Hosting

Hosting's Next Step

Vendors hope variety and flexibility will entice businesses to use their new, but more expensive, packages of managed services
from: informationweek.com
By Bob Wallace (bwallace@cmp.com)

he hosting industry is looking for more customers like Paul DiNicola. A bit of a risk taker, the downhill skier, scuba diver, and VP of operations for Insurance.com, an online insurance company in Newton, Mass., uses co-location services from Exodus Communications Inc. to house his company's servers. He's now interested in emerging hosting services that combine maintenance, professional services, and other options in integrated bundles at predetermined prices.

"Hosting-center space has become a commodity--it's like selling air," DiNicola says. "The days of hosters providing just data-center rack space, power, and a network connection are numbered, because companies like ours want equipment and services packaged and managed by the provider."

Hosting vendors want to move customers from low-margin basic services to more expensive and profitable managed services packages that include a variety of hardware, software, security, monitoring, and network options.

"Every hoster is moving in this direction," says Joel Yaffe, a senior industry analyst at Giga Information Group. But he's not convinced businesses will follow. In general, he says, "the packages better serve the needs of hosters than the needs of customers." Hosters must build enough flexibility into their packages to meet users' requirements as they grow, he adds.

Digex, a WorldCom company whose customers include J.P. Morgan Chase, Nestlé, and United Airlines, will start offering about 20 managed service packages, perhaps as early as this week, through its own hosting centers and from some run by UUnet, another WorldCom company. Hosting leader Exodus, with 42 centers and 4,500 customers, including British Airways, General Electric, and Microsoft, next month plans to roll out what it calls Management On Demand packages. And AT&T, with 13 centers in the United States, the United Kingdom, and Japan serving companies that include CBS.MarketWatch.com and FAO Schwartz, will introduce packaged services next month.

Qwest Communications International Inc., which last year struck several multibillion deals to extend its hosting presence worldwide, last week introduced its first managed services, created in conjunction with Hewlett-Packard. It plans to offer packaged versions of the services later this year.

Managed services go beyond the mere leasing of data-center space to include a wide variety of services and capabilities that are managed and monitored by the hosting company. The packages--which comprise both new services and some already available from hosters a la carte--will range from basic offerings that include leased servers, software, and monitoring to integrated setups with Internet infrastructure staples such as security firewalls, caching systems, load balancers, Web switches, storage, and content-distribution systems. Professional services and overall site management will also be available.

The value to hosting vendors is clear: Lower costs, thanks to automated processes that support packaged, rather than custom-designed, services, and higher revenue, since the more services they sell, the more money they make.

But will IT managers go for the new approach? DiNicola says he's interested "because we don't have time to recruit the right skilled workers to manage our site and develop what we need, nor the money for building and outfitting hosting centers."

But not everyone is sold on the idea. "My top question is whether these packages are flexible, and, if they are, how much will they cost?" says Martin Redington, VP and systems architect at Beenz.com Inc., a New York online rewards company. "I would want to know what I could add to the setup and what I couldn't." The dot-com now uses co-location and backup services from Exodus.

Hosting executives say customers will be able to add--for a price--any type or number of servers or services, including sophisticated capabilities such as burstable network bandwidth to handle peak demands. They'll offer products from a variety of leading vendors, including Cisco Systems, Compaq, Microsoft, and Sun Microsystems.

"Packaged services are definitely a more efficient way of delivering services," says Peter Fortenbaugh, senior VP of strategic planning for Exodus. "By automating processes and standardizing on the package components, we can pass along savings and offer more all-encompassing service-level agreements than today. We're convinced most of our cus-tomer base will migrate to this marketing model."

But Greg Alexander, senior VP of MIS at Sharperimage.com, the online arm of retailer The Sharper Image in San Francisco, isn't sure any package of managed hosting services can be flexible enough to meet his needs. Last year, his company replaced its E-commerce site with a more sophisticated one. "We made the change while co-located at Exodus, but this big a change was beyond their area of expertise. I don't envision a preset and integrated package approach allowing that."

Alexander also questions whether that approach can handle the growth of the company's business--from $5 million in 1998 to $60 million last year--or its Web infrastructure, which requires quick changes. Still, he says he'd consider some new services if they are less expensive than buying the hardware and managing it himself. "We're very interested in storage and caching systems offered as services," he says.

Vendors say packaged services will save businesses money, especially when compared with the costs of setting up the systems and integrating them internally. A full menu of managed hosting services can cost $62,000 per month, Yaffe says. He expects hosters will charge up to $33,000 a month for a prepackaged, integrated set of services. Still, that's considerably more than the $5,000 to $7,000 per month they get for basic co-location service.

But, some analysts say, the real goal is to increase the vendors' own profits by raising the monthly fee customers pay for services and boosting revenue per square foot in their costly hosting centers.

Although AT&T, Digex, and Exodus wouldn't reveal pricing information for their upcoming services, they insist they can offer lower prices because packaged managed services don't need to be set up and configured for each customer. The approach also allows for better integration and easier management, and it lets the hosting vendors offer service-level agreements that cover the entire packaged offering. At the same time, the vendors are trying to automate more of the system setup process, which can speed deployment and reduce costs and the need for trained staff.

Certainly, hosters will have to do something if they want to meet growth projections. Overall sales of hosting services will climb from $4.39 billion this year to $19.77 billion in 2004, according to Forrester Research, thanks in large part to managed hosting services, which are expected to jump from $1.88 billion this year to $10.97 billion in 2004. Co-location, however, will show modest growth, rising from $730 million this year to $1.03 billion in 2004.

Hosters have enormous financial incentive to sell more expensive services. Some have spent hundreds of millions of dollars to build secure hosting centers with highly redundant systems that are designed to ensure availability; they need to recoup those costs. And the current economic slowdown has poked holes in their business plans.

"The dot-com consolidation affected 15% of our hosting customers, meaning that we lost them altogether or they scaled back substantially on what they had contracted for," says Jenny Proctor, director of hosting and ecosystems at AT&T. The application service provider market, which was expected to soak up a lot of the facilities space managed by companies such as Exodus, has also grown slower than expected.

Analysts say the dot-com bust will continue to hurt hosters. "They made up 40% to 50% of hosting revenue last year, and by year's end will account for less than 20%," says Tim Abbott, an equity analyst covering Internet infrastructure for Merrill Lynch.

Managed services are one way to recover some of that revenue. Another is to automate the mostly manual process of setting up and configuring systems for each customer, which results in sky-high staffing and operational costs. Digex says its automated processes let it set up and deliver systems in 10 days, even though the number of servers it deploys has jumped from 100 per quarter in 1997 to nearly 700 per quarter this year, says Andy Hunn, senior director of business development for Digex.

Merrill Lynch's Abbott says staffing constitutes 70% of the cost of running hosting centers. "Hosters are beginning to see that reducing that figure is a big plus in cutting their operational costs," he says.

Hosting vendor Loudcloud Inc. last week unveiled software to automate more Web-site functions for its customers. "The reason we outsourced everything to Loudcloud was speed to market," says Tim McGirr, operations director for Juniper Bank in Wilmington, Del. "And we avoided the time and investment of hiring staff to manage our site."

Other businesses see less need for the packaged approach. Pioneer Investments Management uses nonpackaged managed services from Digex and is content with the offerings. "They provide us an array of backup, performance-reporting, server- reboot, configuration-change, and monitoring services that work very well," says Iang Jeon, senior managing director of E- commerce for the Boston financial-services firm.

Pioneer could benefit from a managed hosting package if it includes all the items it buys from Digex as well as ongoing and enhanced application-management services, Jeon says. But only, he says, if the price is right.

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