Evolution of the Web Hosting Industry
Evolution of the Web Hosting Industry
Where is the web hosting industry now, and where is it going? Every industry goes through four stages of development; knowing what stage an industry is in, and where it is going, can help industry players make plans and decisions, as well as consider what they need to do to attract and keep customers. This article examines those four stages, and considers where the web hosting industry is in relation to them.The web hosting industry has been around for roughly ten years now. It has gone through many changes in that time, from apparently wild growth through the terrifying business climate caused in part by the terrorist attacks on the World Trade Center. Given this, people who work in the web hosting industry – and those who are served by it – might find it beneficial to take a step back and look at the industry’s evolution, to get a better idea of where it is now and where it is going in the future.
When studying industries, it is commonly accepted that they evolve through four basic stages: introduction, growth, maturity, and decline. These vary in length with the type of industry, and have speeded up in recent times because of the increased pace of technological development, which now affects so many different industries. For example, the introductory stage of development for the automobile industry lasted 25 years; we have since seen many high tech products introduced and then become obsolete in a tenth as long. Technological developments can not only speed up the evolution of an industry; they can also throw a mature (or even declining) industry back to an earlier stage of development, with changes renewing and revitalizing the products and services offerings.
With these points in mind, we can begin to understand why it might be helpful to know where the web hosting industry is in its evolution. To answer this question, though, we need to know what indicators characterize each of the four stages. Not surprisingly, many factors affect industries, and a sense of the numbers we get from these factors can help us figure out where an industry is in its development.
When trying to figure out what stage an industry is in, researchers and analysts examine something called value drivers. To quote an article by M. Eric Furlow of Furlow Consulting, “A value driver is a measure used to track financial and operational variables in a business or an industry.” While value drivers affect all industries, different value drivers affect different industries to different degrees. Furlow identified ten value drivers for the web hosting industry. Among others, these include churn and net gains; average revenue per account per billing; revenue/EBITDA per square foot of data center space (which reflects efficiency in use of resources); market size and market share; and free cash flow, which is the real amount of money left after all expenses are accounted for.
Value drivers are not the only indicators of where an industry is in its evolution, however, as we shall see shortly.
Evolution of the Web Hosting Industry – The First Stage: Introduction
In this stage, many if not most people aren’t yet fully aware of the industry or what it has to offer; consequently, industry players need to not only sell their wares, but teach people about them. (Contrast this with the gasoline industry). There is a certain amount of chaos at this stage because no standards have yet been set, and/or they change frequently. Since the industry is just getting started, not many people are in it yet, which makes this an excellent time for industry players to increase their market share since they have so few rivals.
As you would expect from the lack of competition, prices are high. Another factor keeping prices up is high expenses; it is costly to invest in a new business, even more so when you can’t simply get what you need “off the shelf” (this holds true for both human skills and physical equipment). When a company doing business in an industry in this stage of development needs an infusion of cash, it will look to venture capitalists, angel investors, and Wall Street. Banks, which are basically conservative, will usually not want to get involved.
The risks to any new business in an industry in this stage are high, but so are the rewards. If you have come along with the right product or service at the right time, you could receive a major pay-off. The web hosting industry’s introductory phase coincided with the early days of the World Wide Web (about 1995). Thus, it was driven to some degree by the dot-com boom.
Web hosting companies and dot-com firms drew to some degree from the same talent pool. If you were a system administrator, you might prefer working for a web hosting company, taking care of hundreds of sites (usually with help), rather than working for a dot-com and being responsible 24 x 7 for just one site, all by yourself. Without the resources to handle their own web hosting, many dot-coms had to outsource the hosting of their websites. Often, the same ISPs that provided Internet access to dot-coms were the first ones to enter the web hosting business, and they had large infrastructure costs to recoup. But the industry was poised to change.
