development

November 19, 2007

A Feature Too Far

I just finished the best Software Project Management book I have ever read. It covered proper planning, requirements gathering, resource management, inter-organizational communication, and even discussed the immeasurable factor of individual effort. The book's title is 'A Bridge too Far' by Cornelius Ryan. The book is actually a historical account of "Operation Market-Garden" which was an attack by the Allied forces against Nazi Germany in World War II.

First let me say that I am not comparing Software Development to War. I do appreciate the difference between losing one's job and losing one's life. But as I was reading the book, the parallels between the job of a project manager preparing for, managing, and executing a large project are not unlike that of the job of a General's planning staff preparing for a major offensive.

Operation Market-Garden was a combined ground and paratrooper attack into The Netherlands by the Allies a few months after the invasion of Normandy. Things seemed to be going well for the Allies in the months after D-Day and the Allied Generals became confident that they could launch a lightening strike that would end the war sooner rather than later. The operation seemed simple, Airborne paratroopers would be dropped deep in Nazi territory and would capture key bridges along a route into The Netherlands. A ground offensive would quickly follow using the bridges that were captured by the paratroopers to get almost all the way to Germany's borders. The short version of the story is that the ground offensive never caught up to the paratroopers and the offensive didn't succeed.

Reading the historical account, with the benefit of hindsight, it became obvious that the Allied Generals underestimated the difficulty of the task. The offensive scope was too big for the resources on hand and perfect execution of all the individual engagements was required. The schedule the Generals developed was impossible to keep and schedule slips meant death for many of the soldiers. Communications between elements of the units involved was critical but did not occur. However, because of heroic actions of some individuals and personal sacrifice of many, the offensive almost succeeded.

In the early stages of a project, setting realistic goals, and not putting on blinders as to the quantity and quality of your resources are key to a projects success. Going on the assumptions that the 'development weather' will always be perfect, communications will always work, and that all tasks will be completed on schedule is a recipe for disaster. And you can't always plan on individual heroics to save a project.

I usually try to inject some levity into my posts, but not this one. 17,000 Allied soldiers, 13,000 German soldiers, and 10,000 civilians were killed, missing, or wounded as a result of this failed offensive.

-@nday91

November 16, 2007

The Value of a Customer

For the two people who actually read my posts, you know that I blogged about how I look at the value of a server. Basically, it should be valued by the cash flow it produces. Without a customer to use the server, the cash flow it generates is negative, i.e., less than $0 due to the costs of keeping it racked up, powered up, and connected.

So, how do you place a value on a customer? Customers and servers are not a one-to-one connection because many customers have more than one server. They also buy more than just servers, such as additional software and/or backup services.

Like most of us in the industry, I spend a few minutes each day scrolling through the customer forums, both ours and 3rd party sites – you probably know which ones :). I look at the customer comments and sometimes I wonder if the folks in our industry understand the value of these customers judging from the way some customers are treated.

Granted, some customers are abusive and need to be fired, so to speak. Others appear to be high value customers with multiple servers and solid business models where someone has dropped the ball and caused them to seek greener hosting pastures. If companies understood the dollar figure valuation of each customer, they might think twice about their next course of action with a particular customer.

To value a customer, I look at the statistical expectation of how long that customer will stay with the company, how much the customer currently buys with us, the statistical expectation of how much additional business they will place with us, the gross profit generated by the customer, and that old stand-by -- the minimum acceptable rate of return for an investor in the company. From these data points, I do a simple Present Value calculation and arrive at the value of the customer, which is the amount of cash that would have to be invested to yield the economic equivalent of the expected gross profit that the customer will produce. I'd give you a sample calculation, but a) it would make this post even more boring, and 2) some things we like to keep secret :).

This is important because it can make the growth of a hosting company less "slippery" -- sort of like when Eric takes off from a red light in this:

For example, if you sell 100 new servers but customers release 90 back to you during the same period, your growth doesn't have the traction it would have if only 10 servers were released back to you. By retaining valuable customers, you don't spin your wheels as much. Spinning the tires at a hosting company is not nearly as much fun as watching Eric drive.

