Posts Tagged 'Money'

May 29, 2013

Tips from the Abuse Department: To Catch a Predator

We've all seen the emails exclaiming, "THE KING HAS SENT YOU 1,000,000$ US DOLLARS," or "I NEED A PERSONAL ASSISTANT PAYING 500$ A WEEK." Do people actually fall for these? The answer is YES, many do. They think, "What risk is there replying to this email and possibly getting $1,000,000 or even a fraction of that?" As it turns out, there's a lot of risk.

As the senior manager of SoftLayer's abuse department, I know all about these kinds of scams, and I thought I'd reply to one of those emails to show what the interaction usually looks like and explain how the scam works.

---------------------------------------------
From: "Freddy Scammer" <scammer@address>
To: "Freddy Scammer" <scammer@address>
Subject: PA URGENTLY NEEDED

Hi, I am looking for a Personal Assistant, Kindly let me know if you are interested, and i can send you more details. Thank you

Freddy Scammer
---------------------------------------------

First, notice that my address email address isn't listed in the TO field or even the CC field. I must be BCC'd along with many others. I've changed the scammer's fake name to a more fitting name, and I'll use masculine pronouns when I talk about "him." According to our friends over at 419scam.org, this guy has been flagged as a scammer using the same name and email address. The name he provided actually belongs to a company that produces lamps as well as an American historian who focuses on colonization, decolonization and African history.

In the initial message, you'll see that there's no "all or nothing" proposition. Just like any scam, the scammer requests and provides information slowly to reel in a victim.

I replied back:

---------------------------------------------
From: <MY-EMAIL-ADDRESS>
To: <scammer@address>
Subject: RE: PA URGENTLY NEEDED

Doing What?
---------------------------------------------

I wanted to keep it short to see if I could get him to tell me more. He didn't disappoint:

---------------------------------------------
From: Freddy Scammer <scammer@address>
To: <MY-EMAIL-ADDRESS>
Subject: Re: PA URGENTLY NEEDED

Hello

Thanks for your reply, I got your email through the Chamber of Commerce directory. I am looking for someone who can handle my business errands during his or her spare time. I need your service because I am constantly traveling abroad on a missionary trip to build homes for orphaned children and doing other business as we are franchise company into alot of things.

Responsibilities:
1. Receive my mail and drop them off. {Your location doesn't matter as long as you have a post office nearby}
2. Pay my bills.
3. pay our workers on a regular basis

I would have love to meet with you to discuss this job in more detail, but I am currently away on a missionary trip. If you decide to accept the position, please read the employment requirements listed below.
REQUIREMENTS:
A. You are an honest and trustworthy citizen.
B. You need to be able to check your email regular and answer calls.

The pay is $500 weekly and you are entitled to other additional incentives after 1 month if you are hardworking. First, If I were to mail you a payment to
pay people that are needed to and your payment for your service, where would you want it mailed to?

Secondly, how would you like your name to appear on the payment? Note, payment would come in form of Check.

Provide me with the following details below to get started.

Full Name:
Complete Address(No PO Box allowed):
City:
State:
Country:
Zip Code:
Home Phone:
Cell Phone:
Age:
Occupation(If any):
Alternative Email if available:

Awaiting your prompt reply.
---------------------------------------------

Sounds easy enough right? Well it is easy. Who couldn't use an extra $500 a week! But there are a few problems here. If this sounds a lot like a "money mule" (or money laundering) type of situation, that's because it is! A money mule is a person who transfers money acquired illegally (e.g., stolen) in person, through a courier service, or electronically, on behalf of others. The mule is paid for their services, typically a small part of the money transferred.

Money mules are often dupes recruited on-line for what they think is legitimate employment, not aware that the money they are transferring is the product of crime. The money is transferred from the mule's account to the scam operator, typically in another country. Similar techniques are used to transfer illegal merchandise.

