August 9, 2002

CarrierHotels.com Interviews Hosted Solutions CEO

By Rich Miller, CarrierHotels News Staff

Are the deeply discounted data centers of today the foundation for the profitable web hosting industry of tomorrow? Rich Lee thinks so. In fact, tomorrow is already here for Hosted Solutions, the company Lee launched last year with assets purchased from a bankrupt provider. Based in North Carolina's Research Triangle, Hosted Solutions purchased the data center and customers of Utenzi in a Chapter 11 deal, and was profitable within six months of its launch.

“I knew that if we had focus - concentrating on one facility and one market - that the model works,” said Lee, Hosted Solutions's chief executive officer. “You can build up a huge circle of influence in the community, and web hosting can be very profitable.”

With the right cost structure, that is.

“The beautiful thing about our model is that we have no debt on our facility,” said Lee, who co-founded Hosted Solutions in June 2001 with company president Chris Hanks. Hosted Solutions's 11,000 square foot facility in Cary, NC includes 6,000 square feet of raised-floor data center space. The equipment for the company's 140 customers fills about 27 percent of that space. “It's a Rolls Royce facility, and we're putting some common business sense into it and running it like a true bricks and mortar operation,” said Lee. “We got to erase all the liabilities and cherry-pick all the assets.”

With more than 50 telecom companies in bankruptcy and remaining providers slimming down, the market is flooded with finished data centers and equipment. Many will stand empty or be converted to an alternate use. A few will remain intact as their owners emerge from Chapter 11. The rest will be acquired by new owners, who will operate these facilities without the mountain of debt it took to build them. These providers may represent the shortest route to profitability for money-losing data center assets, and their success could have substantial impact on competitors who've either skirted Chapter 11 or emerged from bankruptcy.

“I think we're seeing a new breed of provider that's very focused on the expense side,” said Lee. “They expand when they can afford to do it, get a good entry price, and do it in a way that isn't a distraction to management.”

Acquiring bankrupt assets has its challenges, according to Lee, who previously founded and sold MPInet, an ISP in Orlando, Fla. “The first six months we had to overcome some challenges because of the previous bankruptcy (of Utenzi),” said Lee. ” As we've seeded the new brand, we've built up a good name and a good reputation.”

That's paying off in Hosted Solutions's sales effort. Earlier this month the company announced nine new customers that will generate $200,000 in revenue. “We're doing well in the small to medium-sized business market,” said Lee. “They want personalized service and a local data center. We can get a lot of $5,000 to $10,000 a month customers, and that's just fine with us. I think we're fighting in a space where we can show a clear return on investment. “Medium-sized companies are starting to get it,” Lee added. “I think the outsourced model is catching on. I can go in and show a customer what the cost of infrastructure would be for them to do it themselves, as opposed to what we can offer.”

With its data center paid for, Hosted Solutions can also price its services competitively. It has 17 employees, compared to 140 for the center's previous operator, Utenzi. “We have what I call operational leverage,” said Lee. “We can go in there and beat EDS and IBM Global Services by 20 to 30 percent on cost, and still have 50 percent margins.”

Lee thinks the model will work in other markets as well, and there are plenty of data center assets available. “We want to perfect our business here, and then we may go out and look at another facility,” said Lee. “As Hosted Solutions continues to grow, we're going to be very aggressive in looking at acquisition opportunities.”