Squeezing Margins from Web Hosting

August 1, 2003

10 Min Read

By Khali Henderson

Posted: 8/2003

Squeezing Margins from Web
Hosting

By Khali Henderson

While some carriers are getting out
of the hosting business, others are moving in and, thanks to new automation
technologies, creating a profit center.

The topsy-turvy world of Web hosting
continued to experience the ups and downs of the past two years right through
this summer when two large carriers — Sprint Corp. and Cable & Wireless —
decided to pull the plug on their Web-hosting businesses. These announcements
followed an April decision by Level 3 Communications Inc. to shed the hosting
business it acquired as part of Genuity Inc. Computer Sciences Corp. picked up
the business, along with about 100 Level 3 employees.

More recently, on June 4, Cable
& Wireless ended weeks of speculation as it announced it intended to exit
the IP and hosting businesses remaining in the U.S. market. "Our U.S.
subsidiaries make losses, consume cash and require significant management
attention. Both hosting and IP services are businesses which have limited
interaction with the rest of the group and are not central to our plans,"
said CEO Francesco Caio said in a statement at the time. "They may have
value to the right owner but they are not sustainable for us with their current
cost structure."

Sprint followed less than a week
later with the news it would shutter its Web-hosting business — the first major
strategic decision by new chairman Gary Forsee. The company said it would phase
out operations at eight Sprint E|Solutions Centers once it has completed the
migration of current hosting customers to preferred third-party providers or
strategic partners.

Despite these withdrawals, there is
no shortage of companies willing to pick up displaced customers. Carriers like
AT&T Corp. and SBC Communications Inc. and more traditional hosting
companies like Verio Inc., Digex and NaviSite all announced migration plans with
catchy names designed to lure abandoned customers. Verio’s "Here Today,
Here Tomorrow" Migration Plan, for example, offers customer up to three
months of free colocation and dedicated Web-hosting services, including hardware
installation and immediate migration to an NTT/Verio data center. Verio also
says it would provide up to $30,000 in site migration and related professional
services free.

Master agent Broadband.com offers a
unique program to assist companies in evaluating alternative hosting and
bandwidth providers, including free needs analysis, assessment of pricing and
promotions and migration assistance.

The companies staying in the game
face some of the same issues that got their former colleagues in trouble: high
overhead. Carriers, in particular, have taken their lumps with Web hosting,
considering it an afterthought — just another value-added service to increase
customer retention. Now, however, new automation solutions are emerging to help
them squeeze the margins out of Web hosting.

"What we are coming to is a
seminal event for the carriers in terms of deciding what is the role of managed
Web hosting services for them. I think some of them are going to declare that it
is a key strategic initiative in terms of gaining account control for the small
and medium business customer. It’s also a low-risk, high-margin way to increase
average revenue per user," says Scott Armour, vice president-Americas for
Sphera Inc., one of a handful of companies offering automation solutions to
Web-hosting companies.

While many carriers have offered it
as an add-on, now many are beginning to get serious about driving volumes into
their data centers. Automation is enabling them to do so by offloading and
speeding customer provisioning and support. Now, fewer people can support larger
numbers of customers with an even greater level of customer service.

Armour likens Web hosting automation
software to the e-ticket terminals at the airline.

"I am 10 times happier being
able to walk up to that kiosk, change my flight, change my seat, check in, get
into my flight without having to stand in line to wait to talk to a high-priced
gate agent, who is going to work some god-awful mainframe-based reservation
system to try to serve my needs," he says.

Armour says his company’s
HostingBusiness Suite — Server Director, Domain Director, Cluster Director,
Reseller Director and Billing Director — represent the same kind of
"market changing" technology. "Our control panel technology has
basically enabled that same win-win approach to Web hosting where customers can
do things themselves and the hosting company saves a bunch of money and yet the
customer at the end of this is actually happier," he says.

What Sphera’s technology does
exactly is enable customers to manage their core Web services like email. It
also enables point-and-click installation of value-added applications, such as
e-commerce packages, databases, application development tools, streaming media,
collaboration systems and Web utilities.

The HostingBusiness Suite also
offers management interfaces to data center managers, system administrators and
even resellers.

"[Besides customers], the next
big group that they are now dealing with that is driving costs is
resellers," says Armour. "So, with our new modules — Reseller
Director and Billing Director — we have taken the same concept of customer self
service and extended it from the end user up one level in the value chain so
that now resellers can go in, they can define their own service plans, they can
manage their own resources, they can manage their own customers — all on their
own through an intuitive GUI interface without having to involve human resources
from the data center or hosting side."

The impact of such automation, he
says, is a reduction in the number and duration of help desk calls and an
ability to hire less expensive personnel to field those calls since they can use
the same intuitive tools. "On average, we are seeing a 20 percent to 30
percent reduction in opex in terms of traditional hosting models to this
automated hosting model," he says.

In addition, Armour says Sphera
customers are experiencing improved customer retention, which translates into
higher profits. "After four to six months, support loads go down and
profitability goes up," he explains. "If you can get account life to
go from 18 months to 27 months, what you are adding is nine months of almost
pure profit on that account."

