Competition spawns consolidation

March 28, 2001 -- (WEB HOST INDUSTRY REVIEW) -- Expect the consolidation of smaller firms to continue as global telecom giants enter into the Web hosting arena.

With Sprint (sprint.com) and WorldCom (worldcom.com) both injecting themselves into the hosting and application provision market, smaller competitors have teamed up to inoculate themselves from side effects. Their current vaccine of choice is the merger.

In a bold move late last week, Interland (interland.com), a leading provider of business-class managed Web hosting solutions announced plans to merge with HostPro (hostpro.com), the fastest growing division of Micron Electronics (micron.com), the 17th largest computer manufacturer in the United States.

In accord with a strategy formulated over three months ago, Micron Electronics concomitantly announced that it plans to get out of PC manufacturing by selling its non-hosting businesses, Micronpc.com and SpecTek. As a result Micron will lay off 400 people in its PC division, about 20 per cent of its workforce.

Citing the inhospitable environment plaguing the consumer PC marketplace, Micron made earlier attempts to reposition its hosting operation as an application service provider (ASP), by offering components of popular office suite software packages online to small and mid-sized businesses.

With the completion of this merger however, Micron will step away from that unsound strategy and recast itself as a pure play Web host.

Indeed, the combined company will have six data centers, 112,000 customers and more than 227,000 paid hosted Web sites, giving the company a fighting chance against the slew of telecom companies that are reorganizing themselves to provide advanced Web host offerings.

With Sprint and WorldCom beset by falling prices in their core business of long-distance, both respective companies have made a concerted effort to capture clients in the complex Web hosting sector. According to the Yankee Group (yankeegroup.com), both companies are beginning to sell a series of complete Web hosting offering instead of providing them a la carte.

By doing this, both WorldCom and Sprint hope to demystify the purchasing process for their clientele and gain market share against such leaders as Exodus Communications (exodus.com) and Genuity (genuity.com), in order to capture revenues in the fasting growing sector.

The managed Web hosting market has already seen rapid growth and IDC (idc.com), a leading market research firm, predicts it will rise from $4 billion in 2001 to $17.2 billion in 2004. Forrester Research has predicted an even higher figure of $20 billion for the same period.

Though dot-com start-ups continue to die a rapid-fire death, there continues to be a huge market to host Web sites for more successful Web ventures and other brick-and-mortar companies looking to expand their Web presence. For this reason, large telecom companies have moved into the industry with a vengeance, forcing the originators within the sector to unify in order to compete.

The Interland-HostPro merger is thus only a precursor of the further consolidation to come.

It demonstrates that if smaller and earlier players in the Web host game want to remain relevant and be able to compete, they will need to grow large quickly. The Interland-HostPro merger fits that bill.

Firstly, the new entity is publicly traded, allowing it to easily raise capital for expansion. Secondly, combined revenue is expected to reach $160-180 million by 2002, representing a sequential revenue growth rate of 10 per cent. Finally and most importantly, the company expects to be fully profitable within 12 months.

Expect a series of older and smaller firms to replicate some formulation of this deal within the next three months in order to remain relevant, competitive players in the complex Web hosting sector.

About the Author
Rawlson O'Neil King is a managing editor and analyst at the Web Host Industry Review. Before joining theWHIR, Mr. King was Director of Corporate Communications at WebHosting.Com. During his tenure at Canada's most successful Web host, he established ineedsupport.com, the first branded destination customer care site in the shared hosting industry. He has prior experience as an IT consultant who served non-profit organizations, government and private industry. He holds a Bachelor of Journalism degree from Carleton University. Mr. King's column appears in theWHIR weekly.