When it comes to the Web hosting market, what a difference two years makes.

In 2003, Northern Virginia, Silicon Valley and Dallas were among the areas littered with mothballed Internet data centers, as carriers such as Exodus, Cable & Wireless and Sprint exited the hosting and collocation markets after the dot-com bust.

Today, service providers including Equinix, Savvis Communications, AT&T and MCI are snapping up these empty facilities, retrofitting them with today's power-hungry Internet servers and reopening them to meet skyrocketing corporate demand for hosting. This call for floor space and services at carrier data centers and the accompanying price increases are being driven by corporate efforts to improve disaster recovery and regulatory compliance.

"If a company looked at outsourcing two or three years ago, it was a buyers' market. Now space is tight, and costs are up,'' says Margie Backaus, chief business officer of Equinix. "We used to do four- or five-year deals with customers. The reason we're doing one- or two-year deals is that we need the ability to raise prices" in response to the changing market dynamics.

Internet data centers are so packed in certain cities such as Chicago; Washington,D.C.; New York, Los Angeles and San Francisco that service providers have waiting lists of customers wanting floor space. For example, Equinix has 20 companies on waiting lists for its facilities in Washington, D.C., Chicago and Silicon Valley.

This complete turnabout of the Web hosting and collocation markets is a surprise to many corporate network managers looking to renew their contracts. Rates are as much as double what they were a year ago, and it's difficult to lock in today's prices for more than a year, industry insiders say.

"The collocation market is brutal [for customers] right now,'' says Mark Winter, executive vice president of IT at Deluxe Laboratories, a media services company in Hollywood, Calif. Winter considers himself lucky to have replaced his collocation contracts with a utility computing deal 18 months ago, when buyers had more leverage to negotiate prices for outsourcing Web applications.

Winter switched from buying collocation services from Qwest and WinStore (with Deluxe owning and operating the hardware) to a fully outsourced utility computing contract with Savvis a year and a half ago. He renegotiated his contract with Savvis this summer to lock in pricing for the next three years.

"Our prices are 10% higher than with Qwest and WinStore, but we have no capital expenditures and no increase in head count," Winter says. "The 10% increase is minimal because it's a lot cheaper than adding head count. And I don't have to buy high-end servers or back-up systems."

Winter says he got a better deal in his renegotiations with Savvis because his company is a large, growing customer. Deluxe almost doubled the number of server blades it uses in Savvis' St. Louis data center during the past year.

"I have more leverage because I came in early,'' Winter says. "Savvis wanted reference customers. I have a large bundle of business with Savvis, so I have some buying power."

For network executives such as Winter, Web hosting and collocation are among the few services in their telecom budgets with rising prices.

"In the last year, pricing in the collocation market is up from an average of $20 a foot per month to $40 a foot per month," says Rob McCormick, CEO of Savvis. "We are doing deals now in the mid-to-high $40s. But that is far below the cost to build a new data center."

Demand for Web hosting and collocation services picked up at the beginning of 2005, and service providers are scrambling to meet that demand.

Consider the following developments:

• AT&T this month is opening a new data center in San Jose, which will more than double its hosting capacity in Silicon Valley, and AT&T is expanding its New York center by 27%. It also is opening a new data center in Shanghai, bringing its worldwide total to 28 Internet data centers, which offer managed hosting services.
  
  

• Savvis plans to open a 127,000-square-foot data center in Santa Clara, in the first quarter of 2006. This will give Savvis 25 data centers, providing a range of Web hosting services from unmanaged floor space to fully managed pay-as-you-go utility computing.
  
  

• MCI plans to open an Internet data center in the Washington, D.C., area in the second quarter of 2006. MCI recently expanded facilities in New York, Dallas and Boston.
  
  

• Equinix, which has been the most aggressive at buying and retrofitting abandoned data centers for its collocation services, purchased its third Internet data center in the Los Angeles area in September. Earlier this year, Equinix expanded its centers in Silicon Valley and Chicago.
  
  

"In the past 22 months, we've picked up six centers and increased our overall footprint by 50%," Equinix' Backaus says. "Our revenue is up 30% year over year. What we've seen is very good and steady demand and growth not only from new customers, but 50% of our business comes from our existing base."

Like Equinix, all of the top-tier Web hosting and collocation service providers are reporting double-digit growth in revenue this year. However, most of this growth is coming from a handful of cities.