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/

by mariojoze • 15 years ago

63 41 15 years ago

They should make a deal like twitter did early on with NTT or another telecom company for equity in exchange for data centers.

andrewmccall• 15 years ago

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?

brianbreslin2• 15 years ago

Secondary issuance of shares? Or trade options?

rubyrescue• 15 years ago

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...

vidarh• 15 years ago

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.

benpopper2• 15 years ago

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.

Tossrock• 15 years ago

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.

felipemnoa• 15 years ago

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.

bbhacker• 15 years ago

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.

nknight2• 15 years ago

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.

vijayr• 15 years ago

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?

patrickgzill• 15 years ago

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.

ChuckMcM2• 15 years ago

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).

sunchild3• 15 years ago

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!

togasystems• 15 years ago

Who do they host with now?

kerryfalk• 15 years ago

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...

jsiarto• 15 years ago

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...

untog2• 15 years ago

I'm genuinely surprised by this. I always figured that Groupon was an expensive business- but that it was because of their army of sales associates, not because of hosting.

What are they doing that <insert name of successful web company here> isn't?

jpdoctor• 15 years ago

> 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.

tryitnow• 15 years ago

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.

cma• 15 years ago

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?

adaml_623• 15 years ago

If this is true does it imply that upper management took too much money out after the last round of funding?

tomjen3• 15 years ago

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.

richardburton• 15 years ago

They should run a Groupon on data-centers.

bobds• 15 years ago

Joking aside, I think this might be a good idea.

jjoe• 15 years ago

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

pbreit• 15 years ago

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.

chernevik• 15 years ago

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.

AznHisoka• 15 years ago

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?

newman314• 15 years ago

Not trying to be snarky but maybe the founders shouldn't have taken so much off the table in the last funding round.

tocomment• 15 years ago

Why don't they use EC2 instead of building a data center? That way there's no big up-front cost.

untog2• 15 years ago

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.

benpopper2• 15 years ago

Yes, this was the impression I got from my source.

tibbon2• 15 years ago

Maybe they could release some more stock as a 50% off Groupon deal :)

Source: Groupon Doesn’t Have The Cash to Build Its New Data Center

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