Web-Hosting Companies Serve Up Broader Menus

But the industry has undergone radical change with just a few years. Websites have become infinitely larger and more complex--they have added features such as streaming audio and video, animation, forms and e-mail, Java applets and, now, e-commerce.

Thousands of small companies entered that market in the last few years by simply setting up a server and renting an access line, usually just a T1 or integrated services digital network (ISDN) connection. "At its very simple level, anyone can do it," says Sean Brophy, vice president of corporate development for Verio Inc., Englewood, Colo. "But if you put mission-critical applications on it, you want a bulletproof facility, power backup, diverse fiber routes in and out of the data center and backup systems in event of failures. And few companies can offer that service."

Those that can are the top-tier hosting firms, in which there has been a spurt of strong growth and a spate of consolidation that has created several web-hosting super companies. GTE Corp., Stamford, Conn., acquired web pioneer BBN Planet Corp., Cambridge, Mass., now Irving, Texas-based GTE Internetworking, which then also acquired Genuity, also based in Irving. Verio acquired Hiway Technologies, Boca Raton, Fla., to become the industry leader in the number of domain-based websites hosted--more than 160,000.

Rochester, N.Y.-based Frontier Corp. acquired GlobalCenter, Sunnyvale, Calif., now Frontier GlobalCenter, which already had merged with nationwide ISP Primenet. Sage Networks Inc., Cambridge, Mass., funded by a venture capital firm called Charter House Group, New York, made at least 18 acquisitions in 1998.

Among the competitive local exchange carrier (CLEC)-owned hosting companies, Intermedia Communications Inc., Tampa, Fla., bought Digex Inc., Beltsville, Md., while Dallas-based Allegiance Telecom Inc. launched its own in-house web-hosting service that is geared specifically to the needs of its small and medium-sized business clients.

These newly enlarged hosting giants are developing a new kind of hosting business, one that operates at a different scale than the rest of the industry. They manage large websites for multinational corporations that may include mission-critical virtual private networks (VPNs) or e-commerce sites, or consumer services that get huge traffic surges. They are driving the adoption of these new services: today e-commerce and tomorrow online applications.

CLECs and Hosting

Web hosting is part of the comprehensive data services package a CLEC needs to offer, says Henry James, senior analyst at Bear Stearns & Co. Inc., New York. "It is our belief that you need to have this bundled package of telecom and data products in order to be competitive in this market, and that includes standard local telephony and long distance voice, in addition to data and Internet and access to web hosting."

Intermedia is widely considered the leading CLEC in the web-hosting field after its acquisition of high-end provider Digex, the customers of which include American Century Mutual Funds, Anheiser Busch, Ernst & Young LLP, Forbes Inc., J. Crew, Nike Inc. and Standard & Poor's. Digex is one of the companies taking the lead in hosting applications, one of the most promising new services on the web-hosting menu.

Concentric Network, San Jose, Calif., a leading high-end hosting firm, which has customers including Casio Computer Co. Ltd., Hitachi Ltd., PointCast Inc., RealNetworks and 3Com Corp., provides private-label services for Vienna, Va.-based CLEC Teligent. Verio counts a number of CLECs among its 4,000 resellers worldwide.

Allegiance formed its own web-hosting service rather than making an acquisition, in part because the company found the valuations on existing web-hosting properties higher than its internal standards for making a buyout.

CLECs are not a part of the core business of Verio yet, "but we could be a very important part of their offering," Brophy says, "especially those who decide to go with indirect channels and have to win the hearts of those indirect customers. They have to have packages of products to roll out."

Several companies partner with CLECs, offering both co-branded and private-label hosting services that the CLEC can resell as part of its service package. Qwest Communications International Inc., Denver, intends to go after co-branded and private-branded partners, among them CLECs, very aggressively as it rolls out its hosting service in 1999.

