Jul, 2001 : Hosting services boom during sagging economy Rawlson King

📅 July 13, 2001 - The sagging economy has benefited the booming hosting services sector. Since more companies are looking to saving money by outsourcing, Web hosting has become one of the fastest growing sectors of the New Economy. With dozens of carriers investing in the rollout of data centers and hundreds of customers sign up with to host their Web site with third-party providers, the Web hosting sector is experiencing an unprecedented boom.
According to IDC (idc.com), U.S. based Web hosting service providers (HSPs) generated nearly $4 billion in revenue in 2000. This represents growth of more than 100 per cent when compared to the hosting sector's revenue in 1999. While IDC predicts that revenue of U.S based Web hosting providers will increase fourteen-fold between 1999 and 2004, other research houses are not much more muted in their predictions.
"Web hosting providers are core infrastructure plays in the Internet andshould be over weighted by investors looking for companies that benefit fromthe overall growth of the Internet," says Michael Bowen, an analyst atDeutsche Banc Alex. "We expect the Web hosting sector as a whole to achieve$19 billion US in revenue per annum by 2003. As more companies move toe-commerce and applications outsourcing, high-speed access and Web hostingservices are becoming essential elements of computing and communications."
Hosting is currently popular with businesses because of the benefits itreaps. Outsourced services such as managed hosting are advantageous becauseit allows enterprises to deploy secure and reliable Web and IP serviceswithout the expense of building the Internet infrastructure in-house. Forthis reason, two-thirds of businesses throughout North America have decidedto outsource their Web services infrastructure to hosting service providers.By so doing, they are able to devote less time and fewer capital and humanresources to managing infrastructure, permitting them to focus on their corecompetencies to weather out the rough economy. This has made Web hostingone of the fastest growing sectors of the telecom economy. While growth intraditional telephony markets, such as equipment manufacturing andlong-distance has stalled, the revenue of the largest participants in theWeb hosting sector continue to grow, despite decreased market capitalizationand reduced revenue growth in other areas of the economy.
WorldCom (worldcom.com) continues to rank as the second-best hosting service provider, with over $240.2 million in revenue in 2000. Two-thirds of WorldCom's U.S. business is made up of enterprise customers, while the other third consists of Internet and application service providers. The company is presently the most dominant provider in the space because of its impending acquisition of complex hosting powerhouse Digex (digex.com).
That company, with 2000 revenue of $168.1 million is noted for its qualitymanaged hosting services. Though the companies are still separated traded,they have begun to leverage each other's resources. The result is thatDigex now has unmitigated access to WorldCom's global IP network, whileWorldCom can utilize Digex's hosting expertise. Further, once the twocompanies merge, WorldCom will acquire Digex's huge managed hosting based,estimated to constitute 70 per cent of the managed hosting marketing inearly 2000.
This places WorldCom at a great advantage, because most research houses arepredicting a decline in co-location services and a concurrent increaseddemand for managed services.
Unfortunately, this creates challenges for Exodus Communications(exodus.com), the top-ranked Web hosting provider. By swallowing GlobalCenter (globalcenter.com), its chief competitor in a $6 billion deal, the company was able to enlarge its customer base to 4,500, housed within 5.1 million square feet in 42 Internet data centers worldwide.
The challenge confronting Exodus however is that revenue is no longer basedon square foot deployed, but on services offered. Exodus will have toreposition its service offerings in order to maintain market dominance inthe long run.
Regardless, all the companies listed above will experience healthy growthdue to the sagging economy. This is because outsourcing is always up duringa down economy. As companies endeavour to shrink expenses and make costsmore predictable, they tend to seek outsourced services. This trend willonly accelerate if US growth continues to be circumscribed.