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Software // Enterprise Applications
02:07 PM
David Ewalt
David Ewalt

Web Hosting Rises From Ashes

Service providers finally are beginning to see signs of growth as businesses outsource web sites to save costs and refocus staff on more important tasks

Web-hosting companies were among the market segments that benefited the most from the Internet boom. But of all the industries that took a beating in the dot-com collapse, few fared worse than Web-hosting providers.

In the '90s, service providers spent hundreds of millions of dollars to build state-of-the-art hosting facilities, and they offered bargain-priced services because they believed that demand for their offerings would grow by fourfold each year. They apparently believed that all of those Internet startups would prosper and require ever-increasing bandwidth. That, of course, turned out not to be the case, and hosting providers were left hanging when new customers didn't show up and existing customers went out of business.

The hosting shakeout was brutal. Some companies went out of business. Others underwent massive restructuring and layoffs. Even the largest and most financially secure outsourcers made changes to their hosting operations. And some telecommunications companies that had big hosting arms gained the distinction of being among the decade's biggest corporate-fraud cases.

"Everyone drank the Kool-Aid that the market was going to grow 300% to 400%, and then they sat there with unused data space and employees," Gartner analyst Ted Chamberlin says. "It was kind of a Darwinistic cleaning of the market."

But just as the tech industry is finally getting back on its feet, so Web-hosting providers are rising from the ashes. They've learned to provide products for larger companies rather than risky startups and are designing new services to increase revenue.

Mike Caspar, chief technology officer of GolfServ Inc. Photo by Chris Lake.

Hosting companies save GolfServ money because it doesn't have to buy servers or worry about bandwidth for the sites it runs for 200 clients, CTO Caspar says.
"They're going after more established companies," says Mike Caspar, chief technology officer of GolfServ Inc., which produces and manages golfing-related Web sites. "They've been forced to provide more enterprise-level solutions."

"I call this the hangover phase," analyst Chamberlin says. "For the first time in a very long time, we're seeing some expansion." Gartner estimates that the U.S. Web-hosting market, which brought in about $5.5 billion in revenue in 2002, will surge to $17.8 billion in 2007.

Leading the new wave of providers are two technology-services companies, EDS and IBM, both of which offer hosting as one of their many services. A number of telecommunications companies, including AT&T, BellSouth, and Sprint, see hosting as a way to add value to their existing IP networks. Other telecom companies have hosting subsidiaries, such as MCI's Digex and NTT Communication's Verio. Transport companies like Cable & Wireless plc are in the market, too. There are even a couple of big pure-play hosting companies, such as NaviSite Inc. and Rackspace Managed Hosting, that have survived the dark years.

That's a far cry from the dozens of big Web-hosting players fighting for space just four years ago, though it's still a pretty healthy competitive landscape. But how are these big names managing to stay alive?

For one thing, a cutback in IT spending and staffing has boosted demand for Web hosting. "There are a good amount of enterprises out there who don't have the people, the processes, or the infrastructure to host a Web site," Gartner's Chamberlin says. "Businesses would rather put IT people on key functions that develop the business."

That's certainly true in the case of GolfServ. Since it manages the golfing-related Web sites for more than 200 clients, including America Online, CNNsi, Fox Sports, and NBC, GolfServ has plenty to worry about in terms of just making the Web sites work. "We're software people," Caspar says. "We build the apps, we handle everything from the front end. But [hosting] isn't really where our expertise is." Besides, he says he doesn't have a big enough budget to build the sort of systems needed to support 200 different sites.

"In order for us to hire a team and build the infrastructure here, it would be very expensive," Caspar says. "We could buy a couple of servers and that wouldn't cost that much, but then we'd have to build a server room, raise the floors, have it temperature controlled, get a redundant T1, hire a support team

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