I've been looking through conference session slides from HostingCon, and so far I've found Hostway co-founder John Lee's presentation most informative. (Irrelevant coincidence: at my first job out of college, I shared an office with John's best friend from University of Chicago.)
Since the title of John's talk was "value-added services", I thought he would cover revenue enhancement through add-ons. Hostway is privately-held, but soon-to-be-public GoDaddy is similarly focused on bundling website templates, search engine optimization, merchant accounts, etc with hosting. According to GoDaddy's S-1, these items generated $10.3 million in Q1, 2006 revenue - compared with $11.5 million from web hosting. Also importantly, GoDaddy reports that add-ons tend to have higher profit margins. And at ISPCON back in May, John shared his discovery that the more services you sell to any individual customer, the less likely he is to cancel any of them.
But John took a bigger picture view this time and showed that hosting is still a greenfield opportunity. He said that of 1- to 99-employee businesses that have websites, 43% still maintain their hosting infrastructure in-house. That companies spend $22 billion/year on local advertising. And that Hostway's 100+ server relationship with Fox News started with a $20 shared hosting account.
These facts and stats put the shared hosting market in a surprisingly optimistic light. As 1&1's Neil Simkpins puts it, the industry just needs to build trust among consumers. But instead of the more difficult task of persuading first timers to become siteowners, the challenge is merely to convince existing website operators that someone else can maintain their infrastructure with as much reliability - but at lower costs.
By the way, if you combine John's figures with the widely-held assumption that every other small business still isn't online, it would seem that the multi-billion-dollar web hosting industry still hasn't touched nearly three-quarters of its prospective user base. And if you consider that GoDaddy's generated almost as much revenue from add-ons as from hosting, the industry's only reached a small fraction of its potential.
To maximize future hosting earnings, John recommends building a service portfolio that includes not just shared hosting and typical add-ons, but also dedicated servers (in case a Fox News-like account comes along), backup/storage/disaster recovery options, SaaS solutions (which 13% of small businesses are already using), and mobile-ready Microsoft Exchange.
In Hillary Stiff's presentation, she projects that shared hosting valuations have little chance of rising above current levels (approx 1x annual revenue, with escrows, holdbacks, performance based earn-outs, etc). In which case, maybe would-be sellers should instead be raising investment funding for deploying new services?
(But wait - in other news, Google now offers hosting. To "see what Google can do with the Google infrastructure." Such as its "massively scalable, highly available storage technology". It's only for open source projects. For now. Google doesn't currently have plans to offer website hosting. But could that change down the line??)
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