Evolution of the Web Hosting Industry – The Second Stage: Growth
Near the end of the first stage, initial public offerings of stock increase. This heralds the second stage of an industry’s evolution, which is growth. IPOs become common; there is a shift as Wall Street becomes more involved in the industry, angel investors and venture capitalists somewhat less so. This is an extremely active and challenging time for any business, because lots of companies are getting into the industry; consequently, this is the time when the number of competitors is at its highest. Interestingly, so is merger and acquisition activity. Even so, the total market is still growing, so there is a lot of room for companies to capture share in a larger market.
Prices start coming down, as companies gain more customers and can thus spread out their costs some. You would think this would be a less risky time for many companies in this industry, but in fact they start taking larger risks than before, because capital is more available than in the first stage, and growth is more rapid. Both of these factors help to offset some of the risk. By taking risks, I don’t simply mean investing in more machinery or people to expand the company; in the growth stage, there is still significant innovation going on.
Arguably, the web hosting industry is currently in this stage of development. Those in the industry need to be very alert, watching for advantages – because this stage can end very quickly. Late in the growth period, mergers and acquisitions continue, but their nature changes; you see more vertical integration. In the web hosting industry, one example of this would be web hosting companies buying backbone providers, or vice versa. A company making such a merger or acquisition would gain advantages in cost/control over supply, or distribution.
If you’re a sharp business thinker, you’ll see that this is actually the best time for a private company to sell – if it is timed correctly. When the growth stage of an industry’s development ends, it can end quickly. Look for huge drops in stock prices – fifty percent or sometimes more. There are other signs as well; when innovation slows down and there is plenty of supply, the industry has reached the next stage of development.
Evolution of the Web Hosting Industry – Stages Three and Four: Maturity and Decline
At the mature stage of an industry’s evolution, there is relatively little difference between the products offered by the big players. Think of the PC industry as an example; how much difference is there between computers sold by Dell, HP, and Lenovo, who purchased IBM’s PC business? Incidentally, if those names are familiar, that’s another sign an industry has reached maturity: with mass market saturation, the names of the major players in the industry become commonly known, practically “household names” in fact.
With customers perceiving little difference between the players, churn increases. Prices become more elastic, because that is now the main competitive difference. As a result, businesses experience lower profit margins. These are all symptoms of the commodity effect, which Furlow says is “the most feared of all signs in an industry.” Other flags to watch for include a significant decrease in the number of mergers and acquisitions, with a few larger deals still being made; public companies starting to miss their numbers on Wall Street; and relatively few changes in technology standards.
It is true that the web hosting industry went through a difficult period after 2000. Before that, customers were most concerned with performance from their web hosts; would they stay up, would they deliver content fast, and how fast? We even started seeing content delivery networks crop up, such as Akamai and Sandpiper, to fill this need. But after 2000, the industry found itself with an excess of capacity. In that same year, the dot-com bubble burst; that industry contracted, and web hosts who had overcommitted were hit hard. Then came the terrorist attacks on September 11, and the house began to fall apart, with a number of hosts declaring bankruptcy. Suddenly, customers of web hosting companies were concerned less with fast performance, and more with whether their web host was going to continue to be around. After all, they had their own problems to contend with.
These are signs of an industry in decline. The hallmarks include oversupply, products and services priced below cost (which is unsustainable), and churn overtaking customer adds. Bankruptcies become common; mergers and acquisitions, on the contrary, all but disappear. If Wall Street leaves the industry, you can be sure that it is in decline.
So if web hosting went through so many of the signs of decline, how can I say that it is in a growth stage today? The answer is that some industries can move back to an earlier stage due to technological innovation. The prime example of this is the cable industry. It had reached a mature stage of development delivering cable TV. Then, thanks to technological advances, all of a sudden the same wires that brought premium TV to the home could be used for broadband Internet access, voice over IP, and anything else the companies can figure out to send. As a result, cable companies were able to create bundles of services that slowed down customer churn and helped to differentiate them from their competitors. With the economy improving, many web hosting companies are engaging in a similar strategy, offering a variety of package deals of services at different price levels to help generate customer loyalty.
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