-Gary

Categories: 
November 6, 2007

Stress is Free

Wikipedia defines stress as the condition that results when person-environment transactions lead the individual to perceive a discrepancy, whether real or not, between the demands of a situation and the resources of the persons biological, psychological or social systems. In a nutshell that says Stress is your mind telling you that you are in over your head for a multitude of reasons. I have worked many jobs in the past where those transactions were out of control and they became high stress jobs. Let's hit the "wayback" machine and relive the stressful ones. I am assuming some of you will relate to this and some will just think it's funny.

The Burger years - It all started at Burger King. I know if you haven't done the fast food thing you are thinking, "Right, that isn't a stressful job!" I'll tell you though, during a lunch rush when the order screen is full and backlogged and you are the only one making burgers and you are about 30 behind, it can be a little stressful. Then there are the times when non-paying customers are eating food from the salad bar and you have to tell them to leave, but that is a separate (and funny) blog entry. Anyway, I decided that the burger future just wasn't for me and it was adding to my ham hocks so I left for...

The Factory Months - Repetition became the word of the day for the next 8 months. I lifted 100lb bags of powder repeatedly, then cut the bags and dumped the chemicals into a vat. After hours of mixing it magically and chemically became glaze for toilets. I even made pretty colors with Black being the most time consuming, specific, and expensive (if you have ever priced a black toilet now you know why it is so high). Really the only stress there was just trying to get it all done in 8 hours correctly and not hold up the day guys and make them wait on me. Driving the forklift through the wall and losing 50 pounds of Burger King induced ham hocks was just a bonus. After that it was off to…

The Mall years - Any of you ever hear of Babbage's? I took a store manager position and you would be amazed at how stressful working from 9am to 10pm during Christmas hours was. Normally it was just the kids kicking and screaming but during Christmas it was THE PARENTS! "I was first in line! No! I was" All that for games for the Linx hand held (it was SO cool and so before it's time), Nintendo, or Sega. Even during the slow months the monotony of standing there just waiting for a customer was almost as stressful. I thought it was time to get a real job so I went to work for...

The Clone wars - Computer clone manufacturer as a sales person. A sales position is very stressful. I bet all you folks out there that have to meet a quota know exactly what I mean. The last day of the month you are popping the champagne corks and getting big bonuses and commissions and then the very next day your sales are at $0.00 and you are at square one again. It's numbing and nerve-wracking. I am no longer a sales guy after 5 years of that hell and my hat is off to those of you who are good at that gig. I learned a few technical things while being in sales so it was time to try them out.

The "Internot" years – Phone support at its finest! Phone support in the early days was different than today. Today we have remote control tools and things of that nature where in the past it was all trial and error with some folks who just bought that new computer (and very first computer) with a Winmodem in it. Oh, the good old winmodems (I just shivered). I can't even begin to explain how stressful a 12-hour shift of phone support talking about winmodems can be. If any of you remember that I bet you just shivered too. Two years of phone support was enough so...

The Geek years – Systems admin/engineer. I stressed out like crazy taking my MCSE all to get this phone call while working at a fortune 500 company. "Email is down! For everyone! Fix it! We can't do anything without it! We are dead in the water!" MORE STRESS! I have found that CEOs can't live without email anymore when in the past they actually played golf on the golf course, now they claim to still work! I worked with Terminal services, Citrix, and Exchange, the things that companies just CAN'T live without. Sleep was optional during this time so I decided...

