Part II: Microsoft Hosting Summit 2009 – Move Up the Stack?

At the summit, John Zanni, the General Manager of World-Wide Communications Sector for S+S, gave his annual “Hosting State of the Union” presentation.  Of course it was important to address the current economic downturn head-on and while discussing it, John got a good chuckle from the audience commenting that nowadays “Flat is the new Growth.” One area of focus of the talk was in hosted applications. He presented IDC data showing steady growth of SaaS and cited that the current economic situation could actually be an opportunity for SaaS as many companies are looking to cut costs. Focusing on more traditional hosting providers, he presented Tier1Research projections showing steady growth of hosting business, with Shared and Dedicated showing single/double-digit percentage growth and Managed hosting showing ~25% growth over the next several years. He also stated that the Shared and Dedicated hosting business has lower margins and that gaining volume in these segments was tough, while Managed Services on the other hand, represented higher margins and the ability to compete on value. He recommended hosts to move up the stack to managed hosting services where the growth projections are highest. Mr. Zanni did address other areas like the Cloud, Azure, and Microsoft hosted services, but I stop here for a few thoughts.

I’ve heard the recommendation to “move up the stack” many times before from Microsoft, Tier1Research, and other analysts alike. Interestingly, a couple of years ago the recommendation was to move out of Shared hosting and into Dedicated hosting. I even heard some analysts claim that Shared hosting is dead. Of course I do believe that every holster out there should understand the trends of the web hosting industry and that for some hosts, moving into Managed Services is a viable strategy, but I don’t agree that this is a good strategy for all hosts.

First, even at a single or low double-digit percentage growth projected for the Shared and Dedicated hosting enterprise, you are still talking about a multi-billion dollar industry and that kind of growth is nothing to sneeze at. This growth can support many hosts. I think there is room for many different types of hosts for different types of workloads.

I’m not saying that it’s a bad strategy to “move up the stack”, but rather, such a strategy must be thought out carefully as it is very difficult to execute. From my experience, each hosting segment, be it Shared, Dedicated, or Managed Services, requires different types of marketing and sales strategies, has different sales cycles, has different operational support requirements, and requires different type of staff skills.

For many traditional hosts, the Shared hosting business represents the bulk of their customer base and is the “bread and butter” of the company. Refocusing to “move up the stack” can easily mean less attention paid to the very customers who pay the bills. Those Shared hosting customers can miss out on new features and innovations because of the change in company focus. From my experience, it is extremely difficult to juggle staff to support all kinds of hosting segments. Some hosts have even resorted to selling off their lower-end Shared hosting assets to help fund their “move up the stack” strategy.

So despite the recommendations to “move up the stack” to Managed Services, I believe that it is possible to compete on value in Shared hosting. I also believe that it is important to focus on a niche and deliver on innovation within that niche. Our strategy is to “move up the stack” in our own way by continuing to innovate on top of the Windows stack and push forward toward a next-generation shared hosting experience.

Takeshi Eto
VP Marketing and Business Development

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