Greetings:

This is Peter from our team. One of my hobbies is trying to understand business models from a financial end.

I recently read a post on WHT - http://www.webhostingtalk.com/showthread.php?s=&threadid=59837 -- that caught my eye because we've been checking out Dell PowerEdge's.

The 1650 configuration runs $3,371 direct from Dell not including sales tax and shipping (price out at http://www.dell.com/us/en/bsd/products/series_pedge_rkopt_servers.htm).

320 GB of data traffic per month roughly translates to 1 MBs which runs around $750 per month in our net of the woods for a multi-homed provider (DS-3's off an OC3 and OC12).

I'm told Rackspace.com and NTT/Verio look for break even on the equipment within 6 to 12 months which means they would rent / lease out the equipment mentioned here for $281 to $562 per month (bandwidth not included).

So I'm having trouble understanding the business model behind under $500 per month pricing when the bandwidth is most likely higher than $500 (our area is $750) per month and the equipment being paid off within a reasonable time frame would rund $281 to $562 per month.

Furthermore, who is covering the insurance on the equipment? Usually it is the dedicated server provider. What's that run in the equation?

Is there a monthly, quarterly, or yearly allowance for spare parts in the picture? What about the labor required to replace parts that have gone bad (hard drives often are the 1st to go)?

If it is Dell's warranty program, then I guess the server is down for 4+ hours. Correct?

Important: this is not about cutting down any providers or lifting any up.

I'm just curious as to the math behind the numbers that leads to a fair profit. What's the innards of the financial part of the business model look like?

For instance:

$3,371 / 12 month break even on equipment = $281 per month.

1 MBs of bandwith (approximately 320 GB per month) = $750 per month.

Spare parts on hand so you don't have to wait 4+ hours for a fix may run you $500 (memory, hard drive, ?) which spread out over a year runs $42 per month.

Insurance on the low end might run $5 per month.

Fair profit would be ___ per month?

Total: $281 + $750 + $42 + $5 + $___ (fair profit) = $1,078 + fair profit figure.

So what must change in the math in order to be able to do it for less than $500 per month?

Or is bandwidth being oversold? Plus taking break-even out to 48 months or 60? Plus what else?

Please help me understand how the internal business model of this type of offering works.

Thank you.

the bandwith offered on that thread is mosly cogent which you can get for only $40/mbps (not $750). The thread starter does mention about Level3 as backup (notBGP4), but then you can get Level3 at around $180/mbps and again, not $750/mbps. $750/mbps is a bit crazy nowadays, I can even get InterNAP bandwith with BGP4 setup to nine tier one major backbone providers (none cogent) much lower than that.

And besides, one can order that Dell with the basic configuration and add the 2nd CPU and memory for much less (probabyl only 25% of the cost Dell offers on their web), though this may void any warranty on the server.

Greetings FHDave:

Thank you for your reply.

Rackspace.com charges $864 per Mbs when purchased in volume.

NTT/Verio charges around $800 per Mbs.

We thought we were doing well by getting $750 per Mbs (Cable & Wireless and UUNet).

Is there a reason why Rackspace.com charges $864 per MBs and Verio $800? Is the bandwdith of theirs that much better?


Thank you.

Dell's upgrades are expensive. Ever price out a server and look at the prices for upgrades? They're obscene. I can remember times where I saw that you can put a second processor into the 1650 for $499 or $599. What the heck!? Best thing to do is buy base configurations and do your own upgrades. That $3.3k quickly turns into $2k.

Also, you can lease equipment for 36-48 months and lower your monthly costs significantly. At the end of the lease term, send back the machine and get a newer, faster, better one for the same price and resell that to customers. Or you can keep the machine and give your business an asset. :)

As for the bandwidth, you can get 1mbps anywhere from $30 to $500 easily, depending on data center and carriers. Rackspace is known for their high prices, but they are also known for their superior uptime and support.

Greetings allera:

So the higher prices of bandwidth from Rackspace.com are justified?

If you lease the equipment out 36 to 48 months (which can bring the monthly cost under $100 per month depending on the configuration), is the client locked into 36 to 48 months?

Or do you go with a one-year contract and hope the client remains for 3 to 4 years?

Also, is the price of insurance, spare parts, and labor for doing repairs included in the pricing model?

Thank you.

Personally, I think RackSpace charges too much. You can get better deals with similar service elsewhere. But they do have exceptional uptime and exceptional service and support, and those with lots and lots of money (big corps) won't care about the monetary differences.

If the customer cancels, just hope that you find another customer within 30 days so you're not out any money. :)

The price of spare parts, insurance, and labor costs can be incorporated into your monthly price for the server.

Big Ol' Rule of Thumb: don't use WHT to gauge the industry. Personally, I don't know how the majority of the hosts here are doing it for the prices they charge. It's been discussed over and over. Some hosts fail, some seem to succeed.

I am ignorant of the details given, but believe the idea of optimal decision making should be mentioned.

To optimize a decision, business or otherwise, a distinction must be made between marginal and sunk costs. All decisions should be made "at the margin".

Sunk costs are those that will not change based upon the decision, (including inaction) and are therefore irrelevant.

So it's not about making a profit or about total costs, only doing the best under the given circumstances. What you have invested in a product or service can be totally independent of what the market will pay for it. Whether the business in question used this method or used it properly is of course unknown to us.

I am a former IT Manager at Fairmont Hotels, and of course we need to have 7x24x365 servers with 0 downtime and this is how we did it:
Each server had 6 drives - two were mirrored 18GB Operating System drives (only held the os, nothing else), three were configured as RAID 5 (i.e. 3x36GB drives= this gives you about 50-60GB of available data space), plus one drive that was a standby replacement drive (your server needs to have a special RAID card for this feature). On top of all that, we had a second server hardware linked to the first, so if we completely lost the first we would be fine. Plus we had redundant power supplies and nic's in each.