After a quick Google search for a few of the sentences in his message, I found out that this guy is low-balling me! He's offering $600 a week in other listings ... I'm hurt! I replied to see if I could get him off script:

---------------------------------------------
From: <MY-EMAIL-ADDRESS>
To: <scammer@address>
Subject: RE: PA URGENTLY NEEDED

So all I have to do is receive packages and re-ship them to where you tell me to,, also receive payments and cash it out and re-pay workers? How will I be paying them, what method? How often will I have to mail packages out and how big are they, who will pay for shipping?
---------------------------------------------

He was quick to respond:

---------------------------------------------
From: Freddy Scammer <scammer@address>
To: <MY-EMAIL-ADDRESS>
Subject: Re: PA URGENTLY NEEDED

Your going to be receiving payment mostly and it has already been paid for, for the shipping . All you have to do is receive and go ahead and cash it ....... Then i will tell you what to do with the money or whoever to pay with it. got me?
---------------------------------------------

Color me amazed. All I have to do is receive a check and cash it?! What luck!

---------------------------------------------
From: <MY-EMAIL-ADDRESS>
To: <scammer@address>
Subject: RE: PA URGENTLY NEEDED
Ok seems easy enough. But I only have a PO BOX, why would this be a problem? I currently don't have a permanent address as I'm staying with a friend trying to get back on my feet and I'm not on the house lease so I can't receive mail here. Is that going to be a problem?
---------------------------------------------

Now none of this is true, but I knew that this would throw Freddy off of his game. Most scammers don't allow a post office box because they don't want to be scammed ... What's to prevent the "victim" from renting a P.O. Box for a month, getting the check, cashing it and cancelling that P.O. Box? That possibility is a risk that scammers don't like to take. There have even been reports that in some instances, the scammers will send goons to your house if you don't hold up your end of the deal.

This whole underground world that you can get quickly and easily sucked into is exciting isn't it?

---------------------------------------------
From: Freddy Scammer <scammer@address>
To: <MY-EMAIL-ADDRESS>
Subject: Re: PA URGENTLY NEEDED

I'm afraid a PO BOX will not suffice, you can perhaps use a family members address and we can start the payments as soon as you send me the info. Please reply with the most urgent intent as I only have a few positions left as my assistant.
---------------------------------------------

At this point, I didn't bother emailing back. It's pretty obvious how easy it could be for someone down on their luck financially (or just bored) to get sucked into this type of scam. What's actually happening here is that the scammer wants to send money from a compromised account to the victim's legit account and then have the victim withdraw 90%-95% of the money and send it to another account that the bad guy has legitimate access to (probably over-seas). The victim would get to keep 5% for their troubles. Often the checks that are sent won't clear, so a victim thinks the funds are in his/her account ... Money is forwarded to the scammer from the victim's legitimate account and it clears before the funds from the scammer's deposited check disappear.

In some instances, scammers will buy high-priced items online with stolen credit card numbers and have those items shipped to the victim's house. The victim will then ship them to a different address. The bad guy has nothing to lose, and the victim takes all the risk.

The challenge with pursuing these scammers from a legal perspective is that they are often based in regions and areas out of the jurisdiction of our law enforcement authorities. As a result, they usually aren't caught, and they just move along to their next unsuspecting victim.

If you receive a "too good to be true" email from someone you don't know, let me spoil the surprise for you: It's not true.

-Dody

Categories: 
April 12, 2010

How Much Is a Trillion?

