C'mon, Get 'Appy

By Tara Seals

The Web-hosting market is back after a long hiatus, but with a new act: It’s joining with applications and business services, making the space a bit more profitable for resellers willing to bundle Web presence with applications like e-mail and online transaction engines, or hosted software applications like enterprise resource planning. Unlike the Partridges, this is one family of hosted offers whose run may last a while.

While there always will be consumer demand for standalone Web hosting, reseller margins are squeezed by the ability of larger players to offer hosting at rock-bottom prices, says Steve Dunton, CTO of activAeon. His company offers activAeon XA, a tool that allows hosters to monitor exactly how many users a company has on their service for on-demand, accurate licensing. “In order to remain financially viable in this kind of market, you need to be increasing the ARPU [average revenue per user] of your customer base,” he notes. “This can be achieved in a couple of ways. The first and most effective is by up-selling services or cross-selling [customers] to hosted mail or hosted CRM [customer relationship management] or other such services.”

Interland Inc. has been moving away from the traditional Web-hosting model for about 18 months, says John Lally, Interland’s area vice president of marketing. “Over time, technology infrastructure always becomes a commodity, and that’s what had happened to our core hosting service,” Lally explains. “Today, we assist smaller businesses by driving traffic to their site and by putting sound online marketing tools to work for them. We help businesses show and sell their products.”

“For folks using the Web for image branding, it’s not a revenue-generating activity,” says Alex Yevelev, director of sales and marketing at hoster Intermedia.NET, which has about 500 resellers - Web developers, designers and IT consultants - that sell design, desktops, firewalls and Web hosting, packaging it all together. “So customers flow in and out.

But at the upper end, managed hosting can be anywhere from $500 to $5,000, up to $10,000 per month when the Web presence is the revenue-generating activity, not just an extension of sales and marketing. The spending can grow exponentially, complex firewalls, etc., and customers tend to stay.”

Paul Engels, vice president of marketing and business development at Hostopia, says the price keeps going down for basic hosting.

“Offering a broad portfolio, with domain name registration, domain-based, managed email, maybe with transaction processing or payment gateways, and intuitive user interfaces for management, embedded chat, ASP-type services … now it’s about managing and operating your online business,”  he notes. “It ups the ante a bit.”

Aside from competitive pressures, the market for Web hosting has undergone a sea of change in the past two years, say industry players, forcing players to look at applications. During the days of the go-go ’90s, at the height of the dot-com bubble, hosting was lucrative and the selling was easy: Everyone made a Web presence part of their business plans, egged on by ads depicting startup companies deluged with orders within minutes of a site going live. The dotcom era is long gone and the Web hosting industry has had to grow up.

“Folks are more sophisticated now,” says Barbara Branaman, vice president and general manager for hosting services at XO Communications Inc. “End user customers know you can’t just throw up a Web site and expect it to make you money.”

XO offers search engine submission tools, e-mail marketing toolkits, SQL and database capabilities, and recently entered the applications fray with a proprietary junk mail filter and e-mail, and recently PayPal bundled in to facilitate secure e-commerce transactions.

PayPal’s service builds upon the existing financial infrastructure of bank accounts and credit cards and uses a proprietary fraud prevention system to create a safe, global, realtime payment solution.

“The idea is to get out of the commodity space and into a differentiated space like ecommerce,” says Branaman. “There are now full-service plays. The market is changing.”

There’s been steady demand for vanilla Web hosting, but it’s not growing, says Yevelev. “We’ve shifted our focus over the last three years to offering hosted Microsoft Exchange, and we’re becoming more oriented to collaboration and messaging. Every company is finding a niche in the market. It’s better to be a specialty shop for something that not everyone offers.”

I THINK I LOVE YOU, RESELLER

Meanwhile, the ability for service providers to offer suites of services has become limited by the investments required in infrastructure, software licensing and people. Web hosting requires a data center and the ability to provide non-stop service, along with constant vigilance in updating any third-party applications on offer. Enter the resale opportunity.

“There are new applications every week, every month,” says Yevelev. “The expectation is for the service provider to implement the needs on the fly.”

Engels says for service providers to be competitive, you have to offer the service at a low rate, under $50 per month for shared hosting. “Meanwhile, the necessary investment is so large because you have to stay current and sophisticated. So you get almost no payback.”

Joel Kocher, Interland’s CEO and chairman, says as customers’ expectations grow and evolve, the job gets harder. “The provider has to make investments to meet those evolving needs. Small players won’t be able to make those critical investments in new products and service delivery.

I have seen this happen in every single technology market lifecycle in my lifetime.” Companies like Interland, Intermedia.NET, Web.com, XO and Hostopia make private-label resale of Web hosting a core piece of their business, using volume to offer decent margins to service providers, and in turn generating yet more volume. “Our proposition is built on economies of scale,” says Hostopia’s Engels.

“We have 100,000 hosted domains, so we can profitably offer it. Service providers can private label and go to market with a small staff allotment. So they can be profitable.”

Beyond margin help, many hosting companies also offer resellers a wide array of support tools to cater to service providers looking to resell Web hosting. “We’re really optimized for this space,” says XO’s Branaman. “We have a patented architecture and platform technology that is designed to be a reseller platform and to be private labeled, soup to nuts. We provide billing, customer care - resellers want it to be turnkey and without startup costs. We can do that.”

