Interview: Peter Pathos, President, The Planet

Peter Pathos has guided The Planet Internet Services of Dallas through a period of dynamic growth, posting impressive numbers in the first two months of 2004. Pathos, the company's president, launched The Planet after selling the ISP he founded, National Knowledge Networks, to Verio in 1998. In an interview with Rich Miller, Pathos shares his views about hosting technology, the SCO case, and how security issues will bring about the death of the "mom-and-pop" hosting company.

Q. The Planet has experienced a monthly growth rate of 20-percent plus in both January and February, after selling 1,500 dedicated servers in December. Even by The Planet's standards, this is very strong growth. What's behind these numbers?

A. The Planet created a separate division called Server Matrix in March 2003 to cater to the needs of the entry level server market. Since its creation, Server Matrix has seen growth from 50 servers in the first month to over 2,000 servers sold and provisioned last month. We firmly believe the coupling of enterprise-level managed services with the entry level dedicated server has produced a product unique in the industry.

We expect Server Matrix growth to continue with an average unit deployment of 4,000 units per month by the end of this year. On the enterprise side of the house, The Planet has gone to market with a Total Control server line that encompasses everything needed by the SME enterprise host. Hardware, software, bandwidth, security, backup and managed services are all bundled together with a starting price of $299 - a very aggressive price structure aimed at the SME masses. We are already averaging 300 units per month and expect growth to somewhere around 1,000 units per month by the end of 2004.

Q. In the last two months, more than 37,000 hostnames have moved to The Planet from other hosting companies, a net gain of more 31,500 hostnames. Are you taking any specific steps to market to customers of other providers, or is this all word of mouth?

A. Being an engineer myself, The Planet has always been a very technology driven company. To date, we have taken the monies most companies spend on advertising and invested in our network, datacenter infrastructure and hardware. The result has been the best quality product in the marketplace. Our success is very much driven by word of mouth and viral marketing because we literally spend zero dollars on advertising. We believe having the best technology at the most aggressive price is the key selling point to our customers.

Q. EV1Servers, one of your chief competitors in the dedicated server sector, recently signed an intellectual property license with SCO regarding its Linux servers. What is The Planet's position on the merits of SCO's intellectual property license? What kind of feedback are you hearing from customers regarding recent news developments in the SCO matter?

A. There is obviously a very negative tone surrounding the recent license agreement between SCO and EV1. Robert Marsh and EV1 have been very successful since their inception, and I am certain this was a solid business decision for Robert. Currently, The Planet legal team is reviewing all information regarding the SCO lawsuits and alleged claims of infringement. At this time, The Planet has not entered into an agreement with SCO and does not support the legal stance of SCO. We believe SCO is alienating the open source community along with current and future potential customers.

Q. Texas is home to a significant number of hosting companies posting strong growth. Is this a happy coincidence, or are there reasons for this cluster of large hosting firms in the state?

A. I believe the success of the Texas firms is a result of three factors. First, the big three (The Planet, Rackspace, EV1) all have a long history in the hosting industry going back five-plus years or more. Secondly, location does have a significant but understated role in the Internet world. Texas is positioned centrally in the US, with average ping times around 20ms to both coasts, and the jumping off point of international traffic (San Jose, Virginia). I believe this reduced latency has lead to a distinct competitive advantage within North America and is becoming more recognized internationally. Lastly, the Texas area affords hosting companies relatively low cost datacenters in terms of real estate and cost-effective technical talent as compared to our other hi-tech geographic locations like San Jose and Ashburn.

Q. Last summer you said the Planet was seeking expansion opportunities, but we've yet to see news of any major deals for providers or additional facilities. After all the consolidation in the industry, is it becoming more difficult to find quality acquisitions?

