuses on creating
secure, ultra-reliable .
for what Adelson calls an "open marketplace." ISPs can go
without having to pay a competitor for access to other ISPs.
Content providers can co-locate there, and choose exactly which
carrier they want to purchase access from.
So far, the model has proved popular. Providers such as
MCI WorldCom, Cable & Wireless, and NorthPo'
Communications have all agreed to bring fiber into at
one of Equinix's exchanges. Other companies such as
which specializes in accelerating the delivery of Internet
tent, and RemarQ, a provider of Internet discussion .<t'rVl(f' .>I
for ISPs and Websites, are settling there to have close acces
to potential customers. Content providers and
companies have set up shop there in order to take advantage
the choices offered by so many proximate carriers and
component service providers.
296 JU NE 13., ~ O O O &I,JSINESS ;Z.O
Party Invitation
Now, all that's left to do is fill up the empty cages. The trick
is to get a few top-tier telcos to commit. Once that backbone
access is available, the smaller ISPs, ASPs, and others might
commit, too. "We call it the 'teenage party challenge,'" says
Equinix co-founder and CEO AI Avery. "You say you're going
to hold a party, and then everyone starts asking. 'You gonna
go? Who you gonna bring?'"
Documents that Equinix filed with the Securities and
Exchange Commission in accordance with its $200 million
bond issue suggest the company's answer to the question.
While it officially pronounced its Washington, D.C-area IBX
(the one in Ashburn, Va.) as open for business in July 1999,
the document reveals that Equinix "did not offer IBX facili -
ty co-location or interconnection exchange services from
inception through September 30, 1999 as our first IBX facil-
ity in Washington, D.C, had not yet obtained its fiber con-
nectivity from its telecommunication carriers."
To ensure such connectivity, the document continues,
Equinix struck a deal with MCI WorldCom on Nov. 16, 1999.
In exchange for warrants to purchase 450,000 shares of com-
mon stock of Equinix at $1 per share, MCI WorldCom
agreed to install high-bandwidth connectivity into Equinix's
first seven exchanges. "Basically, we said to them, 'Look, we
know you're going to come here eventually. How can we
incent you to accelerate the process?'" says Avery.
With MCI WorldCom committed, others started coming
to the party. At the Newark, N.]., exchange, bandwidth
providers include Atlantic Media, Global Exchange Net,
Level 3, NaviPath, NorthPoint, Teleglobe, and InterNAP
Adelson says the Washington, D.C, IBX is now completely
leased (Equinix will begin an expansion project there soon),
the Newark, N.J., IBX is 75 percent leased, and the San Jose
IBX already has "significant contracts" weeks before its offi-
cial opening.
The bulk of Equinix's revenues come from leasing cabinets,
direct cross-connects to other customers, and connections to
Equinix's own central switching fabric. Unlike most co-loca-
tion facilities, Equinix does not require customers to link to
this network. If they want to aggregate all their connections
on a single port, rather than maintaining multiple direct
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cross-connects, they can do that by con-
necting to this network.
Contracts typically last one to three
years, with payments on a monthly basis.
Adelson declined to provide specific infor-
mation on monthly leasing fees. "Our
prices are negotiated with our customers
individually," he says. "However, fees for
both cross-connects and ports are a minimal
part of the overall cost of a customer par-
ticipating in an IBX center, and thus are
not generally an issue." Avery has been
quoted as saying that "an Amazon.com-level
customer with 20 cabinets would probably
pay between $25,000 and $40,000 a
month." The additional installation and
maintenance services that Equinix offers
(i.e., moving and securing cables, inventory-
ing equipment, installing routers, etc.) will also serve as a
revenue sources.
Ultimately, the model differs fairly substantially from what
others have been doing. Instead of charging for bandwidth
usage on a proprietary network, they simply charge a flat fee
for the direct cross-connects and connections to the Equinix
central switching fabric. And compared to other more hands-
on hosting facilities, the range of services they offer are fairly
minimal. But according to Adelson, the key to Equinix's success
is its narrow focus, along with its ability to attract customers
to its IBXs who do offer the kinds of services it doesn't.
