Source: Groupon Doesn’t Have The Cash to Build Its New Data Center(betabeat.com)
betabeat.com
Source: Groupon Doesn’t Have The Cash to Build Its New Data Center
http://www.betabeat.com/2011/12/19/source-groupon-doesnt-have-the-cash-to-build-its-new-data-center/
16 comments
> What are they doing that <insert name of successful web company here> isn't?
Managing cash apparently. There have been questions about their accounting since the S-1 was filed, which now seem to be even more justified.
Managing cash apparently. There have been questions about their accounting since the S-1 was filed, which now seem to be even more justified.
Actually,I think your initial impression is right. They are are an expensive business because of their army of sales associates. It is precisely because of this expense that they can't afford the technology they would prefer.
I've always wondered why Groupon didn't just provide a platform for well-connected local people to act as completely independent sales reps who work purely on commission. Why bother with actual outright hires? They're most likely going to have to lay a bunch of them off anyways.
I've always wondered why Groupon didn't just provide a platform for well-connected local people to act as completely independent sales reps who work purely on commission. Why bother with actual outright hires? They're most likely going to have to lay a bunch of them off anyways.
What would be their barrier to entry story under this? Why would they need to raise so much capital? How would they scam together an IPO without those two justifications?
This assertion is poorly sourced and sounds like bull. As many have noted, Groupon's processing and bandwidth requirements are relatively low. And are we really to believe "a source familiar with [Groupon's] business"?
ADD: OK, they do send out a lot of emails but even that seems manageable cost-wise with various options short of building your own data center.
ADD: OK, they do send out a lot of emails but even that seems manageable cost-wise with various options short of building your own data center.
Absolutely. It's headlined as if the situation is some kind of financial failure, but there are no numbers on the premium they're currently paying or the cost of a new center. 1/4 of the piece quotes prospectus boilerplate. No named attributions, nothing from analyst types following the industry.
Not even clear cash is the key here anyway, I would think they could finance a data center with some kind of construction mortgage, and maybe some leasing deal.
Now, pulling things out of my hat, I understand that companies can fully deduct their IT investments made in 2011, that's a huge tax advantage. I don't even know if Groupon can make use of that (are they paying taxes yet?). But if Groupon is missing that window because they _cannot_ get financing in place, _that_ would be a story, one with implications for Groupon, their model, the banks, and bank valuation of corporate IT capital assets.
This, on the other hand, is not a story of any sort.
Not even clear cash is the key here anyway, I would think they could finance a data center with some kind of construction mortgage, and maybe some leasing deal.
Now, pulling things out of my hat, I understand that companies can fully deduct their IT investments made in 2011, that's a huge tax advantage. I don't even know if Groupon can make use of that (are they paying taxes yet?). But if Groupon is missing that window because they _cannot_ get financing in place, _that_ would be a story, one with implications for Groupon, their model, the banks, and bank valuation of corporate IT capital assets.
This, on the other hand, is not a story of any sort.
this just doesn't make sense to me - why would they need such infrastructure? they can't even have that many daily pageviews; backend deal management and CRM wouldn't require huge scale or datacenters...
Hey - I'm the reporter who wrote this story.
I wrote the headline to make it clear that this was coming from a single source. I am not an expert in hosting or infrastructure.
That being said, there is an interesting discussion going on over at Betabeat. To quote on comment = "At one side is platform as a service or managed platforms on top of EC2 -- Heroku, EngineYard (which Groupon appears to use), etc. These are easy to set up, and have lower overhead for small or medium organizations. They have the highest per-unit cost, but for rapidly growing or small organizations, can be worth it."
I think its fair to say Groupon is a large company and past the point of its most rapid growth. To me that fits with the idea that they are looking to make a transition but have not accomplished it yet, whether that change is moving to EC2 or building their own data center.
I wrote the headline to make it clear that this was coming from a single source. I am not an expert in hosting or infrastructure.
That being said, there is an interesting discussion going on over at Betabeat. To quote on comment = "At one side is platform as a service or managed platforms on top of EC2 -- Heroku, EngineYard (which Groupon appears to use), etc. These are easy to set up, and have lower overhead for small or medium organizations. They have the highest per-unit cost, but for rapidly growing or small organizations, can be worth it."
I think its fair to say Groupon is a large company and past the point of its most rapid growth. To me that fits with the idea that they are looking to make a transition but have not accomplished it yet, whether that change is moving to EC2 or building their own data center.
More importantly, IF they have that many pageviews, it ought to be scaling in proportion to deals with sales of groupons. So either their margins are horrible, or their tech cost per unit sold is horrible, or something else we don't know about is causing the issue.
It could be they're trying to estimate based on handling their growth for the next three years, for example, in which case of course the cost could be horribly out of whack with current revenues.
It could be they're trying to estimate based on handling their growth for the next three years, for example, in which case of course the cost could be horribly out of whack with current revenues.
