Interesting reading:
Web-hosting Becomes a Growth Business (7/30)
By JERRY ACKERMAN
c.1998 The Boston Globe
It was only a matter of time, once interstate highways were built, before
roadside diners gave way to fast-food chains and mom-and-pop motels
were replaced by Holiday Inns, Radissons, and EconoLodges.
And so it is today along the Internet information highway, where a battle is
being waged for market share in a roadside service called hosting - storage
of Web page text and other content for retrieval by computer users at the
click of a mouse.
Along with storage, some hosting companies see the field evolving to include
rental of specialized business software, on a per-use basis, to customers who
need these sophisticated programs but can't afford their upkeep.
The players range from giants - such as International Business Machines
Corp. and GTE Corp., which got into the game last year by buying BBN
Corp. of Cambridge, Mass. - to Sage Networks Inc. a Cambridge start-up
intent on building a national hosting company by buying smaller operators,
and tiny Taylor Group of Bedford, N.H., which is starting from scratch.
The prize is a position in an industry that now has 4,000 to 5,000 hosting
companies, which maintain the computers, called servers, that store Internet
data. While no single hosting company is believed to hold more than 2
percent of the market, these companies had combined sales of $400 million
in 1997, according to Forrester Research Inc. of Cambridge. That number is
expected to reach $1.9 billion in 1999 and $10.5 billion by 2002.
Underlying this rapid growth is the surging interest in on-line shopping.
Electronic commerce last year chalked up more than $20 billion in sales,
two-thirds of that in business-to-business transactions. Forrester figures that
by 2002, this number could reach $350 billion, as existing on-line companies
- ranging from home-based enterprises to pioneering bookseller
Amazon.com - are joined by retailers such as L.L. Bean, Macy's, and Sears,
Roebuck & Co.
Many of the largest of these ''e-commerce'' companies manage their own
servers and networks. But some big players, and most of the small ones,
contract this work to hosting companies.
These often are Internet service providers, many of them local companies
whose primary business is providing dial-up phone connections to the
Internet.
But along with providing connections, they sell service packages that - for an
average fee of $300 to $400 a year and frequently much higher for large
users - store Web pages, execute orders, and provide software to post
purchases to buyers' credit cards while transmitting deposits to sellers' bank
accounts.
Still waiting to be tapped, however, are thousands of firms that have could
sell their products or services over the Internet but haven't tried, and others
that have yet to exploit the World Wide Web's full potential.
Software products are coming out almost daily to ease the way, says Joseph
Barlett, an analyst with Yankee Group in Boston. ''Most companies going
with a hosting provider today are not very sophisticated,'' he observes.
But many that are very savvy are still hiring hosting companies to help
guarantee service quality for both external Internet pages and intranet content
meant only for employees' eyes. Boston Globe Electronic Publishing Co., an
affiliate of the newspaper, uses servers at GTE in Cambridge for its
boston.com on-line service. For example, when a visitor to boston.com
searches for a movie review, he is tapping into GTE's servers for the stored
information. Texas-based J.C. Penney Co. uses another Cambridge Internet
service provider for much of its Web storage.
Forrester says there were 12,000 such ''complex sites'' last year, and
predicts this number will grow to 20,000 by 2002. Many will be managed
in-house, but many more firms will be paying thousands of dollars a year to
hosting companies.
Looking further ahead, the Internet is on the brink of opening up new ways
for companies to conduct their own internal financial and production affairs,
using software that until now only large Fortune 500 companies could afford.
Seeing this opportunity, major business software developers such as Lotus
Development Corp. (an IBM subsidiary), Microsoft Corp., and Great Plains
Software Inc. are now market-testing versions of their brand-name products
for small companies - firms with 500 or fewer employees - to use via the
Internet.
The concept calls for hosting companies to install master copies of such
specialized software, and then rent access to users. International Data Corp.
of Framingham, Mass. says 25 percent of 900 companies in a recent survey
said they liked the idea for payroll processing; others saw a need for such
services for economic forecasting or supply-chain management capabilities
that they now lack.
''The capabilities in this field are just emerging,'' said Steven Brand, Lotus's
manager for small business applications.
FORMING A BACKBONE
Hosting as a growth business is sharply defined in the ''rollup'' strategy being
pursued by Sage Networks, which since March has spent more than $20
million to buy eight hosting companies from coast to coast.
These acquisitions - in Atlanta, New York, Washington, D.C., Dallas, San
Jose, and Los Angeles - form the backbone of what Sage intends to be a
national company that can establish brand identity in a now-fragmented
market.