Since the budget surpluses of the seemingly long ago Clinton administration have vanished, the government as managed by both major political parties has been on a spending spree. These folks have been throwing down trillions like rappers throw down Benjamins!
Speaking of Benjamins, how big is a pile of a trillion dollars made up of Benjamins? Click here for a quick look.
I did something yesterday that gave me a whole new view of how large of a number a trillion really is. I work with some big spreadsheets of data that I query from our database systems here at work. Using Excel 2007, I can analyze worksheets that are a million records long. So I needed to use the VLOOKUP function in Excel to grab a field of data in one worksheet of a million records and move it into another worksheet of a million records. I run these types of jobs on a server (not my desktop machine) and this process brought my server to its knees.
This particular VLOOKUP job involved a trillion comparisons. For each of the million rows in worksheet #1, it had to search a specified range of one million fields in spreadsheet #2, find the exact match, and bring a specific field of data back into spreadsheet #1. A million rows searching a million fields = 1,000,000 x 1,000,000. And a million times a million equals a trillion.
Now, my server is not a wimpy machine. It has Nehalem processors with 16 total processing cores running at 2.93 GHz. It doesn’t have a stupendous amount of RAM because Excel can only use just so much RAM. But many functions in Excel such as VLOOKUP can utilize all the processing cores you can throw at them.
So when I hit the return key at 5:12 PM yesterday to kick off this VLOOKUP, I noticed that it was taking a while. So I went to Task Manager and I saw that all 16 cores were maxed out at 100% utilization. All sixteen cores remained maxed out until 5:47 PM at which time the job finished successfully.
So, for all the techies out there, that’s your representation of how big a trillion really is. It takes 16 processing cores running at 2.93 GHz each maxed out for 35 straight minutes to run a VLOOKUP involving a trillion comparisons.

Categories: 
November 7, 2008

Tax Policy as Pricing Strategy

One of the big items up for “spin” and a little debate in this Presidential election is the tax policy proposed by each candidate. We’ve heard accusations ranging from tax breaks for wealthy CEOs to socialist welfare where money is taken from the rich CEOs and given to the non-taxpaying poor under the guise of a “tax cut”. The word “fairness” gets thrown around a lot and now Joe the Plumber may get a record deal out of all this.

Absent any fiscal discipline by the government (and I have never seen this from either political party), it’s clear that the government needs more money or else it will run deficit spending until we’re all bankrupt. Therefore, tax policy should be nothing more than a pricing strategy to maximize government revenues. Taxes are essentially the government’s pricing structure for their offerings of goods and services (roads, law enforcement, subsidized student loans, etc.)

The problem is, if cutting a particular tax or tax rate will actually bring more revenue to the government, it will be criticized for whatever group “benefits” from the lower rates, regardless of how much better off the government treasury will be.

Yes, it is possible to bring in more revenue and profit by reducing prices. It is a very, very common practice in the business world and we employ this practice at SoftLayer. Consider this scenario:

You sell a product that cost you $50 to build.

At $100, you can sell 1 unit per month. Here is your revenue and profit calculation:

$100 x 1 sale = $100 revenue – $50 costs = $50 profit

Now, if you cut the price 20% to $80, you can sell 2 units per month. In this case, here is your revenue and profit calculation:

$80 x 2 sales = $160 – $100 total costs for 2 units = $60 profit

So, most people would think that $60 in your pocket is better than $50. By cutting the price, you have made more money.

What if you could sell 3 units if you drop the price to $60? Let’s take a look:

$60 x 3 sales = $180 – $150 total costs for 3 units = $30 profit

Because you only keep $30 profit, in this case the BEST price for your product is $80 because at that price you maximize the profit that you keep.

Likewise there are ways to increase government revenue by cutting tax rates. Let’s say we want to tax more dollars from the rich and give to the poor – fine. The paradox is that the way to get more tax dollars from the rich is to cut their tax rates. Really, I’m not crazy – Congress itself has reported this fact.

Business people know that if you raise your prices, people’s behavior will change and they will buy lower volume of what you sell. Even with must have items like gasoline, as the price rises, people find ways to use less of it, even if using less is inconvenient because you have to get up earlier to carpool.

By the same token, if taxes go up, those who are exposed to those taxes will change their behavior and reduce their exposure to those taxes. As a result, the government can actually collect less money by raising taxes.

Every time we set a price or run a special deal here at SoftLayer, we are well aware of this fundamental law of supply and demand. When we need to move units on a particular item, we will reduce the price.

I only wish our government would apply the same principle when pricing its products and services with tax policy – not because I want to pay less in tax but because I want the government to maximize its profit and avoid burdening our children and grandchildren with unmanageable government debt.