Management! – Get the title. Manager, Director, I want to be a VP, etc. Life will be stress free closer to the top. What was I thinking? I think this one is better broken into two categories, managing up and the WIT method (I just made that up!). We will start with managing up. Managing up? It's the fine art of making your boss think you are interested, patting yourself on the back, seeking new "out of your comfort zone" responsibilities, getting noticed at all costs, act like and work like one level above your title, and knowing what matters to your boss and his boss even if they don't matter to your group or the people you manage. So for the short definition Managing up = Stress! I took pride in being the laid back easy going manager that gains respect from his employees by trusting the people he puts in a place to do their job and letting them succeed and helping when necessary. If you mix that style with a micromanager you are looking for trouble. I think stress starts at the top and is instilled in everyone all the way down to the very bottom. A workaholic CEO = a stressed out workaholic staff. I'm not saying that you shouldn't manage up as it is a very good form of getting promoted etc. I am simply saying it adds stress to your life. On we go to...

WIT – Whatever it takes. There is something to be said about a company that has one simple motto from the top to the bottom; whatever it takes and at the same time actually living to that standard. I have found that place. When my alarm goes off now in the morning, I hit the ground running. I can't wait to get to work and be part of the fun and productive team and do whatever it takes. I can honestly say that everyone at Softlayer has one goal - to be the best! THAT makes for an extremely stress-free and fun workplace. We don't need to work in the Bank of America tower in beautiful downtown Dallas to be happy, we are happy already! Just keep up the free coffee and Monster and I am good to go!

If you own a small business then you most likely deal with stressful situations daily. Why not let us ease some of your IT stress and outsource your infrastructure to the best stress-free IT Company out there - SoftLayer!

Disclaimer:The events depicted in this blog are true. Any similarity to a company living or dead is most likely coincidental.

-Skinman

November 2, 2007

No-Huddle

With the NFL season in full swing and the usual suspects up to their usual tricks, a question was raised as to why some teams opt to run a "no-huddle" or "hurry-up" offense when their backs are against the wall with the clock ticking away, while other teams seem to constantly be in a "hurry-up" mode throughout the game and have a significant degree of success with it. In either case, the objective is to keep the competition off balance and have steady advances to the goal. An obvious example of an undeniably successful team that employs such methods is the reigning NFL Champion Indianapolis Colts.

Before I go further into lumping praise onto the Colts, I feel that I am obligated to state that I am not a die-hard Indy fan. The team that I root for shall remain nameless for this article as I am still traumatized by the hammer that they leveled on my team of choice on the NFL's opening night (Hint: Rhymes with "The Aints.").

Okay, so this observation invites the question: how did the Colts become champions by performing in a manner that, to outsiders, may appear to be rushed and distressed? One could say it's because they have trusted, senior individuals in their skill positions implementing the plan. Another might say that by focusing on rapid incremental results, they are able to execute more efficiently. An additional point might be that the constant communication amongst the players allows them to adapt to the circumstances that are constantly changing so that they may deliver and reach their goals.

To those of you not caught up in the imagery of football, you might recognize that these are some of the same traits that characterize successful adaptations of Agile Software Development. With the goal of delivering continuous and valued improvements to our applications and supporting software, the Softlayer Development team practices many of the Principles behind the Agile Manifesto. While "moving the chains" toward the end-zone alludes to the incremental success of an NFL team's offense, we speak more in terms of functional and valued releases towards achieving greater customer satisfaction. This is afforded to us by the skilled players on our team, constant communication, and a continued focus on producing measurable results. We are determined to keep "moving the chains" so, stay tuned to the Developer Network, Forums, and all channels Softlayer as we continue to push towards our goal.

-DJ

October 31, 2007

Backups

"ah - I don't need backups."
"Too busy to do backups - I'll get to that later."
"Backups? It costs too much."
"I don't need backups - MTBF of a Raptor is 1.2 Million hours."
"Oops - I forgot about doing backups."

Backups are one of the most commonly forgotten tasks of a system administrator. In some cases, they are never implemented. In other cases, they are implemented but not maintained. In other cases, they are implemented with a great backup and recovery plan - but the system usage or requirements change and the backups are not altered to compensate.

