Hosting market remains volatile

Internet hosting remains important to corporate IT, but the market continues to be shaky and customers will have to stay vigilant through 2003 as they negotiate contracts, analysts say.

A sluggish economy and a slowdown in Internet-related projects have stymied the hosting sector for some time. A new report by Giga Information Group says that instability will continue at least through early next year. In the report, analyst Bill Martorelli says consolidation in the market will continue unabated as service providers are rocked by the tough economic environment.

Intel Online Services earlier this year announced it was winding down its hosting business because of a poor outlook for the market. Managed infrastructure provider Opsware, formerly Loudcloud, also announced the sale of its hosting efforts to Electronic Data Systems (EDS). And last week, Digex said it is seeking "strategic alternatives," including a possible sale of the company.

That puts big, stable providers such as IBM and EDS in a good position, Martorelli says. Other providers such as AT&T and NTT/Verio are also playing up their stability to attract large companies.

The shaky market is of little surprise to customers, who have been dealing with service provider volatility for more than a year.

"I think most companies, regardless of who they're with, are looking around because of the uncertainty in the hosting environment. It's just not a given that they're going to continue doing what they're doing now in the future," says a director of e-business strategy at a large capital-goods manufacturer, who asked not to be named.

The company has been hosting with Digex for two years, but its contract comes due in April, giving it the opportunity to consider other options.

"We are moving the viability of the [hosting] company up . . . in our selection process because it's becoming more and more important," the strategy planner says. "A few years ago we looked at functionality and price a little closer than the viability of a company. It was always there, but it carries more weight today."

He also says that while his company is considering bringing some hosting initiatives in-house, "all the reasons why you outsource are still there today."

While the market shakes out, customers still are signing contracts, most which are spurred by site migration, re-architecture, server consolidation, data center consolidation and business software continuity planning, according to Martorelli. Site redundancy, business continuity and security also are driving businesses to hosting providers, he says.

Still, the market isn't growing as fast as it did during its heyday a few years ago. But once the economy improves, well-positioned hosting providers will benefit.

"In 2003 we're going to start to see some of the leading providers emerge from this mess," says Carrie Lewis, an analyst at The Yankee Group. "Who they're going to be is tough to say."