Analysis: Hosting market continues its shakedown

After jumping into the Web hosting market at its height, Intel Corp. and Loudcloud Inc. are the latest companies to bow out of the increasingly competitive evolving market.

This week the companies separately announced that they are shelving their hosting efforts to focus on other areas of their businesses. Not surprisingly, both companies pointed to the questionable financial outlook for hosting providers as the reason for their respective decisions.

The shifts are the result, at least in part, of a sluggish economy and the change in customer demand that followed the dot-com collapse and the application service provider implosion.

Intel Online Services (IOS) launched with two data centers in 1999 and in April of the following year Intel announced it would invest US$1 billion in the business, mainly to build and equip data centers. It planned to have 12 data centers up by the end of 2000, but ended that year with eight and shelved plans for the rest.

Intel announced Tuesday that it will use these data centers for its internal IT operations and will retain most of the IOS employees. As for IOS customers, Intel will continue to service them during the next 12 months while it helps them transition to other hosting situations.

Analysts note that while IOS didn't have the hosting presence of competitors such as Exodus Communications, which had 44 data centers at its peak, it was consistently winning new business. Intel wouldn't discuss hosting revenue or customer numbers, but Tier 1 Research estimates IOS ended 2001 with $41 million in hosting revenue and predicted that revenue would nearly double to $80 million this year.

"We were successful in attracting customers, but if you look at the overall market trends and financial projections for growth and profitability, they didn't meet our requirements," says Christine Chartier, an Intel spokesperson.

And while Intel says its plan is to refocus on its core chip business and become a "100 percent e-corporation," some analysts suspect Intel will license an automated IT management technology called Open Control that IOS announced last fall and planned to begin using to service customers this year.

"That would be much more in line with their overall corporate positioning," says Laurie McCabe, vice president and service director at Summit Strategies Inc.

For its part, Loudcloud announced Monday that it was selling its managed services business to Electronic Data Systems Corp. and was becoming an enterprise software company dedicated to developing and selling the Opsware automation technology it created to deliver hosting services. The company also announced it is changing its name to Opsware Inc.

Loudcloud co-founder and chairman Marc Andreessen said his company's decision to sell its managed services business to EDS was just another example of consolidation in the industry. He also admitted that it reflected the fact that smaller players are apt to get outplayed by bigger service providers such as IBM Global Services and EDS.

"When we started Loudcloud, we said we wanted to be the EDS of the Internet," he told analysts and reporters in a conference call announcing the deal. "Now, EDS will be the EDS of the Internet."

The Intel and Loudcloud developments come as little surprise to industry analysts who predicted consolidation in the market for some time. The market contraction has been happening for more than a year, highlighted last fall by the Chapter 11 bankruptcy filing and ultimate acquisition of Exodus, the Web hoster that basically started it all.

"This is likely to re-emphasize, as if any re-emphasis is necessary, that companies need to be assured by their service providers that they're in it for the long haul," says Bill Martorelli, vice president enterprise services strategies at the Hurwitz Group Inc.

Despite skepticism among industry observers, Intel appeared committed to its hosting business and was signing on big name customers as recently as May when it announced a deal with Discovery Communications, parent of brands such as the Discovery Channel and Animal Planet. Other customers include eBay Inc. and the American Stock Exchange. Loudcloud's customer list wasn't flimsy either with names like Adidas-Salomon AG, Fannie Mae and Sony Corp.

For Intel and Loudcloud the issue might have boiled down to the fact that the economy wasn't being kind to their efforts to be technology developers and service providers at the same time.

"They both appear to have decided that they're better off trying to market their intellectual property - automation software - to service providers and enterprises, rather than trying to fight the war on both fronts," says Melanie Posey, an analyst with IDC.

Loudcloud reported revenue for its most recent quarter was $17.4 million, up from $15.9 million the quarter before, but losses were $30.4 million.

"Now that all the sizzle is gone, they probably don't see a whole lot of advantage of competing against the IBMs and EDSs of the world for this business," says Joe Yaffe, a senior industry analyst with Giga Information Group Inc.

"Focusing on hosting just is not going to pay the bills, you need to have a broader set of offerings to meet the needs of most customers."

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