A hard drive really is a fairly reliable piece of IT equipment. The WD 150GB Raptor has a rating of 1.2 Million hours MTBF. With that kind of mean time between failures, you would think that you would never have to worry about a hard drive failing. How willing are you to take that chance? What if you double your odds by setting up two drives in a RAID 1 configuration? Now can you afford to take that chance? How willing are you to gamble with your data?

What if one of your system administrators accidentally deletes the wrong file? Maybe it's your apache config file. Maybe it's a piece of code you have been working on all day. Or, maybe your server gets compromised and you now have unknown trojans and back doors on your server. Now what do you do?

Working in a datacenter with thousands of servers, there are thousands and thousands of hard drives. When you see that many hard drives in production, you are naturally going to see some of them fail. I have seen small drives fail, large drives fail, and I have even seen RAID 1 mirrors completely fail beyond recovery. Is it bad hardware? Nope. Is it Murphy's Law? Nope. It's the laws of physics. Moving parts create heat and friction. Heat and friction cause failures. No piece of IT equipment is immune to failure.

That 1.2 million hours MTBF looks pretty impressive. For a round number, let's say there are 15,000 drives in the SL datacenter. 1,200,000 hours / 15,000 drives = 80 hours. That means that every 80 hours, one hard drive in the SL datacenter could potentially fail. Now how impressive is that number?

Ultimately, regardless of the levels of redundancy you implement, there is always a chance of a failure - hardware or human - that results in data loss. The question is - how important is that data to you? In the event of a catastrophic failure, are you willing to just perform an OS reload and start from scratch? Or, if a file is deleted and unrecoverable, are you willing to start over on your project? And lastly, how much downtime can you afford to endure?

Regardless of how much redundancy you can build into your infrastructure with the likes of load balancers, RAID arrays, active/passive servers, hot spares, etc, you should always have a good plan for doing backups as well as checking and maintaining those backups.

Have you checked your backups lately?

-SamF

October 19, 2007

A Well Designed Infrastructure Makes Everyone Green

As we all know there is an incredible amount of attention being paid to the “greening” of IT. Most people in the hosting industry regard this as the responsibility of the datacenter, as they can make the largest impact with their large-scale deployments of energy-efficient power supplies and processors, efficient physical layouts, cooling practices, and recycling.

Outside of the hosting industry the options become more varied—namely the ability to save massive amounts of power by turning off unneeded infrastructure during non-peak times. A great example would be a call center that operates 9-5 and shuts their workstations down when not in use, or an accounting firm that turns off their billing servers when they go home for the day. This is far from a common practice currently, but it is a very logical and easy step to conserving power. The gotcha here is that unless you can physically walk over to the infrastructure and power it back on, you are going to have to call someone to do it for you. Then wait for them to do it for you. Then hope that they don't forget. This leaves many businesses with infrastructure in an outsourced datacenter throwing their hands in the air, because it's frankly just too risky to not have their resources available at 9:00am when their day starts—might as well just leave everything on.

The story is a little different here at SoftLayer. Using our innovative network design and remote power control, our customers are redefining the way that IT is deployed in an outsourced datacenter. They run their web and mail servers here, pretty normal stuff. But utilizing the SSL to private backend network feature (allowing them to completely disable connectivity to the public network), they are also deploying their domain controllers here. And their office file servers. And their central servers to which their local thin clients connect. They are getting them out of the closet in the back of the office and into a datacenter on enterprise-grade hardware. And you know what they do at the end of the day? They turn them off. The next morning, a click on the power control in the SoftLayer Portal brings them instantly back online anytime, day or night. No phone call to support needed, no waiting for someone else to do it for you. The impact of technology designed to give you optimal control of your IT environment is staggering, especially when you see so many companies utilizing it.

So not only can you choose to deploy your operations in a datacenter that is making enormous strides in green infrastructure, but you can also deploy in one that provides you with the ability to control your own impact as well.

