Creating a Savvy ‘Network Effect'
IMD: You recently opened a new datacenter in Slough. What prompted you to build a new datacenter, and why did you choose this location?
Koen: We have made a sizeable investment in our UK operations because we see this as a core strategic market, owing to it being such a strong financial center. We had an existing facility in Reading and a smaller footprint in Docklands, but started reviewing our assets as we saw an opportunity to expand.
Coming to Slough was a great decision for all the right reasons. It is close to our UK headquarters in Reading and also close to the downtown area, and has great availability of power and access to fiber networks.
In 2000, the requirements for a facility were vastly different. Today you require more power and more cooling capabilities. Back then, to build a facility you'd spend between $400 and $500 per square foot. Today, it costs close to $2,000 per square foot to build this facility.
IMD: How does the new datacenter fit into your overall service offering in the UK and Europe?
Koen: The limitation in the UK was that we did not sell co-location services because we had a finite asset in our Winnersh datacenter, so we only sold managed hosting services. This building allows us to bring in both sets of customers-those that want managed services or co-location, and those that want both. And that third market is really the biggest.
For example, a big sell-side firm coming into our datacenter will very quickly realize that they need a lot of storage, which they can either build themselves or buy from us as a service.
Our business is really focused on being experts on the fundamental pieces of IT infrastructure. We manage the core components of an IT platform in an outsourced model-servers, storage, and networks. So when we attract customers, we continue to create the dynamic to move towards higher levels of outsourcing.
IMD: You host technologies and points of presence for exchanges and markets in the US and Europe. Why is this an important part of your strategy?
Koen: Picking the right customers allows you to create a network effect around your infrastructure, so that there are buyers and sellers in close proximity. Our customers are not just buying square footage, they are buying the promise of low latency, which comes with being part of a community. It's about building a critical mass of financial firms and market operators... and that only happens in a handful of places.
In North America, we have proximity hosting in the Cermak building in Chicago, which is the same building as the Chicago Mercantile Exchange and IntercontinentalExchange, and SFTI also has a point of presence there. So we are physically in the same building as all of the major Chicago trading venues. In the greater New York area, we have two datacenters that between them host seven stock exchanges and ECNs. We now have hundreds of customers using our proximity hosting services spread over 80,000 square feet of co-location and managed hosting services in those venues.
In London, we have our Docklands facility, which hosts BATS Europe, along with a growing community of customers.
IMD: As new markets proliferate in Europe, does this place more emphasis on latency, and how can network and hosting service providers add value to clients in this type of environment? Is there a set formula for locating trading technologies in a fragmented market?
Koen: We are definitely seeing a swift shift in strategy from big brokerage firms moving towards distributed platforms. They will now happily distribute their platforms to be closest to all the MTFs in London, which is quite a shift. There used to be a single entity that represented the main source of liquidity, to which all firms would try to get as close as possible. But we are now seeing firms willing to split up their platform and put trading engines next to each source of liquidity.
In terms of the importance of network connectivity, as market volatility continues to grow exponentially, all trading firms and data vendors are struggling with infrastructure. And again, that is where our approach of providing flexible network and compute resources that they can expand quickly and at low cost is particularly appealing.
IMD: In light of the current market conditions, are firms under more pressure to reduce costs, and can your services help them?
Koen: Fundamentally, we are trying to change the way enterprises think about their IT infrastructure. We think the old, owner-operated model, is past its prime. For a lot of reasons-technology being one, economics being another-we think that the long-term market trend is for firms to move towards a service delivery as opposed to owner-operated model. In turbulent times such as these, there is no question that this will be one more force to move the adoption rate even faster. Our business model is unique in that we are able to do two things-reduce our clients' costs through economies of scale, and help provide a flexible service that responds to their changing needs with expert technology infrastructure services, which can help them increase their revenues. So we can both get revenue up and costs down. Another point is that our clients can avoid capital expenditures, and that's the game right now.
Customers tell us that 80 percent of their IT spend is put towards managing IT infrastructure, and only 20 percent towards application and business process development. If you ask where you can get competitive advantage, it is not from that 80 percent. CIOs of financial firms must figure out how to take their business processes to drive a better result. Nobody is paying them to run their storage device better than the next guy. We can change that 80:20 split to 60:40, reduce your spend by half, and allow you to focus on the application layer, which is where business outcomes come from.