HostingBusiness Suite is modular and
licenses are granted on a per-server basis. For a midsize hosting company with a
few thousand accounts and 100 dedicated servers it would cost around $25,000 to
$50,000. At the high end, customers with tens of thousands of accounts spend
between $250,000 to $500,000. Armour says that the return on investment is six
to 12 months, typically, but can be much less for larger installations because
the incremental cost to add a server is marginal.

One of Sphera’s new carrier clients
is Aliant, a telcom carrier serving Altantic Canada. Aliant, the merger of four
companies, faced the challenge of consolidating four operating systems.

"We saw pretty strong growth in
the Web hosting business and felt it was important that we get our services into
a single platform that would allow us to better manage them, reduce our costs
and provide them better services," says David Grebenc, director of SMB and
advanced services for Aliant. He says the company looked at outsourcing its Web
hosting services but decided against it after determining its costs to run its
server farm were less. "When we ran across Sphera, their ability to provide
the application that allows us to do Web hosting and support UNIX and NT made us
feel comfortable that we could do it," he says.

Steve Ryan, senior manager of
application engineering for Aliant, said that Sphera’s technology aided the
company in being able to collapse the operating environment and at the same time
pick up and repackage offerings so that customers would get the same or greater
value than before. In addition, it has enabled more uniform and comprehensive
reporting capabilities across the customer base.

Sphera’s solution also allows Aliant
to expand a channel program from two of its jurisdictions to its entire
territory by offering a variety of tools to satisfy developer preferences and
giving them the ability to manage their own customers.

LDMI Telecommunications Inc. is
another carrier that has put its Web-hosting business into high gear with
automation. The company is using a new product from SitePak called Onsite Host
Controller to automate it shared hosting. Joe Ross, product manager for managed
hosting and security for LDMI, says that the company wanted to take it’s
three-year-old hosting business to the next level in terms of the features it
could offer to its base of more than 89,000 SMBs.

"In my reviewing a few
solutions, I found the OHC product really had some features that tailored to
SMBs and wasn’t overkill," he says, explaining it address the majority of
what SMBs are trying to do — "create a Web site, get it online, easily
communicate with their customers, take some customers information, admin their
own e-mail accounts, track visitor statistics and generate additional revenue
without additional sales people."

On the flipside, he says, OHC also
offers hosting automation. "In the past to provision Web hosting, [the
system administrators] would have to go to the console on our e-mail server, the
console on our Web hosting server, the console on our DNS server and do a lot of
configuration. Now, with the implementation of OHC, it’s fill out a form and hit
a button and all of those things are provisioned automatically."

Those system administrators are now
redeployed to the company’s base of dedicated hosting clients. Ross says OHC
also enables LDMI to roll out a new product, virtual private servers, which
enables the functionality of a dedicated server on a shared platform.

The shared hosting package based on
OHC was released to the sales force in July and eventually will be expanded to
the company’s agent channel.

"The way we have been doing it,
it’s fairly costly. It’s barely worthwhile to tell the truth, but once we get
the reseller channel fired up with this [OHC], it’s going to be really hands
off," he says, noting that OHC gives LDMI the ability to offer resellers
private branded control panels and customized hosting packages.

OHC was designed specifically for
telcos and ISPs to leverage their existing infrastructures to address the SMB
hosting market.

"It was clear to us that Web
hosting had to be part of telecommunications companies’ full service offerings
and it was equally clear that there had to be a way they could make money at
it," says Eileen Goldfarb, Sitepak CEO. "OHC lets telcos do
both."

In contrast to appliance-based
solutions like those from Sphera or Ensim, Goldfarb explains that OHC employs a
central server model. "What we do is put a server in your data center and
put our software on it and through a technology we have developed called
‘service driver,’ it communicates with all of the servers already in the data
center," she says, noting that it can be implemented in as little as a few
days or weeks.

Goldfarb says that in SitePak’s
experience, support costs can be reduced 80 percent be allowing end users to
manage their own Web presence. Sitepak’s evidence comes from maintaining its own
based of several hundred hosting customers. "We have worked as a hoster. We
really know the hosting business," she says.

OHC is available for a one-time site
license based on the number of accounts. It ranges from $15 to $50 per account
depending on volume. Most sales are in the $20 range, Goldfarb says. A 25
percent subscription fee for four annual software upgrade releases is required
for the first two years and optional thereafter.

The addition of features and
automation not only can cut operating costs but also are expected to drive
sales. "We want to give them the chance to attract these people because we
have a complete set of basic, easy to use features that are all integrated
together," says Goldfarb.

Sphera’s Armour adds: "What we
didn’t anticipate is that speed of provisioning has led to an increase in their
capture rate and therefore a dramatic increase in sales." Sphera customer
Web.com, for example, reduced its new account provisioning time from up to 48
hours down to 35 seconds — a feat it credits with helping to expand its
business by more than 400 percent.