''We actually think that through consolidation you can build a large
international company,'' said Bradley Feld, cochairman and one of Sage's
founders.
By January, he said, Sage hopes to have between 15 and 25 acquisitions
under its wing, with more planned for 1999. ''We are now one of the top 10
hosting companies in the country and by the end of this year should be one of
the top two.''
Not that this represents a big market share.
Sage says it currently has tens of thousands of clients at its companies; some
estimate that number is less than 40,000. The firm believed to be the nation's
largest hosting operator, Hiway Technologies Inc. of Boca Raton, Fla.,
claims 87,000 customers. And the runner-up, Verio Inc., which has 125,000
customers buying connections to the Internet, may be able to claim about
65,000 as hosting customers, based on rules of thumb that industry veterans
say are commonly accepted.
Both Hiway and Verio also are pursuing rollup strategies. Verio, based in
Englewood, Colo., is publicly traded. Hiway has an initial public stock
offering planned for later this year.
Sage's buying spree has included a large, high-speed computer center near
Washington, D.C., purchased from IBM Corp., to be the linchpin in the
company's operations. A second center is being built in Atlanta, where two
of its operating units are also based, at a projected cost of $1 million.
Sage's money comes mostly from a venture fund managed by a New York
investment bank, Charterhouse Group International Inc. Patricia Riley,
managing director, says Charterhouse has ''well over $40 million in pure
equity'' committed to Sage.
''The way I look at this, you have a market that is growing exponentially and
a business that creates profits quickly,'' she said. An IPO is planned, but no
timetable has been set.
PIONEERING AT BBN
GTE, an international telecommunications giant with $23 billion in revenues in
1997, paid $616 million last year to buy BBN, which in 1969, as Bolt,
Beranek & Newman, launched the forerunner of the Internet for the US
Defense Department.
Today, BBN operates under the name GTE Internetworking, still running key
portions of the Internet and selling services to support its parent company's
drive to compete against AT&T Corp. and MCI Communications Corp.
''We're shooting to be a leader in the hosting market,'' says John Vincenzo, a
company spokesman.
Still under the BBN flag at the time, the company began commercializing
hosting operations at its 11 US locations in 1995, according to senior
product manager Christine Silva.
Going first after large corporations that needed backup storage capacity, the
company last year expanded sales efforts to include small and midsize firms -
companies with fewer than 500 employees or sales less than $100 million.
Analysts say this sector is where electronic commerce is growing the fastest.
Vincenzo said GTE now has more than 1,000 hosting customers. It acquired
one smaller hosting company, Genuity Inc., of San Francisco, late last year
primarily because it had a data center that could be a GTE West Coast
operations center. More acquisitions are possible.
'THIN CLIENT' TECHNOLOGY
Coming from a different direction, Dan Taylor, a Bedford, N.H., software
consultant, sees new computer hardware technology paving the way for
hosting centers to provide small businesses with payroll, engineering,
manufacturing control, sales systems, and other software that they previously
couldn't afford.
Taylor says the licensing fees for these high-end products, which big
companies take for granted, weren't the problem.
It was the cost of hiring someone to install the software, manage its use, and
install upgrades , in as many as 200 desktop computers in a medium-sized
firm. These information systems managers, who can earn $80,000 to
$90,000 a year, also must be available around the clock to solve problems.
The new hardware that is altering this picture is called ''thin client''
technology, a name that refers to the fact that those desktop terminals are
stripped of their software storage capabilities - thinned down - to become
terminals that connect to servers that function as a central computer.
This may sound familiar to anyone who used a computer before the PC
revolution, when computer terminals were wired to IBM, Digital Equipment,
or similar mainframe computers that were tended behind closed doors by
technicians. ''The industry is calling it recentralization,'' says Taylor of this
return to the past.
But by requiring that software be installed and maintained only at the servers,
operating costs plummet and fancy software becomes more affordable.
Taylor this fall will launch his first application of this approach, installing
accounting software in host servers at his company's offices that nearby New
Hampshire College will be able to tap, via the Internet, for teaching its
business courses.
Simultaneously, his company, The Taylor Group, is discussing the hosting of
specialized business applications with New Hampshire's largest private
manufacturing company, Cabletron Corp. of Rochester, and with a
Massachusetts health care firm, Physicians Quality Care Inc. of Waltham,
Mass.
Anticipating success in these pilot installations, Taylor recently bought a 9.5
acres of land in Bedford where he plans to build new offices for his
75-employee company - with 10,000 square feet of space set aside for a
hosting center.
----- |
