PARTNER CHANNEL: Diamond in the Rough

Posted: 10/2002

Diamond in the Rough
Web Hosting Remains a Lucrative Sale Despite Shakeout

By Tara Seals

YOU'VE READ THE HEADLINES, shook your head in resignation over the demise of the latest IP service provider and hoped your Web site is still up come morning. But many say the high-profile bankruptcies and consolidation in the Web hosting space mask real opportunity for web hosters and their channel partners.

"Technology is not in a bad place," says Rob Goble, president and CEO of master agency Venicom Inc. "I don't see a decline in services, and people still need to communicate: the difference is in the amount of debt some companies have."

Scores of industry reports show the market is littered with the corpses of failed Web hosting ventures, and not just in the "telcos with issues" category, which includes Global Crossing Ltd., WorldCom Inc. and Qwest Communications International Inc.

Sketchy times for an industry that Forrester Research predicted would grow to produce $14.7 billion in revenue by 2003, up from $3.5 billion. That was back in the halcyon days of 2001; today, the market totals only $5.7 billion, according to Forrester's revised numbers.

Smart Shopping

All the big names in bankruptcy these days do not mean customers have to settle for second banana Web hosting, and it doesn't mean the space is doomed. There are plenty of success stories, if one knows where to look. That's also good news for channel partners.

Exodus Communications Inc. is a case in point. It was the nation's largest Web hosting company last year at this time, reports Tier 1 Research. It also was struggling under unprecedented amounts of debt from building out 44 data centers, and went on to declare bankruptcy just in time for the holidays. But more quickly than you could say "Yes, Virginia," Cable & Wireless plc swooped in and rescued the majority of Exodus' assets and its thousands of customers. C&W has continued to grow the business over the past few months.

"The bankruptcies that have happened in the hosting space were primarily the result of overbuilding while using debt to do it," says Dave Asprey, director of strategy at Exodus. "Cable & Wireless was able to sell off a lot of business units and raised billions, and as soon as the market crashed they were able to go around and make some strategic acquisitions for pennies on the dollar."

With new owners, the web hosting company works with partners, including regional integrators and Cisco Systems Inc. VARs, to sell its services. Asprey says the most common model for selling complex Web hosting is being included in a scope of work in an integrator contract.

"Also, if you look at the overall structure, it ends up in a lead referral model, and that's because Web hosting is a very complex service at the high end, much more so than say shared Web hosting which is relatively easy to resell," says Asprey. "Typically we have partnerships with VARs and integrators, and once their people see an opportunity, it's likely they'll require our sales engineers and/or reps to work directly with the customer, because our service is custom business, requires a lot of upfront information that a lot of partners aren't equipped to gather."

Perhaps for that reason, most Web hosting companies, whether selling $20 per month shared hosting or high-end collocation, offer a referral or affinity program for channel partners, which allows easy ramp-up into the business.

Interland has made a policy of discovering what VARs need to be successful in hosting. "We conducted extensive research, including talking with our own reseller partners, to better understand what they needed," says Steve Flaig, area vice president of channel marketing for Interland. "What we found is that no hosting provider was really meeting the strategic needs of resellers."

The company is enhancing its channel programs and launched a Business Catalyst bonus program for its VARs in August, offering cash bonuses from $200 to $12,500 per month for increases in recurring monthly revenue.

Interland, which focuses on Web hosting solutions for small and medium businesses, offers standardized Web hosting, e-commerce and application hosting services, from basic Web sites to high-end managed dedicated hosting solutions.

Agents should be diligent in their research of Web hosting vendors, says master agent Goble. "Don't follow the highest commissions or rely on a vendor being owned by some multibillion-dollar company," he cautions. "You have to get in there and roll up your sleeves and look at profitability, business plans, revenue projections, cash on hand of the division you want to rep for. If it's a Tier 2 provider, find out who the underlying carrier is."

Even after making a best effort, it still behooves the agent to have an exit strategy for customers in the event of a vendor failure. Technology adviser Ramp^Rate LLC has launched a program that features multiple service providers for customers that need to migrate from defunct Web hosting providers. The company monitors each of its providers' performance and status by looking at a variety of elements, including network and data center infrastructure, staff expertise, brand fit, financial health, customer experience, reporting architectures, SLA flexibility and pricing.

"We're constantly on the search for new vendors that can ease the pain of our clients," says Ranp^Rate CEO Tony Greenberg. "My people are scouring for vendors and how their clients are experiencing them."

Consumer Reports

Nowadays analysts are a bit less giddy in their predictions than they once were, and some can be downright gloomy.However, the picture that emerges is far from apocalyptic. Research and analyst firm IDC rates Web hosting as the most commonly used and most widely delivered managed service. "Despite all the bad press, economics, and financial brouhaha, customers are becoming more comfortable and more familiar with and gaining interest in using services from xSPs," says Laurie Seymour, IDC's xSP program manager.

In its summer survey, only 5 percent of respondents said they would consider increasing their purchase in the future. This, reports IDC, suggests that future spending on xSP services will be in new areas, and service providers already are lining up.

