This article appeared in the October 2005 issue of Web Host Industry Review magazine. Click here to subscribe for free.
November 18, 2005 -- (WEB HOST INDUSTRY REVIEW) -- In the Internet landscape, a few towering brands cast very long shadows. And for Web hosts – which operate, for the most part, in those shadows – the possibility that those companies might turn their powerhouse brands to take on the Web hosting market poses an intimidating prospect.
With positioning in play from two of the Internet's biggest brands, there is plenty of talk that both eBay (ebay.com) and Google (google.com) will be competing head-on with Web hosts. While many hosts acknowledge the potential for major competition from these online heavyweights, no one seems to be waving the white flag. In fact, hosts speak with confidence that they can take the heat and even get the best of these newbies.
Listening to hosting customer Don Mazzella, editorial director for marketing and information firm Information Strategies (infostrategiesgroup.com), you may conclude that they're right. He has 20 Web sites and he's fed up with impersonal service.
"The key to success against the big boys?" says Mazzella, "How about responsive customer service and having a live voice at the other end of the telephone? Ever try getting an actual human being when you call Google? Smaller hosts will have a big advantage if they just pick up the phone."
It may sound elementary. But it's a step that could make a big difference when new competitors enter the market – which could be sooner rather than later. In June, eBay launched ProStores, a service designed to make those small-time merchants selling antique dolls, old baseball cards, CDs, garden tools and other eBay mainstays look and feel just like the big-box retailers. These online merchants are what eBay calls its PowerSellers, customers who sell at least $1,000 in merchandise on the site each month. More than 150,000 customers currently run their own stores on the site, although eBay does not reveal which ones sell more than $1,000 a month.
Facing criticism from its famously loyal customers for imposing stiffer fees than other online auction sites, eBay launched ProStores as a way to provide those customers with hosting-styled improvements. The platform enables merchants to set up complete e-commerce sites in as little as a half-hour, creating customized online stores with unique Internet addresses. It provides small and medium-sized businesses with the same e-commerce features the big retailers use: full shopping-cart capabilities with online checkout; real-time payment acceptance; integrated supply-chain inventory management; and shipping calculations integrated with all major shippers.
But ProStores is also aimed at large, enterprise-sized clients. Options also include SSL encryption to ensure order protection; custom shipping tables; real-time shipping integration; advanced merchandising and inventory management; up to 20 GB of storage; 24-hour toll-free tech support; supply-chain integration; and priority email customer support. Subscription fees range from $6.95 a month to $249.95 for large-scale, enterprise-intended services. EBay sellers receive a discount of 30 percent on these fees.
"This is our way to provide an online storefront solution," says Chris Tsakalakis, senior director of stores for San Jose-based eBay. "We're targeting offline retailers who don't have an online presence and want to get in. What distinguishes us from hosting providers is that we aren't simply providing the hosting solution. That's part of what we're providing, but we're also bundling it with the highest level of e-commerce tools. The truth of the matter is that we maintain one of the largest trading platforms in the world with eBay – we oversee more transactions a day than NASDAQ does – and we've done this for years with outstanding uptime and reliability. Our hosting takes place within our network operations group, and we believe it's the best in the world."
While eBay has begun to carve out its piece of the hosting market, Google's role in the business is still a matter of speculation. The red hot Web giant's dive into the hosting space is widely anticipated, though Google itself did not respond to requests for comment. The company was accredited as a domain registrar in February of this year, lending further credibility to the impression that the company is setting the stage to offer hosting with a name Internet users embrace with near-religious devotion. It essentially has the infrastructure in place, as well as the talent needed to make the best use of it. If so, Google would present a formidable hosting competitor to the likes of Yahoo! and Go Daddy.
The jury is still out on the directions both companies might take. "Google already has a lot of expertise in running thousands of its own servers in a hardened environment," says Nirmal Pal, executive director of the eBusiness Research Center at Penn State (psu.edu). "It would be a natural and logical extension of their in-house expertise to move into the growing area of Web hosting." EBay, on the other hand, would have to make sizable investments in skills and infrastructure to serve as a full-scale Web host, Pal says.