-Gary

Categories: 
January 9, 2008

More "GAHAP"

Our CEO said “so when will our next blog post on GAHAP come out?” By GAHAP he means “generally accepted hosting accounting principles.” He asked for it, so you get it :). If GAHAP bores you, try this on your iPhone. It’s fun!

I could probably squeeze everyone left reading at this point in a Dodge Viper and we could discuss this over lunch. But SL doesn’t provide Vipers to executives so I guess I’ll post it here for you. A balance sheet by definition is a snapshot of the current financial condition of a company. Here's a formal definition. A GAAP balance sheet simply doesn’t portray an accurate picture of the financial condition of a hosting company.

Probably the most important value that a GAAP balance sheet completely misses is the value produced by monthly recurring revenue. By implementing some sort of fair value accounting as I mentioned before this value gets captured. But on that part of the balance sheet, it still doesn’t help someone looking at the dreaded current ratio. So here’s a way to get a measure of this value that matches up to current liabilities on the balance sheet and get a current ratio that better reflects the company’s true financial position.

Since current liabilities include debt that must be paid at any time over the next 12 months, I would propose using statistics to walk forward 12 months and add “Future EBITDA from Existing Customers” as a current asset on the balance sheet. I can sense the shudders of all accountants who are reading this because you’re thinking that this completely abandons the revered principle of conservatism. In hosting, however, this can be done with conservatism in mind by employing statistics. Public accounting auditors employ statistics every day in their work, so the use of statistics is not a foreign concept to accountants.

Here’s how I’d propose hosting companies do this. First, look at the behavior of the current customer base at the beginning of each month regarding customer churn and the purchase of incremental business by remaining customers. Ignore all new customers acquired during the month and add them to the customer base for next month’s analysis. For each month over the past 12 months, analyze how much revenue is lost from customers who leave and net that from how much revenue is recognized from the existing customers who remain. The results of this analysis can be statistically boiled down to give you an idea of how much revenue will come in over the next 12 months even if you do not gain a single new customer during the next 12 months. That’s the principle of conservatism coming into play here. Let’s call this “statistically stable anticipated revenue.” By the way, at SoftLayer, the incremental business from customers who stay is greater than the business lost from customers who leave us.

Second, take a look at EBITDA margins over the past 12 months and work the statistical mojo to get an idea of EBITDA margins going forward. Multiply this margin against the statistically stable anticipated revenue to arrive at “Future EBITDA from Existing Customers.”

Third, add this category as a new line in the Current Assets portion of the balance sheet as well as adding it as a new line in the Stockholder’s Equity portion of the balance sheet. The resulting balance sheet is much closer to the true financial condition of a hosting company than a traditional GAAP balance sheet.

Why is this view more accurate? 1) A hosting company isn’t like a retail store. Like a hosting company, retail stores have repeat customers but the repeat behavior is more sporadic. The customer may decide that the weather is too bad and they’ll run out and get that new pair of shoes another day. Or the weekend may have been too hectic for a grocery store run so they’ll eat out for the next week. With hosting customers, mission-critical things live on their servers and they are usually set up on automatic monthly billings. Repeat sales are much more predictable than for customers of retail stores. This consistent cash flow has real value, and to not capture it on the balance sheet negatively distorts the financial condition of the company. 2) Putting this statistically solid future EBITDA as a current asset allows a better picture of the current ratio because it is from this EBITDA that the current portion of the company’s debt will be paid. This gives a banker, etc., a clear view of whether the company will struggle over the next year to pay them back.

Here’s how a sample summary balance sheet would look before and after this adjustment.

