Web Host Land Grab Shows No Signs Of Letting Up
10/30/0 18:31 (New York)
By Bruce Sullivan
Since the NASDAQ's March meltdown, investors have been fleeing from tech stocks like cats from a vacuum cleaner. But amid the great sucking sound on Wall Street, some analysts are telling their clients to buy companies like Exodus [EXDS], Digex [DIGX], Interland [ILND] and other Web hosting firms that keep building more data farms. "This is a promising sector with robust fundamentals," said UBS Warburg's Glenn Waldorf.
One key factor to look at in the Web hosting market is just how much demand there is for new data centers versus the actual supply of climate-controlled, redundantly-powered structures, such as the 160,000 square foot facility recently opened in New York City's "Silicon Alley" by Globix [GBIX].
According to Rick Juarez of Robertson Stephens in San Francisco, who also is bullish on the sector, the demand for hosting capacity greatly exceeds supply and will not dry up any time soon. In his 270-page study on Web hosting and e-commerce, "Virtual Bricks," Juarez estimates demand for hosting space will outstrip supply by two-to-one. "Our confidence in the potential for lucrative returns in the infrastructure sector is bolstered by our research, [which] indicates that available hosting space at the end of 2000 will total approximately 20 [million] to 25 million square feet, whereas demand for hosting space will surpass 50 million square feet," writes Juarez. Waldorf says that the thirst for hosting capacity debunks some critics of the sector, who say there is too much available space and that the Web hosting industry is headed for overkill ala the long-distance telephone business. "We're not in a capacity glut. In fact, we can't build fast enough to meet the demand," says Waldorf.
Industry bellwether Exodus is a good example of how the law of supply and demand, at least as it applies to real estate, is a big factor in Web hosting. The company's spacing needs have more than doubled this year, from approximately 1.7 million square feet to 3.9 million square feet, which was a big factor in its recent acquisition of Global Crossing's [GBLX] hosting division, Global Center, said Waldorf. "It gives them a large, well-known player with good assets," he added.
The Global Center acquisition gives Exodus 16 new data centers in locations like Paris and New York plus, as an added bonus, it eliminates a competitor, which, according to Mike Schiff of Current Analysis puts it in a stronger position for future acquisitions. Schiff says that even if the Web hosting and ASP sectors do eventually reach critical mass with a surplus of data centers, the need for their services will expand proportionately. "Somehow work expands to fill the CPU power allotted to it," he said.
Just as Exodus' takeover of Global Center increases its footprint and advanced skills capacity, Waldorf sees the same kind of synergy in WorldCom's [WCOM] majority stake in Digex, which it will acquire if its planned purchase of Intermedia Communications [ICIX] goes through. WorldCom gives Digex about three million square feet of additional colocation space, said Waldorf, plus WorldCom gets Digex's advanced management services skills. Waldorf predict more acquisitions and consolidation in the Web hosting arena, such as Metromedia Fiber's [MFNX] purchase of SiteSmith, as companies try to achieve scale, increase their footprints and sales forces, and gain new network assets.
"That's the evolution from a simple colocation offering to more managed services," said Waldorf.
(Rick Juarez, Robertson Stephens 415/781-9700; Mike Schiff, Current Analysis, 703/404 4162; Glenn Waldorf, UBS Warburg, 212/821-3368.) |
