Rich Miller says 2006 was a huge year for data center stocks. Check out his cool chart:
In contrast, let's take a look at how mass marketing hosting stocks did over the past year (out of laziness, I'm using 12 Jan 06 - 11 Jan 07 stats):
* Web.com: UP $0.14 or +3.33%
* Tucows: DOWN $0.05, or -5.38%
* WebSitePros: DOWN $0.90, or -8.91%
* United Online (parent company of FreeServers.com, BizHosting.com, GlobalServers, and MySite.com): DOWN $1.01, or -6.69%
One possible explanation for this discrepancy is, even as SaaS and social networking providers fill up Savvis' and Level 3's data centers, they're reducing the need for end users to maintain web hosting accounts.
I know that Lou from HostMySite will disagree. A few days ago, he commented on my other post that we're too caught up in our limited view of the Internet world. While the likes of MySpace and Flickr have impressive numbers, Lou's not sure they're widely accessible to the common person. He sees "a vast opportunity that lies outside the existing community of advanced web users".
In which case, it seems our battle is against not SaaS and social networking, but Google and Microsoft.
(This chart was made with Zoho Sheet, using stats from Netcraft's latest web server survey. Microsoft and Google accounted for 46% of last month's hostnames growth.)
Enterprises, driven by blade servers and SOX are going into outsourced data centers. There has also been huge growth in content providers. Space is limited and banks have been slow to finance new builds, having been stung. That has driven per sqft rates sky-high.
Its all about margins and supply. Data centers: high margins (even just colo, without managed svc) and demand beating supply. Commodity hosters? Low margins, huge supply.
If we look behind web hosting and think about MySpace, YouTube - and even Yahoo's recent $10 million acquisition of MyBlogLog - all of these businesses were valued based on the stickiness of their user base. Their buyers assumed that their audiences would be available for future monetization. That's not something Web.com's investors can count on.
And the worst part is, mass market hosting customers are expensive. On the high end, GoDaddy advertises in the Super Bowl. On the low end, many smaller providers pay outrageous affiliate commissions for customer referrals. But at the end of the day, what they get are customers whose needs can just as easily be met by any number of competitors...
Churn is actually a big plus for the colo companies these days - they are deliberately trying to boost churn, in order to perform what they call "customer optimization" - out with cheap legacy customers (some of whom are power hogs), in with higher paying new customers.
In terms of barriers to entry - sure, it costs a lot of capex for servers, but you can buy them as you go, and leasing is usually (relatively) easy. A modern colo facility costs $100mn, with upfront financing needed.