                                                  <b>GAAP</b>            <b>"GAHAP"</b>
Cash, A/R, Other Current Assets                $33,218,805     $33,218,805
Future EBITDA from Existing Customers        <u>           $0     $26,575,044</u>
Total Current Assets                           $33,218,805     $59,793,849 
 
Fixed Assets                                   $90,355,150     $90,355,150
Other Assets                                    $9,301,265      $9,301,265
                                             =============================
<strong>Total Assets</strong>                                  $132,875,221    $159,450,265 
 
Current Liabilities                            $55,807,593     $55,807,593
<strong>Long Term Liabilities</strong>                          $67,766,363     $67,766,363 
 
Stock, Paid in Capital, Retained Earnings       $9,301,265      $9,301,265
Future EBITDA from Existing Customers        <u>           $0     $26,575,044</u>
<strong>Total Stockholder's Equity</strong>                      $9,301,265     $35,876,310
                                             =============================                                                                                   
<strong>Total Liabilities and Stockholder's Equity</strong>    $132,875,221    $159,450,265 
 
Current Ratio                                         0.60            1.07

-Gary

Categories: 
December 13, 2007

Avoid Gift Cards!

I live in America, and as any American knows, we pipe Christmas Music and Christmas TV and Christmas Movies directly into the brains of as many people as possible to attempt to keep everyone safe during this difficult shopping season.

Admit it: when you and your neighbor are running to Electronics in hope of getting the last Wii from the shelf, sometimes the only thing stopping you from dumping a bag of Skittles in front of him or knocking over a Lego display is the constant barrage of Rudolph and Frosty and other Christmas cheer over the PA.

Unfortunately, unless you are content to give everyone a copy of Dryping for Dummies (By Steve Kinman, SoftLayer Press), you will have to wade into the shopping rush to eek out your Santa sized bag 'o goodies.

Never fear, however! The Retail Industry is there to help! For those who don't want to dive head first into the excitement of Christmas Shopping (which can make even a foray to pick up some toilet paper from Wal*Mart into an exciting 2 hour adventure), nearly every retail outlet is willing to give you a 2" x 3" credit card like piece of plastic stamped with their brand. Yes, the Gift Card.

It's been said that over 60% of American adults have either bought or received a Gift Card, this year. It's a very convenient device. For example, if I figure out that Lance really likes Outback Steakhouse, I can buy a $10 gift card from Outback Steakhouse, wrap it in a $1 Hallmark card (although, sometimes the retail outlets already have such cards (stamped with their logo) available), and give it to Lance. "Merry Christmas!" Sometimes you can even get the card gift wrapped.A gift-wrapped credit card!

We're to the point, now, that simply handing somebody a plastic card is actually considered a thoughtful gift. On the way to work, I heard that any fishing lover would prefer to receive a Bass Pro Shop Gift Card over, say, that Bassomatic '76 they've been talking about.

But, lets be honest... it doesn't take much to choose a gift card. I overhear Lance say he likes steak, I see a Outback Steakhouse card, and bam! Before you can say "Impulse Purchase" I now have an instant gift! Sure, it's not as fulfilling as, say, a box of prime steaks... but this way you can give him more gift cards! And more is better, right?

But the comedy doesn't end there. Have you ever seen a gift card in a usable denomination? Usually I find cards with a value between $10-50. Can you even get a steak meal for $10 at Outback Steakhouse? (Don't forget to include the State and Federal Wallet Excise Tax.) And I'm not talking about that free bread, either. No, what happens is you end up either leaving a trifling amount of money on the card (Your balance is ... twenty five cents), or you end up wrapping your card in a sizable amount of cash. See how neat this is? I bought a $10 card, and Lance will pay the balance of the meal... AND STILL THANK ME FOR IT!

Retailers make MILLIONS of dollars off the trifling amounts that just sit, unused, on gift cards. And gift cards aren't usable at another store, so if I want to buy a $20 book, but I only have a $10 Half Priced Books gift card (and a $10 Outback Card Lance gave me as a Thank You), I'll use the card + $10. You can almost never just spend what's on the card.

Here's some friendly holiday advice: If you know what your friend wants, buy it for him. If you don't, ask people close to him. Even Aunt Myrtle's sweater contains more holiday cheer value than the sweater's monetary value in McDonalds Gift Cards.