And just like that, everyone gets to be green. And sorry, envy doesn't count.

-Joshua

October 17, 2007

ISPCON Update: Blogging/Social Marketing Impact

ISPCON Update: Blogging/Social Marketing Impact – Do ya Digg?

With ISPCON starting today I thought it would be interesting to hear what companies and individuals in the ISP space are talking about when it comes to social medias, blogging and any other real user experience methods that are taken to attain and retain a customer base in the ISP world. After all, Softlayer is a cousin (be it distant cousin) of the ISP world and most of our executive management team has all lived the ISP experience at one time in our careers.

The session "using social networking and Web 2.0 to market your business" started off with an extremely interesting video that can be seen here:


Since it was voted one of the more famous YouTube videos, I might be one of the only ones that had not seen it yet, but nevertheless it is a cool look at Web 2.0 (and much more).

There are a few key themes that were driven home during the discussion.

Web 2.0 in its simplest form is user-generated and manipulated content. In technical terms its AJAX, Feeds and Simplicity. The Myspace, Facebook and Youtube phenomenon are drivers of this and we are seeing a huge influx of follow-on companies that are utilizing the common theme of user-generated content to monetize applications throughout the internet. An example of this would be the Facebook open API being used to build gadgets. One gadget cited is a whiteboard application allowing multiple users to collaborate in Facebook and through ad-generated monetization, an obscene number of nearly $100,000USD per month was being attributed to the creator.

Blogging is the real Search Engine Optimization (SEO). Living in the world of Buzz words, it's hard to read any tech publications these days without stumbling across SEO. What is it? Well, no one really knows, but it's some magic that companies are buying into which get them to the front of the search line, so to speak. The concept that blogging is the real SEO is because blogging is very close and very niche to the topics that are being blogged about. If I am a used car dealership in Dallas and I blog about my weekend sale in Dallas, it would make sense that when someone searches for used cars in Dallas, that you cannot get more directly connected. It all makes sense, now it's just how the information is dispersed which leads me to the last point that was driven home.

Tagging is critical to all socialization, blogging, and web 2.0 applications that you may be trying to publish for mass consumption. Since the eyeballs are critical it is key that the use of tagging and linking are used to increase the reach of your user generated-content. For example, the use of Digg, Reddit, and Del.icio.us are key drivers of eyeballs to your content. Tag it all, Tag it often and the eyeballs will follow.

So, when I publish this blog I am sure to Tag it with; Softlayer, Webhosting, Web 2.0, etc. Let's see if my social experiment will pay off and someone out there will Digg this!

-Sean

October 16, 2007

The Miracle of Email

"You see, wire telegraph is a kind of a very, very long cat. You pull his tail in New York and his head is meowing in Los Angeles. Do you understand this? And radio operates exactly the same way: you send signals here, they receive them there. The only difference is that there is no cat."

-- Albert Einstein, explaining radio.

Email, like Telephones, the Internet, Power Lines, Credit Card Terminals, ATMs, etc. have become so much part of our daily lives that we just accept it without really thinking about it. You click "New," put some data into a form, then click "Send." In a couple of seconds (minutes if your mail servers are suffering a spam blizzard), your LOLCAT Email has zipped from one end of the Internet to the other (This proves that, unlike radio, Email does have a cat). Do we marvel at this paragon of technology? Not really. I generally grumble at the mixed blessing that has brought me spam.

A while back, I made the mistake of reading the Wikipedia article on the Power Grid. I was amazed at the mechanics of the system that allows a handful of uranium melting itself into slag in Glen Rose, Texas to shove electrons across a couple hundred miles of copper, through a handful of coils... all to be stopped by a little switch in my wall before they could excite the gasses in my Compact Fluorescent light bulbs. For two weeks after that, I was a road hazard. In the middle of my commute, I'd glance at my right hand mirror, gaze out my side window, and think "Hey! I didn't know they were running two phase power out here!" I must say that I couldn't have been a more dangerous driver during those two weeks if I was dryping.