Once the service provider decides how they want the service to look, with a graphical interface and customized screens, XO also will provide the technical implementation, with a defined project plan and schedule and followon support.

Web.com’s reseller program offers the ‘Highly Available Provisioning Infrastructure’ - HAPI, a suite of software and services.

“We offer Web hosting, domain name registration, outsourced customer service and a built-in billing system, among other things,” says CEO Will Pemble. “Resellers can choose from different service levels for customer service:

For example, you can specify that you want three dedicated agents, and no more than 30 seconds wait time. Or, we can charge the reseller on a per-call level if they like. We even can offer e-mail and live chat help. It’s a cafeteria vibe: We’re doing this anyway, let us do it for you, too. It’s very scalable from a business perspective.”

Hostopia also can offer Tier 1 privatelabeled or generic customer support, which about one in three clients opt for, says Engels.

“There’s e-mail, chat, Web support and scripting on behalf of the client. We can set up telephony systems for clients for hot transfer, so they can transfer hosting calls out of their systems and into ours seamlessly. So there’s an overwhelming demand for more than the product and technology from us.”

End-to-end packaging is part of Hostopia’s reseller lure as well. “We offer a business success practice,” says Engels. “This includes a specially trained sales engineer group, marketing collateral, marketing advisory services. We will design and build online sales sites for resellers.” For the back office, Hostopia offers a flexible provisioning API, or for clients without billing systems or credit-card authorization capabilities, it refers them to third-party providers like Rodopi or Platypus. “Or, we can build a basic turnkey billing system,” says Engels.

MONEY, MONEY

Armed with back-end support options, resellers looking for customer targets for their suites of hosted services have a wide range of options, beginning with small to medium-sized businesses.

“We’re pursuing the estimated 12 [million] to 14 million U.S. small businesses that don’t have an effective Web presence today,” says Interland’s Kochner. “Research study after research study shows that U.S. consumers expect businesses of all types to be online. This consumer force is going to push nearly every business to seek an effective Web presence that generates tangible results.

Someone has to develop, host, maintain and promote these sites, and we know small businesses don’t have the ability, time or money to do this so we want to do it for them.”

Interland and its resellers are hoping to appeal to the segment by offering custom online presences, one-on-one coaching and access to a suite of easy-to-use tools and applications to market their businesses, perform online transactions, and interact with customers and prospects. “These offerings are going to be central to our ability to execute on our strategy of helping small business get online,” says Kochner. “And frankly, we think this is the future for hosting.”

The Yankee Group says Web hosting industry was marked for failure following the highprofile collapse of Exodus and the exit of Cable & Wireless and Sprint Corp. from the U.S. market, but rising demand for an ‘integrated’

Web site has headed off the demise. More than 20 percent of small and medium businesses with Internet access indicated in a survey that they had a need to integrate offline business applications with their Web sites or e-commerce, while 50 percent of SMBs with a Web site want to use it to improve customer service.

Increasingly dynamic Web content also was on the wish list. Yevelev says Intermedia.NET’s business is growing 100 percent on a year-to-year basis since adding the Exchange capability.

Small and medium-sized business accounts for most of it. “Microsoft has sold 100 million- plus seats. Three to 5 percent choose to outsource. A lot of SMBs have not enough IT, can’t provide cash out of pocket, and don’t want to manage a complicated product.”

Great Oak Enterprises, a service provider reselling Intermedia.NET’s portfolio, caters to very small businesses.

Jay Street, president and CEO, says bundled Exchange e-mail has helped grow his business. “To do e-mail inhouse, that’s a $10,000 proposition, and small business owners can’t afford that,” he says.

“To be able to say, I can transform your system from POP mail like AOL, etc., to something that is e-mail accessible anywhere as well as through Outlook, with scheduling, address books and calendaring companywide, is a huge value. E-mail can be the lifeblood of the system. You can get it wirelessly over BlackBerry. To offer that power for a few dollars per month, that’s a huge value for me marketing to small business.”

The home office set is another target. “There’s untapped potential in the SOHO/small business, smaller than five employees, home-based segment,” says Engels. “There are millions of them out there, disguised as consumers.”

Larger businesses are good targets as well. ” believe application outsourcing will become more prevalent with customers placing key systems but not complete infrastructures in the hands of the dedicated hosters,” says Dunton. “I also believe that as more traditional business try to transact more online to reduce their cost of sale, this will increase business in the hands of the dedicated hoster, particularly in the hosting of transactional engines such as Microsoft’s BizTalk Server,” an ERP solution that integrates systems, employees and trading partners for companies.

Approaching a larger customer could be a strategic sell. XO’s Branaman says that once a reseller has a customer on the platform, a strategy is to move people up the food chain and into bigger plans as they use more and more disk and add more services. “All that revenue is gravy, because there’s no cost of acquisition,” she says.

The space will continue to evolve, particularly with Yahoo! as a significant recent market entrant with the capability of bringing content to bear on its offer.

“Comparing the hosting industry to the human life cycle, I would have to say the industry is in its junior high school years,” says Kocher. “The market is still very immature, and consequently is still highly fragmented with only a few large players owning any substantive level of market share. That will change. It always does.” Additional reporting by Suzanne Sanders.