IMD: Is it important to have integrated hosting and network services from the same provider, or is there an argument for unbundling the two?
Koen: We hear constantly that our customers are looking for one provider that can offer a total end-to-end solution. That does not mean that we have to own every element of that solution-we partner with other providers for specific components-but the major point is that we take control and offer service-level agreements that guarantee the end-to-end service. There is no question that the customer base would prefer to deal with one individual. And as technology moves further and further, the blending between the network layer and raw server and storage moves further into the cloud, and these lines are becoming increasingly blurred. So we are moving quickly into a world where being able to control the entire infrastructure that resides in the cloud is going to put more people in a position where they are going to look to one provider to do that.
IMD: You have longstanding relationships both with mainstream data vendors such as Thomson Reuters, and specialist low-latency data providers. How important are these relationships in the development of your services?
Koen: Clearly Thomson Reuters is a very important customer. In fact, they are our single largest customer. They are traditionally a client of our network services, but we have been able to broaden that into other areas, so there are a couple of things that we do for them. First, we run their data collection network on a worldwide basis, collecting all the market information, which is then delivered back to different locations where they package it. We also do a portion of their back-end data distribution. Third, we run the infrastructure for some of their online media properties like Reuters.com in the UK and in the US. Because those sites are intertwined, if there is a failure, one automatically falls over to the other.
Market data vendors are clearly a good market for us. We do business with the top 10 data vendors today in Europe, Asia and the US. From a networking perspective, we are the only carrier that connects to every exchange on the planet today, by virtue of our relationship with Thomson Reuters. But obviously, we have been able to leverage that rich footprint in content to ensure we can provide value to all the other global data vendors.
IMD: Which specific markets and regions do you see providing the best opportunities for growth?
Koen: It is really the big financial centers. Our biggest challenge now is to maximize the opportunity we have in front of us. Our strategy was to go into major market areas. We have expanded in the greater New York area, Chicago and London to capitalize on what we still think will be a good growth opportunity, and also in Singapore and Tokyo.
IMD: So, are emerging markets not a priority?
Koen: Right now, we would like to pause and take advantage of the opportunity in front of us, evaluate how this plays out over the next 12 to 18 months, and then make some decisions. That said, there are still targeted opportunities that we will pursue. For example, we are seeing sell-side firms investing in high-frequency trading platforms in emerging markets like India following a recent change in local market regulations. We have responded quickly to that, and brought to market a proximity hosting service in Mumbai.
CEO Confidential
Name: Phil Koen
Birth date: March 3, 1952
Hometown: Pasadena, Ca.
Education: MBA, University of Virginia
Current Home: St Louis, Mo.
Family: Married 32 years, with a daughter, 24 and twin sons, 21
Q: What book are you reading?
A: When Markets Collide by Mohamed El-Erian, the co-CEO and co-CIO of Pimco, which provides a thorough and in-depth look at the current financial crisis
Q: What music is in your iPod right now?
A: KKSF's Sampler 18, a collection of jazz cuts from great jazz artists like Peter White, Boney James, Paul Taylor and David Benoit
Q: What was your first paying job and how old were you?
A: My earliest jobs were gardening. At 15, I graduated to selling rugs at a local department store. If you want to learn about people, get a retail job-you'll learn very quickly how to deal with people
Q: What is your favorite city or place to visit?
A: Singapore is very special to me because our family has lived in Singapore two different times for a total of eight years. The city is vibrant and always changing. As modern as it is, it still maintains the old world charm of yesteryear
Q: What magazines or newspapers do you read?
A: The New York Times, The Wall Street Journal and the Financial Times, the Economist, Portfolio, Wired to stay connected to the technology world, and because we love to travel, Conde Nast Traveler
Q: If you could have dinner with anyone, real or fictional, dead or alive, who would that be?
A: My Dad. I was very close to my father growing up and learned so much from him. He passed away about 12 years ago, and I still miss him. To have dinner with him one more time would be pricelessOnly users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
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