Is there a way out of this trap of value-locked slivers of plastic? Indeed there is! If you wish to transfer value to another person without locking them into one choice, give them... CASH! Yes, greenbacks, bucks, dead presidential portraits, green... whatever you call it, United States Federal Notes are accepted by all retailers, in any denomination. Value not used by one retailer can then be spent at another. This value can also be stored up where it may earn interest and combine with more legal tender until a large item can be bought. The best solution for any gift giving problem where "Gift Cards" are suggested as a solution is CASH, such as when you absolutely can't think up something to buy. And it makes a great stocking stuffer. In Bulk. Hint, hint.

Yes, you in the back? What does this mean for SoftLayer? Just because this is a SoftLayer Blog doesn't mean it has to have a SoftLayer moral! But lucky you... I've got one right here: (this weekend only, special holiday financing available!)

Like Gift Cards, each SoftLayer server comes with a bloc of value attached: bandwidth. This valuable commodity makes the servers work. You can have all the processing power in the world, a RAID 75 array with 100 petabytes of space, 40 terabytes of onboard memory, and if you don't have any bandwidth... it's all moot.

Unlike gift cards, however, SoftLayer attaches some real value you can actually use. For many users, even touching the top of the 2 Terabyte bandwidth pipe is a real exercise.

However, sometimes, like gift cards, a customer buys a server with value attached... but simply cannot use it all. Or they put the server 100% on the private network and never use the bandwidth at all (Like that $20 gift card from Sludge Emporium your Granddad gave you last year). Is there any way to salvage this value?

Indeed! The SoftLayer Secret Labs rolled out a new feature a while back: Virtual Dedicated Racks. These VDR's (as we cool SoftLayer Secret Lab Technicians like to call them, because TLAs are cool) allow you to virtually rack a group of servers behind a virtual bandwidth meter. All the attached bandwidth value of those servers are lumped together, like a good 'ol pile o' cash, and the aggregate amount attached to the rack. An example:

Each server comes with 2T bandwidth (generally).

Without VDRs, if server bassomatic.76.example.com only uses 1T of bandwidth, and server auntmyrtle.sweaters.example.com uses up 3T, you end up with a full 1T overage on Aunt Myrtle's site, even though you have a full 1T worth of value on the other server not being used!

With VDRs, the two servers pile their value together, making a 4T rack. Bassomatic.76.example.com uses 3T this month, while Aunt Myrtle's site only uses 1T. Combined, their "rack" uses 4T of 4T, so 4-4 = 0!

Like cash, but unlike gift cards, with VDRs you are able to pool your value to allow the usage of more value at one time. Now how awesome is that?

If you would like to experience the excitement of pooling your bandwidth, talk to your SPS (as we cool SoftLayer Secret Lab Technicians like to call our SoftLayer Professional SLalespersons, because an acronym is still a cool TLA as long as only three letters are capitalized), and get yourself a Virtual Dedicated Rack (make sure to call it a "VDR" when you order it to sound cool).

And let 'em know this post by Shawn got you interested. If I get enough referrals, I'll get the December SoftLayer Referral Outback Steakhouse Gift Card!

-Zoey

Categories: 
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: 
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: 
September 27, 2007

Who Counts Your Beans?

Just like any company, the search for ways to increase revenues and lower costs to make more money never ends. In the increasingly competitive hosting environment, raising prices is rarely an option but finding ways to cut costs while making the experience better for the customer can and must be done on an ongoing basis.

We have achieved some success to date with the provisioning of nearly 10,000 servers; however, the end game is far greater as the ultimate goal is to become a multi-national corporation serving markets all around the world. In the hosting space, you don't really have a choice, you either innovate and get bigger or you get out. The complexities are just too great to have the luxury of maintaining the status quo. The technology landscape is littered with companies that started reading their own press clippings and got fat, dumb and lazy. And keep in mind that copying your competitors only delays the inevitable; the "me-too" companies eventually go away. In the technology world, you must innovate and push the envelope to survive.

While we are constantly looking for new and better ways to serve the customer, a great deal of time is spent improving internal reporting systems. I work with a management team that understands the importance of budgeting and tracking various financial and operational metrics. To that end, we have made a substantial commitment in systems and people to gather data to help make the best decisions for us and most importantly, for our customers.