My latest project at SoftLayer (WHOIS management for ARIN... look in the portal under SWIP) had me doing research on Email (as all transactions are conducted through Email).

Like David Bowman staring into the black monolith at the end of 2001, I was struck by the simplicity and beauty of the Email system!

Let’s tag along with an Email message, so you can see just how cool this is.

Bob is currently taking a vacation in Glen Rose, Texas (taking the tour of the Nuclear Power Plant). Sitting in the lobby of the Visitor's Center (thinking about this giant reactor being at the beck and call of his little switch), he has a firm wish that Alice could come see this. He's a cheapskate, though, (that’s why he’s at a local power plant instead of, say, Disneyworld) so he's not going to waste money on a Power Plant Postcard and stamp at the gift shop. No sir, he opens up his blackberry and sends a short Email to Alice ("Wish you were here!"). A few seconds later, Alice's Email client pops up an alert that she's received an Email from Bob. The Email itself is simply a block of text… really! No magic going on here! Here's what the Email looks like:

From: bob@example.net
To: alice@example.com
Date: Wed, 10 Oct 2007 12:54:08 -0400 (EDT)
Received: From EXAMPLE.NET
 by EXAMPLE.COM with SMTP
 Wed 10 Oct 2007,
 12:55:00 -0400 (EDT)
 
Wish you were here!
 
---
Bob
Sending to Alice for over 30 years.

Simple, huh? To help visualize this transaction, Figure 1 shows a “RFC 2822 Compliant Post Card:”

Bob opens up his Email client, and writes "Wish you were here!" in the message area. He then adds his signature, and writes in the subject. The Email client adds headers to the address area of the Email (From, To, and Date), then drops the Email into Bob's local Email server (EXAMPLE.NET).

The Email server at EXAMPLE.NET looks at the address section of the Email and notices where it is to be sent to Alice (who has an Email box at EXAMPLE.COM), and opens up a SMTP (Simple Mail Transfer Protocol) connection to Alice's mail server. It then sends the message and moves on.

Alice's Email server puts a “postmark” header on the Email (the Received header) and drops a copy of the entire text block into Alice’s Email box.

Alice opens up her Email client, which then downloads all the text files from her Email box. It reads the From header and tells Alice that she has an Email from bob@example.com

That’s it! Simple, huh?!?

If Bob's Email server can't send the mail directly to Alice Email server, it can send the Email through a relay server. This server adds its own "Received header" to the Email. If you look at the headers of any Email you've received (spam is not only a good source of vitamin Sodium Nitrate, but also an excellent resource for Email headers), you can see every single server your Email passed through. It’s like those neat stickers customs officials stick to your luggage as an apology for cracking your locks when you fly internationally.

That's all there is to it! A simple block of text, passed off to an Email server. And the actual protocol is just as simple. Here's what the communication between Bob's Email server and Alice's Email server looks like (modified from the example on Wikipedia's SMTP article):

Bob’s server connects to Alice’s and identifies itself:

ALICE: 220 smtp.example.com ESMTP Postfix
BOB:   HELO example.net
ALICE: 250 Hello example.net

Bob's server then tells the receiving server about the Email:

BOB:   MAIL FROM:<bob@example.net>
ALICE: 250 Ok
BOB:   RCPT TO:<alice@example.com>
ALICE: 250 Ok

Bob's server then tells Alice's that it's ready to send the real message:

BOB:   DATA
ALICE: 354 End data with <CR><LF>.<CR><LF>

Next follows the RFC Compliant Email message from above, ending the data with a ".", which tells Alice's server that Bob’s message is complete:

BOB:   From: bob@example.net
BOB:   To: alice@example.com
BOB:   Date: Wed, 10 Oct 2007 12:54:08 -0400 (EDT)
BOB:   Received: From EXAMPLE.NET
BOB:    by EXAMPLE.COM with SMTP
BOB:    Wed 10 Oct 2007,
BOB:    12:55:00 -0400 (EDT)
BOB:   
BOB:   Wish you were here!
BOB:   
BOB:   ---
BOB:   Bob
BOB:   Sending to Alice for over
BOB:   30 years.
BOB:   .