You might be surprised; I know Alexa isn't exactly an infallible oracle, but they list groupon.com as averaging between the 200th and 400th most visited site globally, and 53rd in the US. "ranking.com", whoever they are, says between 150 and 75. I'd feel confident saying they're at least in the top 500, and that requires a fair bit of horsepower. Now, they could probably solve a lot of their problems with smarter engineering before building a data center, but they certainly have traffic.
Stackoverflow.com has an Alexa ranking of 108 for the world and 165 for the US. Last I heard they were not using that many servers for their site.
They should run a Groupon on data-centers.
Joking aside, I think this might be a good idea.
You don't need to build a whole data center to get wholesale pricing on power and bandwidth. To me this reads like Groupon has thrown the towel and has deemed it OK to throw more hardware at the problem. Perhaps they've come to the conclusion that buying their way out of the suboptimal backend system is much more cost effective than hiring very capable people.
Regards
Regards
Could somebody who has knowledge about data centers make a quick estimation how much such a data center might cost?
I am asking since I am not a data center/architecture expert but the Groupon site should not be that complex from my perspective? Also the content should mostly be static, so caching should solve many problems.
I am asking since I am not a data center/architecture expert but the Groupon site should not be that complex from my perspective? Also the content should mostly be static, so caching should solve many problems.
A rule of thumb is $4000 or $4500 per kilowatt.
So 100KW of power, with N+1 power feeds, generators, full UPS backup system, etc. would cost about $500K to build. Would give you 10 to 20 racks' worth of power.
However, that is too small to be worth it, so they would probably build something quite a bit larger than that.
Figure 200 racks, each with 8KW-10KW per rack, that means 2 megawatts of power, thus 2000 * 4500 = $9 million for the building.
Figure $40K per rack to fill it with hardware (at a low estimate), half full of 100 racks is another $4 million.
Plus they have to manage construction, sign various contracts, pay permit fees, buy land, pay for fiber, etc. At a minimum they would need $20 million all in before serving the first byte of traffic.
All this is my estimate, could be entirely wrong.
So 100KW of power, with N+1 power feeds, generators, full UPS backup system, etc. would cost about $500K to build. Would give you 10 to 20 racks' worth of power.
However, that is too small to be worth it, so they would probably build something quite a bit larger than that.
Figure 200 racks, each with 8KW-10KW per rack, that means 2 megawatts of power, thus 2000 * 4500 = $9 million for the building.
Figure $40K per rack to fill it with hardware (at a low estimate), half full of 100 racks is another $4 million.
Plus they have to manage construction, sign various contracts, pay permit fees, buy land, pay for fiber, etc. At a minimum they would need $20 million all in before serving the first byte of traffic.
All this is my estimate, could be entirely wrong.
Depends on the data center of course.
There are four components to a 'data center':
1) The structure. These can be pretty simple, a concrete slab, then 'tilt up' walls tied together by steel joists. Internal structure is 'UPS area' / 'power ingress/conditioning' / 'data area' / 'office area' / 'fire systems area'. If its mostly data operations the bulk will be the 'data area'. The cost of land figures into it as well but you probably try to build it where land is cheap, connectivity is high, and power is cheap.
2) Power and Cooling infrastructure. This stuff is dictated by both the climate around the data center and the municipality. Santa Clara California used to have a bunch of semiconductor fabrication plants (fabs) which have all since closed. That left them with excess power capacity, so lots of folks are building data centers there to get access to the cheaper power. (land is still expensive). Cooling can be one of a number of forms, evaporative works well in the Bay Area generally.
3) Staff - Generally an electrician, a network guy, a security lead (+ some number of contract security personnel)
4) General 'stuff' associated with building a data center (raised floor tiles, sprinkler systems, power conditioners, big switches, UPSes and their batteries, chillers, more big power switches and transformers, generators (back up power), lights, etc.
I would be surprised if it cost less than $5M to build or more than $15M.
I actually put together a plan for a 'pocket' data center (one that could be put into an urban area easily, 1 - 3MW of power) but not surprisingly cannot find a bank to fund it. (its around $10M all up depending on initial land and fiber costs).
There are four components to a 'data center':
1) The structure. These can be pretty simple, a concrete slab, then 'tilt up' walls tied together by steel joists. Internal structure is 'UPS area' / 'power ingress/conditioning' / 'data area' / 'office area' / 'fire systems area'. If its mostly data operations the bulk will be the 'data area'. The cost of land figures into it as well but you probably try to build it where land is cheap, connectivity is high, and power is cheap.
2) Power and Cooling infrastructure. This stuff is dictated by both the climate around the data center and the municipality. Santa Clara California used to have a bunch of semiconductor fabrication plants (fabs) which have all since closed. That left them with excess power capacity, so lots of folks are building data centers there to get access to the cheaper power. (land is still expensive). Cooling can be one of a number of forms, evaporative works well in the Bay Area generally.
3) Staff - Generally an electrician, a network guy, a security lead (+ some number of contract security personnel)
4) General 'stuff' associated with building a data center (raised floor tiles, sprinkler systems, power conditioners, big switches, UPSes and their batteries, chillers, more big power switches and transformers, generators (back up power), lights, etc.
I would be surprised if it cost less than $5M to build or more than $15M.
