February 27, 2004 -- (WEB HOST INDUSTRY
REVIEW) -- The December sale of DellHost to VeriCenter marked the end
of the DellHost brand and another new beginning for a customer base
that has more than likely become accustomed to moving around.
DellHost was created in February 2000 to
help the world's largest computer manufacturer make up for its falling
hardware margins. Dell Computer Corporation's existing customer base of
small-to-medium size businesses provided the platform for entering Web
hosting - then seen as a lucrative services market.
Eighteen months later, Dell transferred
DellHost customers to Sprint in a seven-year alliance to optimize the
offerings of both organizations and generate between them hundreds of
millions of dollars in sales of hardware and telecommunications
services.
Last June, Sprint (sprint.com)
announced its Web hosting division unprofitable, and in a December 2003
deal reportedly worth $12.5 million it exited the hosting market,
selling approximately 400 managed hosting customers along with four
supporting data centers to VeriCenter (vericenter.com), a Houston-based provider. DellHost customers were part of the sale, but the DellHost brand wasn't.
The sale allowed Sprint to move from a direct hosting sales model to an indirect model, says spokesman John M. Polivka.
"Sprint is keeping hosting within its
product portfolio while relying on third-party providers with whom we
have referral agreements; they in turn will continue to use Sprint for
transport services, as each data center sits astride Sprint's Tier One
Internet backbone," Polivka says.
Sprint's exit from the industry, the
transfer of DellHost customers, and VeriCenter's growth through the
acquisition inspires a multitude of meanings and interpretations
between the parties involved, as well as among competitors and
observers.
The purchase gives a larger national
footprint to VeriCenter, which boasts 14 consecutive quarters of
revenue growth since its founding in 1999 and a customer base of
businesses including the federal and local governments, energy,
professional services and technology companies.
The acquisition adds data centers in
Atlanta, Boston, Dallas, and Denver to VeriCenter's holdings, in
addition to technical talent and many assets of DellHost and Sprint
E-Solutions.
"We grew immediately from a strong local
player to a national player in the top tier of the managed hosting
market. Our goal was to find a way to remain profitable while making a
bold move of that nature, so we are naturally very pleased," says
Leslie Butterfield, Ph.D., vice president of marketing at VeriCenter.
"Today, we are firmly established in the
top tier of pure play managed hosting providers. Our goal is to
continue to grow the business to the top of our industry becoming the
preferred provider of managed hosting and utility computing to the
small and medium sized business market as well as the enterprise
business market."
According to Butterfield, VeriCenter
stood out to Sprint because of its standing in a number of areas,
including: a sharp focus on managed hosting; mature processes in the
managed hosting space; the financial strength to manage the transition;
and a company Sprint would want to partner with in a marketing
agreement and as a provider of managed services to Sprint customers.
Still, Sprint's exit from the direct Web hosting model hasn't been without controversy.
Sprint's exit "was a smart move, but it
was a stupid move to enter the business in the first place," says Ben
R. Neumann, founder and chief executive officer of Globat LLC (globat.com), a Los Angeles based hosting company.
"They were thinking 'it's an interesting
little business, and we are going to make $250 million a year with it.'
Then they noticed it's just as expensive as maintaining your cell phone
customer base or your phone long distance customer base. You have to
maintain them and make sure they are happy, otherwise you lose a lot of
them. Customer turnover in the Web hosting industry is substantial.
"As we have seen over the last few years,
there is heavy consolidation going on in the hosting industry, and it
will continue to go on for quite some time until the companies that
just want to make a quick buck are weeded out," Neumann says.
The transfer of DellHost customers to yet
another provider also resulted in complaints from DellHost customers
that emboldened Neumann to promise them better service for free: any
DellHost customer who signs a one-year contract with Globat gets six
months of free Web hosting service.
"The response has been very good. Here
you can get three times the features and the same customer service for
$7.50 per month," Neumann says.
"It's always bad if your host goes out of
business, but when you also have been paying too much: $20, $30, $40,
$50 per month, you get angry. Many former DellHost customers are
actively referring other DellHost customers to sign up with us," he
says.
Neumann, an industry veteran since
founding a low-cost Web hosting service in 1995, says he will continue
trying to win over former DellHost customers even though the transfer
to VeriCenter is complete.
"As I discovered with my previous
company, which did 16 acquisitions in two years, they [VeriCenter] will
discover acquisition is terrible. You have to be extremely well versed
in how to do it or you lose the majority of your customers, because
people like me are after you…We won't be sleeping. We will keep our
feelers out for disgruntled customers," he says.
Whether the VeriCenter management team is
equipped to deal with the instant growth the acquisition brings is one
of the key questions sparked by the deal, says analyst Andrew
Schroepfer of Tier 1 Research (tier1research.com).
"That kind of instant growth is both a
positive and negative challenge. It is the kind of transaction where
good leaders are created or destroyed," Schroepfer says. "The company
seems to be in the right frame of mind and ready for the opportunity.
The contract renewal cycle will be the most significant challenge. The
company needs to make itself known as a trusted partner, and if it can
earn the respect of the customers quickly before the renewal cycle
comes around the rest of the issues can be handled without a problem."
With the Sprint transaction now final,
those customers have a new provider, "so the uncertainty card that a
competitor could play is now gone," says Schroepfer. The chief time for
competitors to encourage the migration of DellHost customers is gone,
he says, describing "a lost opportunity for low hanging fruit."
