Web host gives up the ghost

The web hosting world has seen a bankruptcy and a desperate cash bid this week. But as Ben King reports, things are going to get worse before it gets better...

Remember how the train of thought went? First, anything vaguely associated with the word ecommerce meant easy cash.

Then, as the polish began to rub off the dot-com delusion, the cliché of choice was: "This is a gold rush, and the way to make money is to sell shovels. We're selling shovels." Now there are warehouses full of shovels and a dwindling supply of miners to buy them.

The net hosting world was home to some of the keenest exponents of this kind of logic. It was pretty clear to most market watchers that a large percentage of dot-coms were going to stiffen, but if everyone and his uncle were going to move onto the web they would always need somewhere to host their sites. It seemed logical that looking after websites was a sure-fire way to make money.

The problem is that rather too many people had the same idea and all of them have overestimated demand. The result is that the web hosters are starting to go the same way as dot-com consultants and other people who thought that selling shovels to imaginary miners would make them rich, powerful and happy.

Which all means we can look forward to more bankruptcies, takeovers, rights issues, rightsizings, downsizings and other well-disguised examples of business plans going pear-shaped. Step forward CityReach, the docklands web hosting centre which was set up 1999, to cash in on the internet boom. It's called in the administrators.

Stumble forward also TeleCity, the 'internet hotel' that has had to turn to a rights issue to raise working capital after a plan to merge with the larger Redbus Interhouse fell through.

Like the dot-com sector, the weak will be the first to fall. Despite raising E260m of venture capital funding and an even larger credit facility, CityReach seems to have run out money. Cue the creditors banging on the door.

In the long-term, CirtyReach will resemble survivors in any other market with excess supply - offer massive volume, or find a niche market for value-added services.

And while the headlines are occupied by a couple of high-profile bankruptcies, there is a frenzy of merger activity going on behind the scenes as struggling web hosters band together for scale.

Exodus Communications recently acquired Global Center, the hosting business of telecoms carrier Global Crossing, in a bid to build scale. CityReach would be a nice cheap addition to someone's empire,too, although now Exodus seems more likely to be bought than buy.

Meanwhile, other companies are beginning to buy-up smaller companies with particular expertise in a bid to improve value-added offerings. This ranges from providing the servers, IT support and enhanced service levels all the way through to getting involved in a client's business processes and effectively adopting a consultancy role.

The straightforward web hosting market is effectively merging into a larger, more diverse market which some commentators are referring to as the managed service provider space.

An interesting alliance which illustrates this trend is the recent tie-up between MSP Loudcloud and Qwest, a communications company with an important web hosting business.

The gloom in the web hosting market isn't likely to be permanent. Analysts Frost and Sullivan reckon 2005 will be the year when things begin to turn around, when demand matches supply.

Yet this is an unusually pessimistic forecast for any analyst to make, and it highlights just how bad the situation has become.

Some voices in the market are looking at third generation mobile as a possible source of new demand for web hosting, but this seems like a case of replacing one unsustainable fad with another. Business-to-business services and the ASP market seem like a much more reliable foundation for a business plan.

In fact, 2005 is probably the earliest date for the upswing to begin. It could well be later. Until then, things are going to get worse before they get better. Expect a steady flow of alliances, mergers and takeovers on the newswires over the next year or so, peppered with the odd bankruptcy.

Expect also a dizzying range of acronyms ending with the letters "SP" as survivors invent new monikers for their services to chase those niches for their value-added services.

After all, the people who make money after a gold rush will be the ones who sell the most exotic shovels.