The Host With the Most?
Posted Tuesday, June 15, 2004
Web hosting in one of its various guises should be considered by any enterprise embarking on e-business. The potential for cost savings and benefits through reaching customers and coming to market faster is huge, but there are also great risks. The principal danger is of choosing a Web hosting provider that is either unsuitable -- perhaps being unable to deliver the level of service you require -- or worse, about to go bust.
The dangers of the latter were demonstrated by the high-profile agonies suffered last year by PSInet, the company previously touted as the "Internet super-carrier", which is now threatened with bankruptcy. The problem with the Web hosting business is that to make it viable, major investment has to be made up-front in data centres, staff and network infrastructure, in the hope that the customers will then come flocking in.
Although rapid growth in Internet use continued through 2000 despite the dot-com debacle, PSInet suffered because it was over-ambitious in its projections and a little ahead of its time. Caroline Bryan, Web hosting analyst at Datamonitor, says, "It over-reached itself and sunk too much money into its IP network and datacentres, while the services did not take off quite as expected,"
This showed that size alone is no guarantee of success in the Internet service business, so the question is how can a potential Web hosting customer make sure it is entrusting its Internet shop window to the right provider. After all, in the case of full outsourced Web hosting, an enterprise might be relying on the service provider to collect a sizeable proportion of its revenue through e-commerce, as well as to deal with customers.
According to Bryan, hosting companies that have spun off from some existing large players in telecommunications or systems integration are better placed, because they have independent revenue streams and so rely less heavily on the goodwill and patience of their financial backers. The best UK example is BT Ignite, said Bryan, which although still losing money overall has a huge existing network infrastructure it can call on, as well as BT's IT solutions business Syncordia and its outsourcing company Syntegra.
This point is echoed by other analysts, such as consultant and analyst Ovum's ISP-watcher Henning Dransfeld. "ISPs with a telco background can leverage their telecom network and are in a good position to offer good quality of service," he says. This includes not only the big incumbent carriers such as BT, but also the likes of NTL with cable TV networks and in future others exploiting the unbundled local loop.
It can be argued that BT has over-reached itself with the huge investment in 3G mobile networks on which there will be no immediate return. There is also the little matter of the $1.25bn ([pound]8.5bn) it is spending jointly with US telecoms giant AT&T over three years in setting up the global network of at least 44 data centres for the Ignite Web hosting services. But the principal risk is of takeover rather than collapse, with hopefully less disruption to the hosting.
In any case, at least according to BT Ignite's vice-president of sales and marketing Perses Sethna, the company is on target to start making money on Web hosting by 2003. Some of the individual country businesses making up BT Ignite are already profitable, for example I.net in Italy, which recently had a successful initial public offering with BT retaining a 50.8% stake. But other Ignite businesses, including the UK operation, are still making significant losses.
The Web hosting story began in the US with basic co-location services and has since expanded into more managed offerings, including up to full outsourcing and application provision. There is now a broad spectrum of services on offer, but most analysts assign these to just three categories.
For this reason, others such as Worldport only provide dedicated services. Few if any ISPs in the hosting business want to confine themselves purely to co-location because, as research director specialising in ISP issues at the Gartner Group Eric Paulak points out, it delivers a relatively poor return per unit of space and in locations such as the City of London, where property is expensive, it is only just viable.
Matching hosting providers to these categories is easier said than done, as suppliers are reluctant to admit that they are only in the co-location arena, even if that is all they are capable of providing. BT Ignite addresses the entire spectrum, but Sethna admits cheerfully that all their marketing effort is pitched at dedicated hosting because that is where the most money is to be made.
"If you look at the pricing for basic co-location within the UK, it works out at about [epsilon]100 ([pound]65) per square foot," says Paulak. This figure can be increased by perhaps 25% by offering some additional management, for example of the IP routers, but pales into insignificance when compared to the pickings that can be made with dedicated services.
The gulf is not difficult to estimate, As a rule of thumb, according to Paulak, a business-class hosting service with management will cost between [pound]100 and [pound]400 per user per month, depending on location and level of sophistication, with the average being around [pound]200. A typical Web server can handle 50 users and 12 such servers can be accommodated in a rack occupying nine square feet in a room. This equates to about [pound]10,000 per server per month, or [pound]120,000 per rack per month. Dividing by the nine square feet, this comes to about [pound]13,500 per square foot per month, which is a good 100-fold increase on what can be earned with co-location.
The result is that dedicated services are that much more expensive for customers, but when you put into the equation the cost of managing the facility and acquiring the necessary in-house IT skills, it may look more attractive. For a mid-sized company with 100 users, the cost of a dedicated Web hosting service would be [pound]240,000 per year on this basis.
So despite these costs, there is a strong swing in demand from co-location towards dedicated services, according to Sethna. But because of the huge cost differential, a number of larger enterprises that already have most of the human resources needed to run a Web site will at least start off with co-location to test the waters. To cater for this, many business sector ISPs, such as UUnet, will continue to offer co-location services for the foreseeable future, almost as loss leaders to lure customers into their Aladdin's cave of more lucrative services. As Bryan notes, "Web site hosting is one of the first things that a company is quite willing to outsource."
Basic co-location is technically far easier to provide and is more of a vanilla service, with fewer differences between the contenders. But when it comes to dedicated services, some providers are more capable than others, both in their ability to offer the high levels of availability needed for e-commerce and in the range of options offered. BT Ignite, for example, can now go beyond full outsourcing of IT to embrace customer relationship management (CRM), "In this way we can provide not just the technology but surrounding services to get a company to market quickly," says Sethna.
This could appeal not just to end customers but also to aspiring application service providers (ASPs) which might have a sound proposition but not be geared up to handle CRM issues on behalf of its own customers. "So we are packaging this as a wholesale ASP offering," says Sethna.
Some of the value-added services that a large player can bring embrace both IT and surrounding business issues. One is Web caching, which is particularly important for international multinationals, where a global enterprise might want localised content located close to the relevant customers for performance reasons. This in tarn requires the hosting company to have at least a satellite data centre in each country in which they operate.
But before getting carried away with value-added options, users should evaluate the ability of hosting companies to deliver maximum availability, says Worldport's vice-president of sales and marketing Frazer Hamilton.
This cannot be achieved through resilient hardware and communications alone, but requires attention to the operating systems and applications as well. "For this reason we do not use a standard operating system," says Hamilton. "We harden the operating system to make it more secure, and also the applications." The essence here is to close unnecessary routes into the system that a hacker could exploit, using similar principles to those applied to military-grade software development. Now with large Web site hosting, there is a growing need for such hardened software in the commercial sector.
Another pressing need in Web hosting is better support for peering arrangements between providers. Progress is being made in basic connectivity to create faster transmission with better quality of service along end-to-end paths through the Internet, traversing the domains of multiple service providers. But what is lacking is the ability to retain information about content during such multi-ISP transmission.
"We think new content peering arrangements are needed to drive the industry forward," says Sethna. "We want to be able to swap content across the network and retain the intelligence and functionality so that, for example, information on the consumer is passed back to the source. Then an advertiser might be able to have granular information of who is looking at their content."
This may raise privacy issues, but that is another story. Without doubt though the next chapter in the hosting saga will address the content distribution question.
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