Of course, the big threat posed by these brands may not be to SMB-type hosts, as Google's greatest strength, for instance, would be its ability to gather up new and fledgling Web site operators, including the customers of its Blogger service.
And while the competitive influence of such a move might be overwhelming in spots, it is unlikely that the competition would be considered unfair, even if a mega-host were to put thousands of smaller hosts out of business.
Small to mid-sized hosts shouldn't bank on that possibility, says e-commerce legal expert Bradley J. Gross, an attorney and chair of the global e-business and licensing group at the law firm of Becker and Poliakoff PA (becker-poliakoff.com).
"There's a difference between tough competition and unfair competition," he says. "Tough competition occurs when large players enter into areas previously occupied by smaller companies. Unfair competition, on the other hand, occurs when large players take unfair advantage of their size or market position in order to eliminate competition. Tough is legal; unfair is not."
There are unfair practices that small to mid-sized hosts should look out for, Gross says. If a larger player forces a customer to scuttle a contract with a smaller host just so the customer can do business with the larger host, that would be considered unfair competition in a court of law. A larger competitor making false or deceptive statements about a smaller host would also be a legal no-no.
And there are steps small and medium-sized hosts can take to help minimize the ability of new competitors to take business away.
"As the market changes and new players begin to emerge, smaller companies are well advised to take an audit of their current contracts, and ensure that they are adhering to their obligations," Gross says. "Otherwise, they may unknowingly provide a window of opportunity for vendors to cancel their contracts, in favor of signing up with the big players."
It comes as no surprise to companies already operating in the hosting business that big players are making these moves.
"It makes sense for eBay since they lose business right now when their auctioneers direct people to stand-alone Web sites for additional up-sell or cross-sell," says Mini Peiris, senior director of product management for NetSuite (netsuite.com), a provider of hosted e-commerce and business management software. "And given the number of stores that Yahoo! hosts, and the rivalry that exists between the two, it wouldn't surprise anyone if Google is looking at this as well." The immediate effect of this new competition could be a decrease in the price of hosting, in part because larger companies can offer better rates for bandwidth.
Ultimately, small and medium-sized hosts need to provide something the big boys can't. "They need to provide value-added services or best practices," says Peiris, whose company provides hosted e-commerce and business solutions for more than 7,500 small and mid-sized businesses worldwide, including Marvel Comic Collections, Scientific Notebook Company and former NBA star and current New York Knicks President Isiah Thomas' Dale and Thomas Popcorn. Among the services NetSuite offers as a means of distinguishing itself from the large players are site analytics, order processing, shipment tracking, self-service, customer service management, email marketing, online promotions, discounts and accounting and customer relationship management.
"Our customers have complete real-time visibility into their orders, customers and marketing efforts," Peiris says. "Even the likes of eBay and Google couldn't offer all that out of the gate. These giants bring their brand to the table, but aren't necessarily the ideal solution for everyone – one size does not fit all."
Google and eBay are not the only large names that could enter the scene. And there have been whispers that the big banks may attempt to muscle in on the action. They see the growth of e-commerce on customers' balance sheets and they like what they see.
"Like Google, they are aggressively attempting to capitalize on their brand equity," says Christopher Faulkner, CEO of C I Host (cihost.com), a Web host with 220,000 small to medium-sized business clients around the world. "The bigger banks have built a name that most people trust – in spite of all of the ID theft scares within the financial world." Still, Faulkner finds the concept is a bit of a reach.
"It is no accident that so many hosting companies come and go," he says. "It is one of the most competitive industries, and because it is an Internet industry, it moves incredibly fast. Increasingly, hosting is a commodity. But, there are so many unknown variables – the economy, bandwidth and other types of overhead. And again, there are so many security concerns. It's different than storing money in a large, closed, steel vault. A data center is like a vault with thousands of entry points. And each one of those openings has an intruder – a virus or whatever – designed specifically to creep inside undetected, 'shoot up the place' and take the money."
And then there's the work-ethic thing. Banks or Web builders?
