Dot-Com Boom and Bust
By Dennis McCafferty
This story appeared in "Ten Turning Points," featured in the September 2004 issue of Web Host Industry Review magazine. Click here to subscribe for free.
September 24, 2004 -- (WEB HOST INDUSTRY REVIEW) -- Failure, it turns out, was an option. It didn't seem that way in the 1990s as MIT professor Tim Berners-Lee created hyperlinks and paved the way for the clean, accessible World Wide Web.
That simple wrinkle fast-forwarded the once-obscure tool, and opened the floodgates of promise and hype. The gold rush was on. It seemed that anybody with an e-tail plan could get 15 minutes with a venture capitalist. And the hosts came in droves, eager to serve as conduits for the new medium.
Web hosts, in particular, seemed to be on solid ground. Even if the e-tailers and media startups folded, the demand would always be there. As the new millennium dawned, no less than one million new Web pages went up every day. Investors dumped $30 billion into dot-com startups in a single year.
"The gold rush to the Internet directly spawned the shared and mass-market hosting sector we have today," says Jackie Fewell, CEO of Web host FatCow. "Hosting was once the bastion of only large and medium-sized companies that needed outsourced solutions and often had vendors such as IBM maintain datacenters and managed services for them. But this gave way to shared hosting for the masses who needed to 'get on the Net,' eagerly provided by hosting companies both large and small that had a server, some bandwidth and a dream."
But something happened. At the turn of the century, dot-coms started dropping off the map. And they weren't being replaced. Funding houses were shutting their doors. By 2001, hosts started to suffer similar, unsustainable losses. Months earlier, companies like Exodus, GlobalCenter and Digital Island couldn't build data centers quickly enough. But suddenly, their dot-com customers were disappearing. Exodus filed for bankruptcy by September 2001. And it wasn't alone - Loudcloud would announce by June 2002 that it was leaving hosting to develop software. Digital Island reported that its data centers would be used at well under 50 percent capacity.
Failure was not only as an option. It was reality. "During the boom, many hosting companies expanded both their physical footprints as well as their value-added services without an eye to the business viability of their offerings," says Bob Hammond, CTO of content delivery network operator Mirror Image. "They hoped clients would fill the space and adopt their value-added services, which caused them to grow so fast that the rest of the company could not keep up with the required support structure."
Now, in 2004, the aftermath of the dot-com boom and bust might just resemble that of the auto industry, when a jungle of potential players eventually thinned to a few who knew how to play the game. There are encouraging signs. Microsoft is pushing hosted Exchange. Gartner estimates that by 2008, 34 percent of all software will be subscription based, which bodes well for hosting demand.
Investors like Michael DeAloia, of BlueBridge Networks, are finding bargains at those data centers, anticipating the next resurgence of the hosting industry. He was part of an group that recently bought a 20,000 square-foot building once owned by Genuity and valued at $20 million, as well as a 15,000 square-foot data center once owned by Cable & Wireless and valued at $12 million. "We bought those facilities at a pruning price of zero dollars," DeAloia says. "We simply assumed the leases, which, of course, we negotiated to get a better deal."
Costs for Web use are similarly declining. "Broadband prices are still dropping and the market is still very competitive," says Steve Dunton, CTO of activAeon, which provides software license reporting tools for hosts. "Customers are literally paying one-twentieth of what they paid for T-1 lines as recently as the year 2000." A sea change in business philosophy has sobered the companies that survived. "Grow fast or die" has become "pay as you go." Web hosting is, once again, on a fast growth track according to IDC, with revenues projected to reach $22.4 billion by 2007, up from $7.4 billion in 2000.
"Following the bust, the dot-com market and the hosting industry have begun to take the Web-enabled message into the broader, enterprise market," says IDC Web hosting analyst Melanie Posey. "For hosts like IBM and AT&T, this opened the door to pitching hosting as a complement to traditional services such as data networking and IT outsourcing."
It's more about substance than style these days, about proven game plans rather than pie-in-the-sky thinking. "Back in the Dot-com boom it was all about space with ping, power and pipe," says Roy Dimoff, CEO of Web host ViaWest. "Dot-coms got up and running as quickly as possible, with the plan to go public or sell. An outsourced colocation or hosting solution met the needs of that business model. But the managed service provider who survived not only met those needs, but he invested wisely. Now that company can point to a healthy customer base, revenue stream and technical experience."