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5 Reasons to avoid multi-year colocation contracts

Since its inception in 1998 as SuperFord.org (originally as a place for friends to post information about their vehicles) to the transition to a database-driven online community (in May 2001 re-launched as SuperMotors), SuperMotors has been running on commodity hardware built and funded by us three owners of the business. We were fortunate enough to have the expertise of web development, server building, and FreeBSD administration shared between the three of us. When we eventually outgrew our commercial-grade cable internet service in the early 2000's, we entered the wonderful world of colocation.

In our never-ending quest to drive down operational costs of running a hobby-site-turned-online-business, it was critical for us to find an affordable colocation provider in terms of rack rental fees, bandwidth fees, reliability, and 24/7 data center access.

These reasons for not entering into multi-year hosting contracts are not to do any disservice to our current colocation provider. We have been nothing but happy with the experience. Changes in online business, technology, personal, and professional lives of small business owners are sometimes very unexpected, and it's these changes that we've experienced that I wish to share with you in our 5 reasons to avoid multi-year hosting contracts:

1.) The price of bandwidth continues to drop

This may seem obvious, but it is completely true. Since we began colocating, the competitive landscape has increased many times over. Prices, levels of service, and popularity of colocation and managed hosting have changed significantly. We are nearing the end of a 2-year contract and let me tell you, in March of 2005 when we renewed our contract, it was the best deal at the time. But guess what? It's very expensive compared to what can be had now. We find ourselves today locked into 2005 pricing.
Lesson learned: It may look like a cost-savings at the time to drive down your immediate monthly costs by a few dollars. The money wasted down the road is considerable.

2.) The price of server hardware continues to drop

What seemed like an "investment in the future" in mid-2004 when we built our server, turned out to be anything but. The simple fact is that a server investment is a considerable expense for a small business, especially for a community-driven site that can grow at exponential rates. At the time, 300 GB SATA drives were the biggest, baddest drive you could buy. Today, just over 1 year later, 750 GB drives are coming into the realm of affordability for the common man. We quickly outgrew our server in the course of just 1 year and found ourselves in need to make another significant investment. While still commodity hardware, it does get more expensive to "do it right."

Bound and determined to again "invest in the future," we made a significant investment which would later turn out to be a complete disaster. While not really linked to colocation in any way, this type of situation is a potential risk in any business building their own servers and working with the lowest cost vendor. Hindsight is always 20/20; if I were to do it all over again, we would have purchased a Dell PowerEdge server for considerably more money and just called it a day. However, that would not have saved us from #3.

3.) You WILL outgrow your servers

Unless you have a SAN, which is highly unlikely for a small startup, you will outgrow your storage capacity more and more often. For our business, file storage is a critical component...more so than database performance. We can get away with a fairly light-weight database server due to our database structure and server optimization with FreeBSD and MySQL, but there is no magic to file storage. We just need more. And we need more space ALL THE TIME. This creates a very difficult financial model because it truly is exponential growth. The more users that hop on broadband internet connections, the easier it is for them to post more data. The more digital cameras become affordable, the more pictures they post. The more megapixels digital cameras offer, the larger the file size is that gets posted. Today, with the popularity of video and how easily the average consumer can record video and digitize it on their home computer, this creates an even larger demand for storage.

4.) You WILL outgrow your original bandwidth requirements

When we locked into a 2-year contract in 2005, we were locked into specific Mbps 95th-percentile billing. 95th percentile billing is a great way to control your monthly costs, but is an even better way to choke your growth potential. Community-based sites offering photo, audio, and video hosting like SuperMotors are much better suited for total bandwidth transferred. Furthermore, what we found is that in order to increase our bandwidth, this meant committing to the bandwidth through the end of our contract or signing a new contract (and thus extending the original contract).

Due to the nature of 95th percentile billing, we did cap it. An open 100 mbps connection to the internet on a 95th percentile billing model is a recipe for disaster for a site like ours, financially speaking. A user that posts a link to a video on a popular forum could single-handedly increase monthly hosting costs many times over because of the spike in traffic that their shared video could cause. Under total data transferred, this is a much more manageable billing model for our site.

But back to the bandwidth requirements -- your requirements will surely increase over time. It's better to start low and gradually increase your monthly costs than to commit to where you think you'll be in 2 years just to get the better monthly deal now. You'll spend more money in the long-run by committing early. While there is no guarantee, the trend definitely says bandwidth will continue to drop -- which is another reason to ramp up your bandwidth needs.

5.) These days, managed hosting is completely affordable

Thanks to increased competition, more affordable server hardware, and bandwidth prices dropping, viable companies like Peer1, Rackspace, and INetU have made a business out of providing managed hosting. Through Peer1 managed hosting, we will get 40% more storage space, 4 times the bandwidth (based on our monthly average data transferred), 24x7 managed hosting, a 1-hour hardware replacement Service Level Agreement (SLA), and a 100% network uptime guarantee on the core Peer1 network all for 5% LESS than what we pay for colocation today. This is an incredible change in landscape compared to where we were nearly 2 years ago when we were "planning for the future" with buying and managing our own server hardware and locking into the "affordable" 2-year colocation contract.

Best of all, we no longer have to manage or own any hardware. There are no more sleepless nights wondering if the servers will crash or repairing the servers when they do crash. We can focus 100% on building our online community and sleep peacefully at night knowing we have a solid service level agreement and 24x7 tech support.

We will be committing to a 1-year contract (minimum commitment). At any point in time we can upgrade our servers to support additional storage or processing needs as well as add additional bandwidth on an as-needed basis. This model keeps our operational costs at an all-time low while giving us the flexibility to scale without signficant financial risk (like our CCSI vendor fiasco) and without significant financial/time investment (like purchasing, building, and setting up a server). At the end of 1 year, we can always re-evaluate the competitive landscape to see if it makes sense to move our business elsewhere. Moving an online business from ISP to ISP is certainly no joy-ride, but knowing we have the option puts us in a position of power come time to renegotiate a contract.