A. The Planet is currently in the process of acquiring additional facilities and we expect to have an announcement in the next 60 days. Historically, we have operated very lean with profitability as the benchmark to success. Datacenter properties are becoming increasingly scarce in the marketplace, but we believe this is due to the consolidation in the marketplace and the rebound of the industry. I firmly believe the Tier 1 datacenter facilities currently on the market will be depleted within 12 months. The opportunity to capitalize on the dot com bust is fading fast.

Q. What's your assessment of the current state of the hosting market? How is it different today than it was a year ago, and how is it likely to be different a year from now?

A. The hosting market is quickly consolidating and the industry is seeing the rise of several large competitive hosting companies (non-telco related). Overall, the hosting market has seen a tremendous rebirth since July of last year with the move to outsourcing and the overall rebound of the economy. We believe hosting will become more of a utility model as companies shift to web-enable all aspects of their infrastructure. The economies of scale, network security, bandwidth quality, and datacenter infrastructure will simply cost too much for the average company to perform in-house. Over the next year, I expect the hosting market to continue to grow beyond analysts' expectations and continue to consolidate among several key hosting players.

Q. The Planet offers customized solutions for many of its customers. Has this become more difficult with the company's recent growth? How do you make this approach scalable?

A. The Planet has two distinct divisions that cater to two distinct segments of the hosting market. Our Server Matrix division targets the entry-level dedicated hosting market with an overlay of automated managed services. As a long time enterprise dedicated host, we sat down and figured out which enterprise quality managed services could be completely automated, and brought those services to the entry level dedicated market. The result is a very aggressive competitive advantage in the entry-level market and a highly scalable product offering. The Planet caters to the SME and large enterprise hosting environment. Our Total Control server line includes a bundled set of products much like our entry level line with additional SLA metrics and more managed services with a monthly commitment in the $249 to $999 price range. These bundled products are highly scalable and fit 90% of the SME needs in terms of hosting. Our full-scale enterprise offerings are still completely customized and we focus on automation as much as possible.

Q. Last year you began emphasizing managed security offerings. Has the recent surge in worms, viruses and other malware had any effect on uptake of those offerings? If so, which services are the best performers?

A. I believe security will cause the death of the mom-and-pop hosting company. Due to the rising threats and more malicious types of attacks, only those larger hosting companies focused on security will succeed. We have spent millions of dollars building an infrastructure that will help us combat against DDOS, Syn Flood, Virus, Worms, and other security threats. We have found no single product will protect against all security threats. We offer the following mix of products and network design to protect our customers.

  • Host Level - Private Vlans, VPNs, antivirus, Intrusion Detection Systems, Tripwire, Event Monitoring, vulnerability assessments, OS hardening, load balancing and Firewalls
  • Access Layer - Netzentry FloodGuard for Network Segment DDOS and Syn Flood Protection
  • Distribution Layer - Cisco Netranger cards in our core Cisco 6500 routers. ISS IDS for global recognition of issues. Netzentry FloodGuard for Global DDS and Syn Flood Protection
  • Border Layer - the use of 6 Juniper routers and 15 GigE connections to 10 different providers.

Q. Conversely, has the jump in malware threats made delivering top-flight security to your customers more difficult than before? Can the same amount of staff handle a growing volume of threats?

A. Security is becoming increasingly important. Our security team has grown from two people in January 2003 to over 20 full-time employees including a 24/7/365 security NOC. While security is still very scalable, the shift of broadband access to end users (home and small business) with little or no security focus has created a ticking time bomb for security threats. We will continue to focus on security in 2004 and we believe it will become one of the greatest barriers to entry in the hosting marketplace.

Q. Pricing and margins are key issues for hosting companies. What's your current take on trends in the price of hosting services, and where they are headed?

A. Pricing became completely irrational in 2002 and early 2003, as evidenced during the last phase of many dying companies. Since that time, pricing has leveled off and I see many prices beginning to shift back up again. Margins are improving over time and we believe they will continue to improve as the cost of technology continues to drop and the market continues to consolidate. The highly competitive hosting market will always keep pricing very affordable while responsible companies will continue to be profitable going forward, maximizing the value to the customer.