"You have to remember that Internet companies have a culture," Faulkner says, "that developed when entrepreneurs worked around the clock for two or three days, then collapsed into a cot on-site. Banks have a legacy of 'bankers' hours.' Sure, that is changing. But it is certainly rooted in actual tradition."
Hosts that stand to survive challenges from larger, better-branded companies keep coming up with new ways to appeal to business owners out there. Affinity Internet (affinity.com), a Web host with more than 180,000 small to medium-sized customers, just launched ReadyWeb Commerce, which allows its customers to launch and maintain e-commerce Web sites without having to do any Web development work. The service includes a professionally designed Web site; an online product catalog with shopping cart; and an order management system with the ability to automatically process online credit card payments. Up-front costs are as low as $200. Affinity supplies the talent for that task. Other recent product launches include a pay-as-you-go Web site design and hosting version of ReadyWeb; and ValueTraffic, a full-service online advertising agency.
And the company is hardly packing up shop over the prospect of bigger, stiffer competition. In fact, a senior executive there - to coin a phrase from baseball legend Yogi Berra - describes it in a "deja vu all over again" matter-of-fact manner.
"In the late 1990s, several major phone companies launched hosting services and were perceived as a threat by traditional hosting companies," says John Enright, vice president of marketing for Affinity.
"They were followed by major PC hardware companies, who also had the potential to capture significant market share. In each case, the new players actually improved the overall health of the industry. While some major companies were more successful at hosting than others, the market is still dominated by the providers with the best product, not the best brand. Today's hosting customer is looking for services that help them achieve their business objectives, and that involves a lot more than just cheap hosting space."
Roughly 10 years ago, smaller players entered the market in droves to offer niche services as well as more affordable terms that the bigger boys couldn't. Many went out of business because there were too many of them for the number of customers out there. And the price wars produced slim profit margins that eventually choked them, says Gross, of Becker and Poliakoff, paving the way for larger players to command center stage. But this, too, does not have to last.
"The bigger players took over where the smaller players left off," he says.
"And that was how it remained for approximately five years. Now, however, people are demanding more focused services, at reduced prices. Generally speaking, larger players are not nimble enough to respond quickly to market demands. Smaller players generally focus on their core practices and, consequently, can provide more focused services and customer support. When larger players expand, however, they often expand into non-core areas, and suffer from 'too big too fast' syndrome – poor customer service, and a misunderstanding of the marketplace and the issues that affect consumers." C I Host's Faulkner recalls that a rather large name, Dell, attempted to play the same game.
"Dell is an awesome company, but they are not a hosting company," he says. "They failed. I can't see these new players as having the experience or intuition to know how to satisfy each diverse customer's needs. But that is our competency, our strong suit. It is what we do – period. It is not what Google does and it certainly isn't the reason people know the name of eBay. Hosting firms – the ones that have survived various shakeouts – have seen it all. We've learned. We've turned on a dime. We've adapted."
And, in the end, perhaps all the interest from top global brands isn't such a bad thing. After all, the interest creates a buzz about the Web hosting industry overall, only helping to enlarge the overall pie for everyone. Since the dot-com meltdown of the early part of the decade, online activity has increased rapidly. The number of sites online in July was well over 67 million, up 2.76 million from June, according to Internet research firm Netcraft. The only larger gain was a 3.3 million host-name increase in March 2003, Netcraft reported, which ended months of stagnation and kicked off 30 consecutive months of positive growth for the Web. Factors cited by Netcraft included increasing use of the small business online storefronts, as well as the explosive growth of blogs, online advertising and seller speculation of domain names.
"The number of active sites on the Internet has grown steadily year after year," says Enright, of Affinity. "And the number is growing faster and faster. It's an extremely healthy industry, so it's no surprise that major Internet brands are starting to take notice. In fact, you wonder what took them so long. Eventually, I think we'll see two or three companies break from the pack. But these market share leaders will continue to be driven by the quality of their product more than the popularity of the brand. So the opportunity to gain market share is open to anyone – large or small."
