Osama Arafat looks back at Q9’s inaugural year

An international law firm has signed up as its latest customer, but the verdict came in months ago: Q9 Networks has survived.

The managed infrastructure provider, based in Toronto, celebrated its first year in business last month. In the meantime, competitors like Bird on a Wire have been acquired by AT&T and Exodus Communications has filed for bankruptcy. Q9, on the other hand, has won customer after customer, from Cadillac Fairview to the Globe and Mail.

On Tuesday Q9 said it had formed an agreement to provide Internet connectivity to more than 700 lawyers at the Toronto offices of Torys. Frank Post, the firm’s manager of network administration, said it chose Q9 because Torys had been unhappy with its former service provider, whom he didn’t name. He said Q9 will reduce the number of “hops” required between different Internet backbones.

“An AT&T could have given us what we had from our previous service provider, but no one could give us what Q9 gave us, which is a connection to all the backbones,” he said. “That pretty much nailed it for them.”

On Wednesday Q9 Network CEO Osama Arafat will be speaking to the York Technology Association’s luncheon series on how to create a successful venture in a down market. Communications & Networking spoke with Arafat on Tuesday to get a preview.

Communications & Networking: A lot of people questioned the viability of the hosting market around the time Q9 entered it. How would you assess things since you started?

Osama Arafat: I think there’s always been doubts about this industry, and the doubts continue. I just got a copy of Web Hosting Magazine, and the cover page says, “The Death of Web Hosting.” (laughs). It’s a black cover, it’s very interesting.

I think our experience has been very different. We believe we provide a very valuable service to our customers, one that basically increases their reliability and performance and cuts down on the cost. For the most part, we’ve proven this to be true, just with all the successes that we’ve had attracting customers and so on . . . it’s a very simple proposition where customers can leverage the infrastructure that they’ve built, where the cost is shared among all the tenants. They can leverage the network that we’ve built.

CN: It’s not like we see a lot of pure-play hosting companies in Canada at the moment, particularly with the financial collapse of Exodus and the purchase of Bird on a Wire by AT&T Canada.

OA: Each one has their own story. Exodus, their pitfall was purely poor financial management more than anything. I think they grew very, very quickly and they have a ton of marquee named customers and so on. Unfortunately, they’ve leveraged their balance sheet with a lot of debt and over-built, and that was their demise, basically. This is not a problem that is fundamental to the business; this is a problem that’s fundamental to the way they ran their business.

CN: True, but when these kind of high-profile failures make headlines, to what extent does that put off other customers who are considering the Web hosting model?

OA: It’s unfortunate to have all this news. Trust me, I wish that Exodus was not in the predicament it’s in, despite the fact that they were a competitor. On the other hand, this is something that we have to work through and educate our customers (about) and basically when we go and pitch them and they bring up those questions, we need to walk them through our balance sheet and our financial situation. Once they see that, their fears go away. It’s just one more obstacle you have to overcome when you’re pitching a customer.

CN: Given the current economic climate and some of the difficult market conditions in the industry, what kind of expectations do you have for new entrants in 2002?

OA: I don’t expect any new entrants. Maybe there might be one or so, but getting capital these days is extremely difficult and this business requires extreme amounts of capital to get into. I think it’s going to be hard for new entrants to start fresh in the next year, at least, because it’s in very short supply at this time.

CN: What kind of advice will you have for the audience tomorrow?

OA: To sum it up in a couple of sentences, my advice is if you want to start a business, you have to look at whether the business works — whether the value proposition works. If it does, then you will succeed and you will find the financing and so on. Don’t be scared by what’s on the covers of magazines or what everyone is saying. At the end of the day, good business plans will see and bad business plans will fail, regardless of the market conditions. We’re seeing exactly the opposite of what we saw a couple of years ago when the market basically invested in everything. And yes, poor business plans got financed, but the businesses went bankrupt.

CN: Has Q9 been at all affected by any changes in spending habits after Sept. 11?

OA: Not really. We’ve seen increased interest in companies that want to have disaster recovery and infrastructure and things along those lines. But that’s always been an interest; the priorities just got raised among the companies. But our proposition is the same: you need the reliable infrastructure for your mission-critical infrastructure.

CN: You’ve enjoyed a lot of customer wins over the first year, but what was the biggest challenge?

OA: It’s a lot of hard work. The biggest challenge has been education, getting more and more customers to look at the outsourcing option versus the in-house option. This has always been a challenge and continues to be a challenge.

CN: Sometimes there seems to be a fear of outsourcing in case the customer ever wants to pull their IT infrastructure back in-house later.

OA: This is an area where we struggle to educate. We are a managed infrastructure service provider. We don’t actually manage the customer’s applications. They continue to control that. They think that outsourcing means they hand over the keys and then they’ll have nothing to do with it. There is something between building the reliable H-VAC and network connectivity in-house and handing over the keys. There is a middle ground, and it’s called managed network infrastructure. We’re going to provide the platform, not the application. We’ve had quite a bit of criticism in that the trend is to manage the application, but we understand the customer has to look at their core competency, and the platform is not their core competency. With TD Securities, for example, financial applications are their core competency, the platform is not. I think we are a very happy medium between handing over the keys a la IBM and EDS, and the other extreme, which is that you deal with backup power and connectivity and all that stuff.

CN: Any particular goals for the company’s second year?

OA: We want to open up a data centre in Ottawa and Calgary. We’re working very hard at that. We should have Calgary open in the spring and Ottawa to follow that.

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