Posted: 07/2000

Webmaking is ‘Sticky’ Business
By Aldo Morri

In many respects web hosting is the platform or foundation of the new Internet economy. Websites are today’s new storefronts; clusters of servers–web hosts–are replacing the brick-and-mortar facilities that defined businesses in the past.

As a result, businesses are compelled to seek out providers of web hosting and design–elements required for even the most minimal web presence–to both implement and manage their websites. In response, the web-hosting services market is growing at a furious pace. Revenues of U.S.-based
web-hosting companies grew by almost $1 billion in 1999, bringing them to more than $1.8 billion, according to International Data Corp.
(www.idc.com). The research firm projects the web-hosting market to increase by a factor of 10 through 2003, when it will total $18.9 billion.

For telecommunications service providers, web hosting and design are a natural extension of their Internet access
services, especially as high-speed access becomes more common. In fact, many carriers have been offering web-hosting services for some time. But its scope and scale have undergone considerable change, making what was a minor add-on to a core service central to their customers’ e-business strategy.

“Just a few years ago, web hosting implied a simple static website on a single dedicated or shared server,” says Courtney Munroe,
director of IDC’s Business Network Services unit. “Today, a single website may comprise dozens of clustered servers operating as one or more domains and supporting several applications or business process and often drawing on resources hosted in other locations.”

Commodity Concerns

Contrary to widespread belief, web hosting is not simply a fast-growing commodity business. Of course, there are certain elements that will be standard among vendors, e.g., that they are housed on reliable real estate or that proper air conditioning protects the servers. But web hosting is much more than that.

Chart: Web Solutions Hosters Carry the Day

“There is a significant amount of differentiation between [web-hosting] providers in terms of the method and skill in which they provide the management services that go with web hosting,” says Lydia Leong, Dataquest Inc.’s (http:gartner4.gartnerweb.com/dq) principal analyst for e-ISP strategies.

Roughly, these services can be broken down into monitoring of servers, the level of service agreement, and the type of consulting and professional services provided.

Pinpointing Partners

The increasing complexity of the web-hosting business has made it big business for big players in the IT, ISP and telco space. A slew of telecommunications providers has explored ways to get into the web-hosting space. Following the lead of ISPs, most
RBOCs, for instance, have tried to develop web-hosting capabilities themselves, so far with limited success.

“I have not seen any of the RBOCs that have tried to get into web hosting be particularly successful at it,” says Dataquest’s Leong. “There is a significant difference in the expertise needed to run a network and successfully managing a datacenter.”

Despite this track record, some
competitive carriers, like Atlanta, Ga.,-based ITC^DeltaCom Inc. (www.itcdeltacom.com), will pursue organic development of such
services. ITC^DeltaCom, a provider in the southern United States, expects to invest approximately $250 million during the next 36 months to fund the development of its web-hosting subsidiary,
e^DeltaCom. The venture will enable ITC^DeltaCom to extend and enhance its data and Internet access products to provide customers with collocation and web server hosting services, the company says.

More commonly, carriers are choosing to acquire or partner with web-hosting
specialists. Among the more forward-thinking competitors, Frontier Communications
(now Global Crossing Inc., www.globalcrossing.com) and Intermedia Communications Inc.
(www.intermedia.com) may have paved the way when they bought their way into the web-hosting market several years ago with their respective purchases of GlobalCenter
(www.globalcenter.com) and Digex Inc.
(www.digex.com).

Moving forward with a similar strategy, Bell Atlantic Corp.
(www.bell-atl.com) last month announced a $25 million investment in Interland Inc.
(www.interland.net), which provides turnkey web and application hosting solutions for small- and medium-sized businesses.

“Web hosting and design was a logical next step for us,” says John Baker, director for Internet Business Development at Bell Atlantic. “We see huge demand in the small-business market over the coming months.”

Interland is one of the five or six larger companies in the small and medium-sized web-hosting and design market where
thousands of companies compete for business. Other large players in the space include Verio
(www.verio.com), EarthLink Inc. (www.earthlink.com) and Concentric Network Corp.
(www.concentric.com).

Like other RBOCs, Bell Atlantic got its feet wet in web hosting by trying to develop the capability in house. Bell Atlantic had begun offering web hosting and related
services through its Web-at-Once program operated by its directory business.

“We are trying to broaden our reach
outside of what is essentially a niche focus with Web-at-Once,” says Baker.

Bell Atlantic says it will continue to be active in seeking partnerships and alliances in those areas–like web hosting–that can complement its high-speed Internet access offering. The company is looking for
partners that will complement its expertise in network operations.