I actually put together a plan for a 'pocket' data center (one that could be put into an urban area easily, 1 - 3MW of power) but not surprisingly cannot find a bank to fund it. (its around $10M all up depending on initial land and fiber costs).
I was talking to a guy who owns a warehouse in Brooklyn a few weeks back. He said he was turning a relatively small part of it (a few thousand square feet, if I recall) into a residence, and leasing the rest. He started complaining about his prospective tenants, so I, sort of jokingly, suggested he build a small data center, since the lease revenue would be much better, even if the costs rise as well. Too bad you weren't there to close the deal!
Heh, timing is everything I guess.
So one 'take' on the cloud meme is public utility compute. I have never been a big fan, but have found the success of EC2 and its equivalents to be reason to doubt my doubt :-)
Back in the way back times the high school I went to shared a mainframe (a Univac) with all the other schools. They used it teach programming and to run various bits of accounting and grading and such. That installation could be an EC2 cluster now. (it isn't but the same reasoning for a shared mainframe would apply to sharing the districts computing tasks into a web2 style cluster.) Every time all the machines get stolen out of a school I think "Gee if they were just terminals and useless without the cluster, they would not be as tasty a target."
Still, not a fan, but like I said the ability to drop in a data center near the center of things in an friendly way, seems like a Useful Thing.
So one 'take' on the cloud meme is public utility compute. I have never been a big fan, but have found the success of EC2 and its equivalents to be reason to doubt my doubt :-)
Back in the way back times the high school I went to shared a mainframe (a Univac) with all the other schools. They used it teach programming and to run various bits of accounting and grading and such. That installation could be an EC2 cluster now. (it isn't but the same reasoning for a shared mainframe would apply to sharing the districts computing tasks into a web2 style cluster.) Every time all the machines get stolen out of a school I think "Gee if they were just terminals and useless without the cluster, they would not be as tasty a target."
Still, not a fan, but like I said the ability to drop in a data center near the center of things in an friendly way, seems like a Useful Thing.
I think the target market in Brooklyn is leasing backup/DR cages for big banks.
I have absolutely no idea what Groupon's load actually looks like, but as for actual datacenter cost, $1,000/sqft would be a starting minimum, and that's for a decent sized datacenter where some economies of scale kick in. Google supposedly spends as much as $3000.
One of the smaller datacenters I've ever been in was around 20-30,000 square feet. Replicating it probably would have cost closer to $3000/sqft than $1000, so you're probably talking about $40 million minimum.
One of the smaller datacenters I've ever been in was around 20-30,000 square feet. Replicating it probably would have cost closer to $3000/sqft than $1000, so you're probably talking about $40 million minimum.
The article says they raised 700M. Even if costs them 100M to build a data center, they can't use 1/7th of the money they raised, to build one? How exactly are they spending that much money?
A reasonable question to which I have no clear answer, but this is the company that tried to turn a $420 million operating loss for 2010 into a $60 million operating income by amortizing their marketing and acquisition costs. Perhaps they're still bleeding money on such costs?
Rather than handling website load, which should be trivial for a site like Groupon.. Perhaps they outsource sending of emails to someplace like SendGrid or Constant Contact, and want to build infrastructure to do it all themselves?
If this is true does it imply that upper management took too much money out after the last round of funding?
Not trying to be snarky but maybe the founders shouldn't have taken so much off the table in the last funding round.
They should make a deal like twitter did early on with NTT or another telecom company for equity in exchange for data centers.
Are they allowed to do this as a public company? Would their growth be attractive enough for someone to take them up on the offer?
Secondary issuance of shares? Or trade options?
That is as it should be. When you are making a new start up the way Groupon is you should be looking at a much higher ROI than the price of borrowing money, so you should throw as much money on growing fast as possible.
Why don't they use EC2 instead of building a data center? That way there's no big up-front cost.
Don't they already use EC2?
It isn't the answer to everything. In fact, it's the answer to far fewer things than people think. EC2 is great because, as you say, it has no big up-front cost. But when you start scaling it isn't actually very affordable.
It isn't the answer to everything. In fact, it's the answer to far fewer things than people think. EC2 is great because, as you say, it has no big up-front cost. But when you start scaling it isn't actually very affordable.
Yes, this was the impression I got from my source.
Maybe they could release some more stock as a 50% off Groupon deal :)
Who do they host with now?
A recent blog post by Engine Yard claims that they host Groupon's site right now.
http://www.engineyard.com/blog/2011/groupon-makes-history-in...
http://www.engineyard.com/blog/2011/groupon-makes-history-in...
Completely off-topic here, but the coffee house mentioned in this Engine Yard article (Intelligentsia) is really the best coffee in Chicago--if not the US.
Also, there is no way that Groupon needs a data center--how can they be spending millions on hosting each month? Something doesn't add up...
Also, there is no way that Groupon needs a data center--how can they be spending millions on hosting each month? Something doesn't add up...
Intelligentsia's pretty good, but they're going to have to arm-wrestle Ritual for the title "best in the US". ;)
Engineyard + support is pretty expensive.
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What are they doing that <insert name of successful web company here> isn't?