This is actually an interesting question that someone asked me the other day. Colocation services, just like any telecom service, are residual in nature. This means the provider has a pretty steady stream of revenue coming in, baring any major disaster.
So how does your run of the mill colocation provider go under? Simple. Lines of credit. Lines of credit can single handedly destroy a business. Why? Because people use them like loans. A loan has a fixed term. A line of credit does not. In fact, a line of credit can be called at anytime and once called you usually have 90 days to make full payment or the bank will seize assets.
During the boom years of our wonderful financial system, business were getting insanely high lines of credit. For example, $200,000 with an interest only payment of 3 percent or even less. Some colocation providers used these lines of credit to expand. Expansion costs included staff, new equipment, advertising, and other things. When the financial crisis hit, many of these lines of credit were called, instantly putting those companies into the red – forcing bankrupcy and liquidation of assets.
There is not a decline in people who require datacenter services in our current recession. The providers that have gone under mostly did so because of poor financial management.