Alice's server lets Bob's know that the message is queued to go, and Bob's server signs off:

ALICE: 250 Ok: queued as 12345
BOB:   QUIT
ALICE: 221 Bye

I marvel at this technology. Every Email in the world is transmitted by this simple protocol. The whole of electronic communication takes place by handing small blocks of text from one Email server to another, until it finally makes its way to the recipient's inbox. That's all! No magic potions, no hocus pocus, no tying messages to carrier pigeons or pulling cat tails.

Not only this, but your message is flying through a blizzard of spam. Because the protocol is so simple, people build simple tools that blast out millions of messages at a time, flying all over the Internet. But the awesomeness of this just makes Email that much more awe inspiring. Email has been running, nearly uninterrupted (as a whole) for DECADES under the most concerted distributed denial of service attack of all time.

And STILL your Email gets to its destination. Benjamin Franklin would be proud.

Think of this the next time you forward the latest list of funny jokes to everyone on your Email list. This incredibly simple protocol will make sure that your vital Email gets to every recipient listed! "Neither snow, nor rain, nor heat, nor gloom of night stays these couriers from the swift completion of their appointed rounds..."

-Zoey

Categories: 
October 12, 2007

The True Value of a Hosted Server

Now that I've ranted on a few accounting shortfalls for the hosting industry I'm going to rant once more. I think that the way hosting companies must book the value of their assets per accounting rules shortchanges hosting companies. Some basic rules of finance clearly show the likelihood that significant value is missing on the financial statements.

Let's consider a mythical server that costs the company $10,000 to buy and the company depreciates it evenly over 3 years. After year one, the value on the financials is $6,667. After year two, its book value is $3,333 and finally $0 after three years. Suppose that the company deploys the server for five years. In reality, after three years, the server's true value is certainly above $0, and the hosting company is shortchanged by not being able to reflect this value on its financial statements. Multiply this effect by thousands of deployed servers and you can see that there is significant value in hosting companies that just isn't found on the financial statements.

So how should we reflect the value of a server? I would propose the use of a "capitalization rate" or "cap rate". This is a common method of appraising real estate and the formula is simple: take the projected net cash flow over the next 12 months and divide by the cap rate, and that's the value. So, what would happen if we applied this to a server?

Looking at our mythical $10,000 server above, for simplicity's sake, let's ignore any allocations of the switches, routers, generators, HVAC, etc., needed to operate it. Let's also assume it produces net cash flow of $100 per month and will do so for 60 months. Its 12 month projected net cash flow is $1,200. We would divide this by the cap rate to find its value.

Naturally, the next question is "what do we use for the cap rate?" For a given investment, the cap rate is the lowest return that an investor will accept for the given risk of that investment. In our server's case, the $10,000 investment produces a return of $1,200 per year. How much would an investor need to invest in lower risk alternatives to get the same return? For a risk-free investment of the same 5 year duration such as a 5 year Treasury Note at 4.25%, you would have to invest $28,235.29 to get $1,200 per year in return. If we use 4.25% as the cap rate in our scenario, the value of the server becomes $28,235.29. However, investors in hosting companies generally look for returns far above 4.25% and these returns are not without risk, so this is not the appropriate cap rate. For simplicity's sake, let's assume that the hosting company investor's minimum acceptable rate for the investment is 10%. In other words, if his investment in the hosting company was expected to return less than 10%, the investor has other lower risk options to invest and get a 10% return and he would not invest in the hosting company.