I would love to reveal all the data we have at our fingertips but for competitive reasons, I don't want to give away too much but let me leave you with this tidbit: I wonder how many of our competitors' CEOs can, from his/her desktop, drill down to any one of 10,000 servers in multiple data centers and know exactly how profitable each individual server is with the click of a mouse.

The best companies in the world are all supported by world-class accounting and finance departments providing pertinent financial and operational data to all its stakeholders. The right information gives you a tremendous advantage over your competition.

Find someone good to count and analyze your beans. Wal-Mart did and turned the world of retail on its head. With a little luck, we might be able to do the same to hosting.

-Mike

July 20, 2007

Your Hosting Dollar

During some recent weekend R&R, my family and I saw a "human statue" street performer. He looked as if he'd been spray-painted gold – clothes, skin and all. He had a bucket out for "donations" and there was a healthy crowd watching. Parents would give dollar bills for their kids to put in the bucket. For each dollar, he'd do robotic movements and noise for 5 to 10 seconds and then return to statue status. After a few seconds, another dollar would go in the bucket and the cycle would repeat.

My son, a budding numbers-geek, said "Wow Dad, he makes pretty good money. I'll bet it’s $50 an hour." Being a full-fledged numbers geek, I said "By my calculations, it's more like $70 per hour".

This got me to thinking. What do we provide our customers for $1 of hosting fees? So I figured it out for our most popularly sold hosting offering. This is not $1 per line item below; it’s $1 for the whole package below.

  • 272,232,402,234,637 operations performed by the CPU at 50% utilization
  • 12 megabytes of RAM
  • 1.4 gigabytes of hard drive space
  • An Operating System to make it all happen
  • 45 seconds of technical support
  • 5,538,770,949,720,670,000,000,000 electrons (in the form of electricity)
  • 10,909 average sized packets of public transfer
  • Up to 37,973,200 average sized packets of private network transfer
  • All numbers are approximate. Nonetheless, be sure to make use of your hosting dollars here at SoftLayer!

    -Gary

Categories: 
July 9, 2007

Profit: A "Win-Win" Arrangement

Remember the "low-carb" diet craze a few years back? Some members of my family jumped on the bandwagon and I can remember seeing a lot of low-carb items in stores; low-carb milk, pasta, bread, chocolate, etc. Today you just don’t see as many of these products anymore. Look at the dates of the articles above and try finding some of the products in the links above – they’re long gone.

Why? Assuming these products really worked as advertised, when the low-carb craze was over, the cost of producing these products became higher than the revenue that the market was willing to pay for them. Maybe the market rejected them because they didn’t work. Whatever the case, mathematically, when costs are higher than revenue, there is no profit. Consequently, companies stopped offering these money-losing products. No profit is a "lose-lose" situation. Neither the companies nor the consumers who want the discontinued products benefit when there’s no profit.

The same goes for the hosting industry. If the cost of providing hardware, software, power, cooling, and bandwidth ever rises higher than what the market demand will pay, this offering will exit the marketplace. Personally I don’t think that will ever happen. Because there is an opportunity for profit in the hosting business, we and other providers will continue to inject our offerings into the marketplace. And due to the cost of these offerings, we won’t be offering dozens of processing cores, unlimited RAM, unlimited bandwidth and multiple terabytes of storage capacity for ten bucks a month.

Thankfully, SoftLayer doesn’t have to deliver all of that to achieve a top notch customer experience (as of yet anyway). But simply providing the list above is only part of the equation. As I mentioned in my last post, treating your customers "right" and building long-term relationships is critical to maximizing profit. Therefore, we do our best to price our offerings at value points that make both our customers and our investors happy. The resulting profit ensures that we continue in business and that we keep our server fleet refreshed. Profit keeps us around and motivates us to provide our customers with an excellent customer experience.

Thus, for SoftLayer and our customers, profit is a "win-win" situation.

-Gary

Categories: 
Subscribe to money