“Our focus has clearly been on the
network side rather than the software side,” says Baker. “We are looking for partners that have applications that we can package with our services and deliver to our customers.”

Adding Applications

Access, design and hosting–the services associated with maintaining a basic web
presence–are complemented by customer relationship management (CRM) and transaction processing applications to enable businesses to deliver information, serve their
customers and sell products and services via their websites (see diagram, page 66). More complex applications, such as collaborative communications, human resource management and supply chain management are others that are beginning to be hosted remotely.

Applications delivery is what analysts say will continue to drive alliances such as that announced between Qwest Communications International Inc.
(www.qwest.com) and International Business Machines Corp.
(www.ibm.com). In March, the companies carved a $5 billion agreement to build and run 28 Internet data centers nationwide to provide web-hosting services to U.S. businesses.

Applications and web hosting are two very different kinds of expertise. Applications developers are essentially
traditional software people that have now turned their skills to the web. The data
center people, on the other hand, are systems management experts that come from network engineering or systems administration backgrounds. Partnering of the two
disciplines is the ideal solution.

IBM has the software expertise while Qwest–which will own the data centers–has
the network knowledge.

“Our strategic relationship enables next-generation services for customers by bringing together the industry’s best information technology and services from IBM with one of the world’s best broadband networks,” said Lewis Wilks, Qwest’s president of Internet and multimedia markets division.

IBM’s global services division will receive $2.5 billion over seven years to build and provide support for the data centers. In return, Qwest will receive $2.5 billion from IBM to lease 25 percent of the space in each data center, making the computer giant an anchor tenant. The $2.5 billion also allows IBM to use Qwest’s network.

Analysts say the combination creates a powerful force in the market for web
hosting, with the wherewithal to vie for major contracts. IBM already is a powerhouse in web hosting–its customers for such services already include The New York Stock Exchange
(www.nyse.com) and Macy’s (www.macys.com) department stores, but that the deal gives them more
visibility in the booming market.

“This raises the profile of both companies in regards to web hosting,” says IDC analyst Melanie Posey. “For Qwest, they wanted to build all these data centers, but it is a huge capital investment, which they needed someone to go in with them on.”

New Carriers

Agile new carriers are not content to watch their larger competitors walk away with all the spoils of the growing market for web-hosting services–at least not in the small- and medium-sized business space.

When Choice One Communications
(www.choiceonecom.com), for instance, went public in February, the Rochester, N.Y., company had in mind to use some of the proceeds to enter the web-hosting and design business. It didn’t take long. In March, it acquired EDGENET Inc., a privately held web hosting and web design services company based in nearby Buffalo.

Similarly to Bell Atlantic, the addition of a web-hosting and design firm is a logical extension of the company’s core services, says Steve
Dubnik, chairman and CEO of Choice One. “We already provide high-speed Internet access for our clients. We will now have additional expertise to help businesses design, develop and deploy business strategies on the Internet,” says
Dubnik.

The acquisition will serve as a platform for Choice One to offer a wide range of web-related solutions to Choice One’s mainly small and medium-sized business clientele throughout the Northeast, and soon in Ohio. Along with voice communications,

Choice One already offers clients services such as DSL, T1 and voice-mail products.

“We want to provide total e-commerce and telecom solutions for clients,” says Ythan Lax, Choice One spokesperson. “In addition to just providing the hookup service on the data side, we wanted also to be able to provide the hosting and the opportunity to upgrade clients’ websites.”

Paltry Profits

Despite the scramble to get into the web-hosting space, profits have been hard to come by, providing yet another reason for companies to take a low risk, partnering approach.

On the low end of the market, few
would argue that, in fact, web hosting is a commodity. Some companies even give it away and run their businesses based on
an advertising or professional services referral model. More typically, small and
medium-sized e-commerce packages can run anywhere from $25 to about $400 per month.

At the higher end, however, anybody who needs a reasonable guarantee of
24-hour, 7-day-per-week site availability is looking at a bill of a couple of thousand
dollars per month. Multiple clusters of services and advanced management, architecture design and monitoring for a high-traffic site can run into the millions of dollars.

Nonetheless–like the large e-commerce sites–profits are likely to come only in the distant future for web-hosting companies that must continue to invest revenue into infrastructure development over the next few years to gain market share.

“People believe that there will be money in it at some point,” says Leong. “But, there are no companies in this space right now who have managed to sustain profitability.”

Aldo Morri is a freelance writer based in Washington. He can be reached at
[email protected].