A branded web-hosting offering is an important item in a CLEC's menu of services, James says. "Actual ownership perhaps is not necessary, but certainly the ability to private label is. That makes a great deal of sense, particularly if you look at the sweet spot of the market, which is the two thirds of businesses that are small and medium-sized. They are the kind of companies who want to outsource communications and data."

What to Offer

E-commerce is the new Holy Grail of web hosting, as multicasting was a couple of years ago. With e-commerce becoming important not just to large firms but also to small suppliers, companies are developing turnkey packages designed to serve a wide range of businesses.

Concentric, for example, uses Cambridge, Mass.-based Open Market's high-end e-commerce software on UNIX servers for high-volume customers, while other packages run on NT servers for less-demanding websites. The company's biggest packaged service is $375 per month for 10 gigabits of traffic transfer per month.

Verio has tiered its turnkey web-commerce offering from $35 a month for a basic site listing products to $150 a month for a site that includes real-time credit card processing. Companies also are attempting to make it easy for customers to scale from one level to another without completely rewriting a website.

Isabel Wang, co-founder of Washington-based Infotonic, developers of ISPcheck, a searchable database of ISPs and web-hosting firms, says bundling of e-commerce applications with web hosting as well as credit card acceptance has become very widespread among her list members, because those are the most difficult services for a small to medium-sized business to set up for itself. Other features are catalog software to organize merchandise and web-design services.

Meanwhile, VPNs are beginning to draw the attention of both hosting firms and their customers. VPNs allow companies to start using the Internet the way they often use a server on the local area network (LAN) today--as a place to store data or information that everyone can access. So the Internet--or at least their VPN piece of it--becomes an extension of the company's LAN. Encouraging the move are developments such as the next version of Microsoft Office, which will include saving a file to the company's website as one of the Save options, so companies can create their own online repositories of data accessible to the rest of the firm.

"That is definitely the next horizon, to go beyond what are normally 'Net applications to accounting and sales-force automation, and hosting them," says Connie DeWitt, director of marketing for the network application services group at Concentric Networks. "It's very new but lots of companies are developing applications that are designed [to be accessed and used via the Internet] or legacy companies are working on converting their products so they work in a shared server at least an IP (Internet protocol) environment."

Brophy says hosted applications is a natural next step for companies. "Where a server that now sits on a LAN could sit on the Internet. It could be in a data center that companies like us run, and it would be more complex and integrated into the back-office systems. If companies are successful at e-commerce, then they will want it integrated into their billing and accounting systems."

Digex already has unveiled the biggest deal so far in application hosting: a partnership with Sunnyvale, Calif.-based Pandesic, a joint venture of Intel Corp., Santa Clara, Calif., and SAP, Newton Square, Pa., that develops online versions of popular enterprise resource planning (ERP) and other software packages. Digex will provide the hosting component in a complete services package that can include bandwidth and will be sold directly to companies.

Despite that deal, the company feels application hosting "is not there yet," says Bob London, vice president of marketing. Although Digex is hosting as many as 50 Oracle databases, its services do not yet include the typical packaged applications, such as Microsoft Word, bundled with hosting and integration services. The company currently is not seeing a large market for those services, London says, in part because many popular applications have not been adapted for online use yet. "So we decided to form a series of partnerships with companies that already build great web solutions," he says.

Sage Networks already is hosting corporate e-mail/communications applications, such as Lotus Notes and Domino. "We look at that as the model for outsourced hosting, where we provide software and hosting," says Brad Feld, co-founder and co-chairman. "We have the basic platform and any Notes applications that sit on top of that we can provide."

Hosted applications are expected to roll out gradually, not all at once, say industry observers. Already beginning to appear are vertical applications, such as a web-hosting package for the legal community. Second would be desktop products such as Microsoft Word and Project, so companies do not have to administer those applications on their LANs. Last would be ERP applications, such as SAP and Bond.

"We expect significant revenue in 1999" from hosted applications, Brophy says. "But the Big Bang will be in 2001."