So if we use 10% for the cap rate in our mythical server scenario, the true value of the server is $12,000 ($1,200 / 10% = $12,000). As long as the 12 month projected net cash flow stays above $1,200 then that value holds constant. Check out the graph below to compare the value of this server from both the cap rate perspective and the accounting rules perspective over the five year life.

From month 36 to month 49, there’s a $12,000 difference in value between the two methods. If a hosting company has a thousand servers like this, that’s $12 million in value that isn’t reflected in the company’s financial statements. That’s huge.

-Gary

Categories: 
October 11, 2007

The Three P's are Changing

The three P's in the hosting world have always been Ping, Power and Pipe. Salespeople regurgitated them relentlessly and operations personnel just shortened them to the P's because we talked about them all the time. The three P's of hosting have changed in the recent years and those not aware of the changing landscape are doomed for failure. I propose a new three P standard (described below).

1) Power -- I list this one first because it is by far the most important. Power is the single greatest limiting factor to technology. If you don't understand the importance of power on future technology, you should exit the industry now. If you are not concerned with power, don't meter power and not fixated with power, you will be in serious trouble in the next 12 to 24 months. The entire industry has shifted to being "green" and large scale datacenter operators are so focused on power utilization, they are building and designing systems completely based on power usage and/or location. It's one of the most critical operating costs and must be understood to maximize long term success and profitability. Here at SoftLayer, we are obsessed with power utilization and efficiency and focus on mitigating power and heat (byproduct of power) to a bare minimum. We know the power usage of every server and network device located in the datacenter and track it real time. We are continuously seeking new low power technologies, engaged in industry consortiums looking for new alternatives, and actively planning our power needs through the end of 2010.

2) Packets -- Five years ago, the internet backbones were full of big fat packets that were easily passed by backbone and edge routers without issue. In the recent years, small packet technologies have greatly reduced the size of the average packet transversing the internet. For those of n00bs out there, smaller packets reduce the overall throughput of the routers processing the packets. The smaller the packets, the greater the reduction in horsepower of those routers. The fast rise in gaming, VOIP and other small packet intense applications has cut the average packet size in half in the last two years and I would expect that to occur again the next two years. Packet size can take the aggregate throughput of a router from several hundred gigs at large packet sizes to potentially single digits of gigabit throughput due to the processing required. Here at SoftLayer, we have installed and upgraded to the fastest routing technologies by Cisco to ensure the greatest network performance, but there are many legacy carrier, broadband, and enterprise routers out there that have limited capacity due to changing packet size. Hosting providers that were built on eBay surplus network equipment from the late 90's will soon begin to implode.

3) IP's (IP Addresses) -- Ok…not really a "P" but I take a little creative leeway here. IPv4 addresses are disappearing faster than norm's plate at the Hungry Heifer. ARIN has publically announced the need to shift to IPv6 and numerous articles have outlined the D-Day for IPv4 space. Most experts agree, its coming fast and that it will occur sometime in 2010 at the current pace (that's about two years for those counting). IPv6 brings enough IP space for an infinite number of users along with improved security features and several other operational efficiencies that will make it very popular. The problem lies between getting from IPv4 to IPv6. We are caught in this "chicken and egg" scenario where we can't leave one without the other being completely reliable. Although I think we will get to IPv6 without too much of a headache, I do think the IPv4 space will become extinct prior to a full scale transition and there will be a time where the cost of IPv4 IP's will skyrocket because of supply/demand. This should be at the top of your list as a hosting provider because additional IP space typically means new customer and/or expansion of existing customers. If you don't have a conservation plan for IPv4, migration plan for IPv6, and transition plan between the two – you may already be too late. Here at SoftLayer, we have been planning for over a year and 2008 will include a rollout of IPv6 to all those customers who seek to run dual stacks and will include incentives to customers who are able to shift to IPv6 completely.

The Three P's will likely change again in a few years as the industry continues to evolve and we find a way to solve the current challenges facing the industry. For now, focus and plan on these three and you should have a long successful existence.

-@lavosby

Pages

Subscribe to development