Scenario: You could loose your OS drive, but everything would be ok since you have another "mirrored" drive that takes over immediately (no time loss). You could loose up to two drives in your data array, since a RAID 5 allows you to loose a drive without any downtime (it does slow down while it activates the spare drive and moves data to it). At this time you would call for an on-site warranty replacement. If you loose a second drive before the first is replaced, you are still ok becuase the RAID takes care of ensuring there is no data loss.

Now my suggestion:
Generally, you are most concerned with moving parts (i.e. fan's, hard drives). You should have RAID card that allows for two mirrored drives (min 36GB/ea), redundant power supply. and nic. This way all of these items are on an on-site replacement warranty and it will give you the time needed to get replacements. As far as the location, you need to ensure they have conditioned power, grounded racks, great air conditioning with humidity control and a backup a/c, and sufficient UPS power in case of a power outage.

Hope this helps clarify the hardware stuff.

cheers, Jeff :)

they buy bandwidth in bulk. You will not get a T1 line for $250 per month. Usually, large hosts order a minimum of DS-3 or even Gig-e line and this is how they can get that price..

also, they don't buy servers from Dell, but usually use less expensive local PC supplier that offers better and faster service, for less.... some providers even build servers themself

I can get a t1 here installed at my house for $250 a month (No BS)
However the 2.5k Install fee is what keeps me at bay :rolleyes:
And yes Build Your own Server..
I can build a
Dual p3 1.x ghz on a asus/soyo MB w On-Board ultra 160 SCSI
1gig Ram
2x 18gig 10k RPM SCSI drives
Dual 3com NIC's
Dual 300-400Watt PS's
etc etc etc
Odd top my head prices I'm lookin at around 1500$ per server
So thats around 125$ a mnth needed to make just to cover server in 1 yr.
Not inculding any Co-Lo cost(s)...

yes, but with one T1 you do not get redundancy. Don't forget about the routers and local loop etc.....

LOL to even have a thought I would actually try to run a hosting biz outta my house... ;)
I'm tryin to make it not be around for 6weeks :D

Just a small comment on a post earlier in the thread. I personally manage several circuits for a couple of datacenters. The cost of the C&W and UUnet circuits is worth the money, but only to a certain extent. I personally use them because we offer colocation services and this is an important aspect in attracting customers. For most web hosting companies the difference between circuits is negligable unless you are talking about a Cogent type circuit. When it is too cheap, beware. Just like everything else, you get what you pay for. One more thing, don't underestimate the cost of the local loops.

-Robert

Robert, good you mention the local loop.
I wonder how much more EzSnake would end up paying, local loop included.

Where in the world does verio charge $800 Mbps? I've seen T1s from them at $225 ( Not including loop ) And they go way cheaper as you buy in bulk. BW Pricing is very cheap. Ive even heard of worldcom (uunet ) selling bw at around $50Mbps ( On large commits )

Originally posted by Tetraboy
Ive even heard of worldcom (uunet ) selling bw at around $50Mbps ( On large commits )

Given their current status I dont think their prices matter right now, its obvious those prices weren't doing the trick.

Verio you can get less than $65 per MBps at a gigE commit.

$750/MBps is absurd IMHO. I can get InterNAP less than half that. Which has proven to me to be the best bandwidth provider for my needs. But that's me. I don't see how anybody would make money off paying $750/MBps.

Rackspace.com may be a excellent provider, but I think you can get the same quality of service and bandwidth through a few select other providers for a resonable price.

But that's just my XXXX per month.

As far as Verio is concerned, they have offered an full rate OC3 for 11k here, but once again that doesn't include the loop. As far as loop prices go, it depends on your distance from their serving location. For an OC3 I would expect to pay between 4k and 6k, for a T1 you can get loops as low as $125. Its all about location, location, location...;)

-Robert

Greetings:

Thank you all for your replies and thoughts.

NTT/Verio charges $100 for every $50 GB when looking at their dedicated servers. I apologize for not being clear of where I got their pricing.

Rackspace.com charges $2.70 to $3.00 per GB which translates to $864 per Mbps.

BTW, how does insurance run these days for insuraning the equipment you co-locate for your customers (dedicated basis; customer required to insure their own equpiment on a pure co-location deal)?

Thank you.

You were asking about under 500$/month insurance and the math behind it, spare parts, etc.

Ordering 500 servers on lease from Dell you will save 30% off the ticket price if you don't haggle. You can probably get 40%, and even defer the first 6 months payment.

This will put your per-server monthly price (6 months defered, 30% off, 2 year lease) at 98$/month including insurance.

Throw in mass-purchased bandwidth for 50$/month, add an extra 50 for "fudge factor" and you have yourself a server for 200$/month which is high-end, has decent bandwidth and which you will make a profit on.

Go with cheaper servers, not so high-end (you can get the 1U's for 900$ if you buy in bulk) and you can easily bring that down to 120$. Get cheaper bandwidth and you can get into the RackShack range of under 100$.

It's all about volume, volume, volume. Sure, 20$/month isn't a great profit margin on 1 server, but on 1,000 servers, and a greater profit margin for the higher end servers?

Actually this one is easy. You just get Arthur Andersen to help you. Take your expenses from the lease and expense it out 100 years. Instead of calling your bandwidth cost an expense you call it an asset. So there you have only minimal expenses. Now anything you charge is profit :-)