"It costs us so much less to operate our business, because
we don't have to operate a wide area network, and we don't
have to operate switches, and we don't have to support a man-
aged services infrastructure," he says. "My margin is so much
better when you think about it that way. Imagine the costs if
we had to pay a fiber provider for an international backbone.
That's the key," he continues, revving up into evangelist
mode. "Not only must I shed services that compete with my
own customers. Not only must I be completely neutral. Not
only must I provide choice. I have to focus on never investing
in services that are going to increase our cost to the point
where we can't continue this business model. And fortunately,
that's what our customers do: They invest the costs in pro-
viding those services."
For customers, the efficiencies of Equinix neutral exchanges
play out in several ways. "Using Equinix provides a faster solu-
tion for us as we complete our own data centers," says Art
Medici, senior vice president of marketing at backbone provider
Cable & Wireless North America. "Their centers are filled with
the kind of customers we want to offer our services to."
As for ISPs, instead of paying a carrier (that may ultimately
be a competitor) for access into a network access point, they
pay a neutral third-party for their access and can interconnect
with peering partners on a one-to-one basis. They also have
access to hundreds of new potential customers, and to com-
ponent service providers through whom they can outsource ser-
vices they don't necessarily provide themselves, like email,
Usenet, and content distribution.
At the same time, content providers, ecommerce companies,
and ASPs can choose from multiple bandwidth providers,
Website hosts, and other component service providers that
their business might require. And every IBX customer gets
the benefit of Equinix's claimed mission-critical-caliber infra-
structure without having to invest the money it takes to
build climate-controlled, ultra-redundant facilities with cut-
ting-edge touches like eerily glowing man traps.
"We've run calculations that estimate that ISPs who use
our IBX centers instead of building their own facilities can
save tens of millions of dollars in their annual operating costs,"
says Adelson. In addition, they have the assurance, through ser-
vice-level agreements with Equinix, that Equinix will guaran-
tee specific standards of facility performance. (Adelson
declined to provide specific information about what these
standards are exactly.)
"I see Equinix very much as a utility," concludes Gartner's
Coons. "A very high-tech, leading-edge utility, providing the
ultimate platform for network connectivity and folks who want
to host things." And by sticking to something that's not cus-
tomer-service intensive, the company can also keep down
labor costs. "The scale they're getting with just a handful of
employees is phenomenal," Coons adds. "A lot of traffic is run-
ning through there, a lot of hosting is happening there, and
they're doing it without a lot of variable expense. And because
of their partnership with Bechtel, now they've got a single, large,
capable contractor who has learned after building several of
their sites exactly what they're looking for. So now they can just
shift and replicate."
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Doing the math
On April 11, Equinix celebrated the official opening of its
San Jose exchange. Hundreds of customers, prospective cus-
tomers, and journalists were shuttled from a nearby hotel to
the exchange. The guests were treated to commemorative
engraved crystal paperweights from Tiffany & Company,
and in the middle of the exchange's parking lot, a large white
tent featured an expansive buffet and a string quartet.
Eventually, CEO Avery addressed the visitors in another
tent; when he finished reading the long list of customers who
would be co-locating at the exchange, the crowd broke out
into applause and Avery stopped to gulp a glass of water.
In other words, things are looking up for Equinix. It has
12 exchanges soon to open, and eight more under construc-
300 JUNE 13, 2000 BUSINESS 2.0
tion. True, as it continues shifting and replicating, Equinix
will need to raise approximately $750 million to complete
the build-out of its 3D-plus exchanges. And so far, according
to the S-4 Equinix filed with the SEC, the company has
"experienced operating losses and negative cash flows from
operations in each quarter" of its existence. But none of that
seems to concern Avery much right now, as he stood in front
of the exchange, watching dozens of potential customers
waiting dutifully for their chance to get a glimpse of the
facilities.
Asked how Equinix was planning to raise all those hun-
dreds of millions of dollars it still requires, he simply smiled
and said, "Multiple sources of funding. Multiple sources of
funding."
G. BEATO IGBEATO@SOUNDBITITEN.COMIIS A CONTRIBTING WRITER TO BUSINESS 2.0.