Most web-hosting companies have instituted tiered services geared to the various size requirements and the types of services requested by customers. A nearly universal offering is shared vs. dedicated servers. A basic website will share a server with numerous other companies but a more complex site may require its own server, or a customer may request a dedicated server. Some web-hosting companies offer dedicated servers in a variety of sizes.

The leading hosting companies now are building multiple sites nationwide and sometimes internationally, and will replicate sites of customers, as needed, at multiple sites. These not only provide redundancy, but also accelerate website performance by routing a user to the nearest server on the network. Frontier already had a national ISP with its own network of points of presence (POPs) when it acquired GlobalCenter, and now is establishing what it calls "media distribution centers" at strategic locations along the network.

Data centers are highly secure, with stringent fire and electrical backup systems, and also can be used to offer collocation services to companies that want to maintain their own server but may not have a secure facility of their own. Exodus Communications Inc., Santa Clara, Calif., has made collocation a significant part of its hosting business.

Concentric has ratcheted up its high-end service offering with what it calls peak protection, a service that distributes a website to the company's multiple data centers, replicates content and routes traffic intelligently to ensure operation even during unexpected high-volume peaks.

For sites that experience use spikes, such as entertainment web pages, the service could prevent server crashes. Even for low-end users on shared servers, for whom web pages also are becoming mission-critical, the company has built a proprietary system that clusters as many as 10 Sun servers and balances loads as traffic fluctuates.

"There are companies building platforms similar to our shared server platform, a mechanism to control servers and meter the amount of usage," DeWitt says.

While offering web-hosting services now is considered a vital service component for most CLECs, it has not become a bandwidth bonanza for service providers yet. "You could apply the logic that a website may be only small today but it could grow into something like a Yahoo!, but it doesn't work that way," says Matt Parnell, vice president, data product management, Frontier GlobalCenter. "The customers seem to reach an appropriate level for their business needs and, unless they change their requirements, like doing e-commerce online, they all reach a certain static space requirement."

His sentiments are echoed by Tom Lord, chief financial officer, executive vice president and member of the board of Allegiance Telecom, who says that the company expects web hosting to become a large part of its business, but the process will happen gradually over several years.

The fact that web hosting is a growth business only where new services and applications are introduced suggests that development of new service offerings will have to be a prime focus of web-hosting companies in the future, particularly the development of applications that can become as much a part of standard enterprise operations as the telephone.

Spinoffs

Indicative of the development of the hosting industry, Intermedia will sell as much as 49 percent of its Digex web-hosting business in an initial public offering (IPO), essentially spinning off the business, although Intermedia will maintain control.

According to James of Bear Stearns, the spinoff strategy makes sense because financing a major web-hosting business is highly capital-intensive and a spinoff would be able to go after its own funding independently.

Also, James says, Intermedia would "be able to get a better value assigned to what is an attractive and valuable business. If you look into the market at comparables, such as Exodus, they trade from five to 15 times forward revenue in terms of total enterprise value. That would imply very attractive values for Digex, which is going to do from $35 million to $60 million in revenue next year."

James says Intermedia anticipates it will get better recognition of the leverage in its core telecommunications business, which is masked by the heavy startup costs of the hosting business. He says CLECs' telecommunication businesses "are starting to hit stride in revenue and cash flow, and early startup losses by a hosting business as it tries to achieve critical mass tend to have a negative impact on that."

Wang says that another web-hosting company is considering spinning off several different firms, each aimed at a particular segment of the market, from consumers to large VPNs and e-commerce sites. The reason for this is that such specialization would result in lower prices for each market segment.

Another strategy aimed at consumers and home businesses has been to give limited space for domain hosting today for free in the hope that customers will stay with the company as they build out their sites and add services such as hosted applications or e-commerce.

So, while consolidation is the dominant trend in the industry today, and bundled new services such as e-commerce and application hosting are the trends leading to the future, web hosting could in the long run see a turn toward more market specialization with multiple services aimed at a specific populations.

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