IO splits in two, solving an identity crisis

IO Data Centers is splitting into two companies as a way to attract investors and resolve a conflict that may have been holding back its business.

IO has two main businesses today. One part sells collocation services from a network of data centers it operates. The other sells modular hardware and data center infrastructure management software that other companies use in their own data centers.

Going forward, IO will focus on selling the collocation services, while a new company it’s forming, called BaseLayer, will sell the modular hardware and DCIM products, said George Slessman, CEO and cofounder of IO, in an interview.

IO has also scuppered plans for a public offering that it had been planning earlier this year, he said. He believes splitting the company in two will make it more attractive to investors and allow it to thrive as a private company.

IO started out in 2007 selling collocation services from a data center in Phoenix. The colo industry has been expanding as more companies outsource their data center operations, and IO now has five data centers—four in the U.S. and one in Singapore—with a sixth to open in the U.K. next year.

It designed the hardware and DCIM software for use in its own data centers, but since 2012 it’s been selling them to other companies as well. The modules look like shipping containers and are used to quickly expand power, compute and cooling capacity. Because they’re self-contained units, they can also be very energy efficient.

The two sides of the business appear complementary, but lately they’ve been getting in each other’s way. Other colo providers are prime customers for IO’s hardware and DCIM products, but because they compete with its collocation services, some are reluctant to give IO their business, Slessman said. By splitting the company in two, it expects to avoid that conflict.

The move may also help to clear up some confusion in the market. IO has been pushing its DCIM products so hard—promoting them at conferences, for instance—that some customers have wondered if it was getting out of the colo business. That’s not the case at all, Slessman says, pointing to its new U.K. data center as evidence.

But there’s also an investment motive for the break-up. As IO explored going public, it realized it has two very different businesses that appealed to different types of investors. The colo business has steady recurring revenues but requires big up-front capital costs to build new data centers. The products business requires less up-front investment, but the revenue stream is less predictable.

If investors can choose which business they invest in, the thinking goes, more of them will be willing to do so. Whether that turns out to be the case remains to be seen.

As for the IPO, Slessman said he’s simply not interested in it. “The process is very hard for dynamic, younger companies to be successful in,” he said. “It’s much easier for companies with billions in revenue and a visible revenue stream.” He also pointed to strict regulations that public companies have to comply with.

The company now has no plans to go public and probably will remain private for at least two years, he said.

Being private means IO doesn’t publish its financial results, but Slessman said the collocation business has been growing more than 50 percent a year since 2007 and has more than 700 customers. That makes it the second-largest private colo provider after Global Switch, he says—though Global Switch is significantly bigger.

The market for DCIM software is also growing, though not as quickly as some expected. The software can keep track of all the hardware assets in a data center and monitor energy use to help reduce costs. But some companies have found setting up the software to be too complicated, said IDC analyst Jennifer Koppy.

IO isn’t one of the more established players in the DCIM market, but there’s still room for smaller innovators, she said. And BaseLayer will be able to sell its DCIM software along with the hardware modules it manages, which will give it a boost, Koppy said.

IO has already been operating as two companies, and the split will be complete from a legal perspective early next year, Slessman said. He’ll continue to run IO, while Bill Slessman, his brother, who was IO’s CTO and is one of its founders, will be CEO of BaseLayer.

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