Exodus, for example, launched in August a set of business continuity and disaster recovery services that also are available to its channel partners. The services include consulting and evaluation, equipment configuration and setup, managed services such as security, data storage and backup, contingency planning and maintenance.

In another example, Via Net.Works USA, an Atlanta-based managed Web hosting company, launched its Partner Plus program this fall. The company does not offer Web development services, but gets a lot of requests for it. So it says it will turn over qualified Web development project leads to its channel partners, ranging from $1,000 to $10,000 worth of work. The leads can be as high as $250,000, says the company, depending on the partner's level of participation in the program, which includes bronze, silver and gold levels.

While The META Group blames market turmoil for causing sizable enterprises to pull web hosting and other network services in house, channel partners report a welcome audience in midsize to large enterprise market, particular among existing customers. Interland channel partner Electric Pulp, for example, has found demand for hosting upgrades and Web site redesigns as existing customers grow or their needs change. Electric Pulp sells Interland's hosting and its own Web development for mid- to high-end clients, including leading medical technology companies, U.S. Senate offices and athletes. "Many clients come to us with existing first- or second-generation Web sites that aren't adequate to their growing needs," Electric Pulp partner Aaron Mentele says.

One factor driving demand in the midmarket is the need for backup services and redndancy. Patrick Hadley, a telecom strategist for agency Communications Resource Management, sells BellSouth Corp. collocation and hosting to large clients in the Southeast, such as small VoIP carriers providing service to Latin America, telemarketers with call centers, catalog retailers and companies with e-business strategies. Those types of customers, he says, want to outsource their Web hosting to ensure the servers are redundant and secured in the event of a disaster.

Hadley says "it's an easy sale because it's asking the customer, do you want to keep your money in a mattress or do you want it in a bank?" Further downstream, there are a raft of customer opportunities for an enterprising agent to capitalize on, says agent Bruce Galle, of LD Wiz. "If most companies have a Web site, it's not by a big margin," says Galle. "I find that close to 50 percent of my [targets] don't have one."

He adds that many times a company with an existing Web site is unhappy with its current provider, or needs more bandwidth. As far as reliability, he has worked with the same provider for three years and feels confident selling its services into his base.

What to Look for in a Web Host

Quality Server Technology. Ensure that the server and server technology used can accommodate the number of users on your particular server.

System Administrators. Ensure there are knowledgeable system administrators

Network Redundancy. Your shared hosting package must have multiple connections to the Internet. Network redundancy ensures that if one Internet connection goes down, then traffic can be rerouted through another connection.

Network Connectivity. It is important to find the fastest Internet connection possible. Since you are competing with other users for resources in a shared hosting environment, you should ensure that you have at least T3 connection that is utilizing less than 50 percent of available bandwidth.

You also should consider the following factors before selecting any type of shared hosting solution for your Web site. You will save money in the long run by selecting a solution that grows with your business.

Purchase only what you need. Select a Web hosting solution that corresponds with your business needs. Don't sign up for an all-inclusive account with a hosting firm if you won't use most of their services. This will unnecessarily increase your costs.

Select a scalable solution. Make sure your hosting solution can grow as your site grows in complexity. Ensure that you can upgrade your site to accommodate increased bandwidth and other demanding resource requirements such as server-side scripting, database support and multimedia streaming.

Find prompt tech support. Only use a host that provides prompt and knowledgeable customer care. A dependable host should offer 24x7 toll-free technical support rendered by experienced and professionally trained technicians.

Check references. Before you commit to a particular hosting firm, ask for references. Canvass other Webmasters running sites with similar specifications. Browse their Web sites and measure response times at both peak and nonpeak periods.

Watch your billing and keep your receipts. Many hosting firms are notorious for horrid billing practices. Check your credit card statements to ensure you are not being overcharged or billed at an incorrect frequency. Most purchases occur online, so make sure to print out your receipt. Most companies will require you to remit that receipt by fax in order to cancel.

Back up all your data. Do not depend on your host to recover any data you publish on the Web. Most hosting firms are equipped only to recover files in the event of a system failure. Be sure you have a copy of any data you post to the Web on your own hard drive.

Own your own domain. Make sure the Web host will not hold you hostage to their service by exercising administrative control over your domain name. Your host should be listed only as a technical contact. You should exercise administrative control over the domain name from the point of purchase.

Follow the experts. Consult our recommended Webmaster resources to learn which hosting companies get thumbs up from established industry participants. Use the resources to glean from the experiences of successful industry players before you spend a penny.

Do extensive background research. Find out whether a host is facilities based or whether it resells hosting solutions. Also determine what payment processor the host uses to run credit card transactions. Determine who owns the hosting company and whether they possess the technical expertise required to run it effectively. All of these factors impact upon the credibility and reliability of the host and the services you provide your customers.

Establish an exit strategy. Always have a backup plan in case your host goes belly-up or experiences an unrecoverable failure. Redundancy should be a priority if you are running an Internet-based business. Remember any service failure can completely compromise your source of income.

Source: Reprinted with permission. Copyright 2000, 2001, 2002 Web Host Industry Review Inc.