Taking A Second Look At Hosted Services

A couple of years ago, the hosting market arrived with a great fanfare. Some people even predicted hosted applications would put VARs out of business. Well, with the recent struggles of big-named hosting companies Exodus and Verio, it appears to be the application hosts that are going out of business.

Does this mean the hosting market is dead? Not by a long shot. Actually, the hosting market is continuing to grow, just not at the same frenetic pace originally predicted. IDC recently estimated the market for Web hosting would have a CAGR (compound annual growth rate) of 33.4% and reach $16.2 billion by 2005. So, why have companies like Exodus and Verio struggled? The simple answer is that like many businesses launched during the dot-com-fueled tech boom of the late 1990s; they tried to run before they could walk.

"The large hosting companies that tried to offer every software solution to everybody are falling by the wayside," says Paul Carman, VP of marketing and business development for Critical Technologies (Oklahoma City, OK), which offers a document hosting and management service. "We are focused on one technology, and our staff has several years of experience in the document management industry."

Installation May Be Simple, But Sales Still Complex
According to Carman, this experience is invaluable when selling a hosted application. "Our biggest competition is still the resistance to change," says Carman. "Installing our service affects a lot of people within a business. Although the technological implementation might be simple, the sale is still very complex."

Scott Hortin, director, product and channel marketing, for Web hosting specialist Interland (Atlanta), adds that some applications are still not ready to be delivered through a hosted service. "The hosted application opportunity is huge," Hortin says. "Currently our feedback is that the market is ready for hosted messaging/e-mail, streaming media, e-commerce, and database applications. We will continue to add other areas, like CRM (customer relationship management), when the demand from our customers is there."

Your Target Customers Are Biggest Beneficiaries
The value proposition for hosted applications and Web sites remains the same as it has always been. It saves businesses money on IT infrastructure. This is an especially appealing proposition for small- to medium-sized businesses that don't have large IT staffs.

"VARs themselves are often small- to medium-size businesses," adds Steve White, Interland's director, reseller and channel sales. "A lot of VARs who have tried to develop hosting services in-house have found it's too much to handle. Likewise, hosting is often too much for their customers to handle."

White cautions, however, that VARs selling hosted services still have to show a specific return on investment to their prospects. "For example, you might have a customer that is getting killed with support calls. You could propose to them a Web site with an FAQ section and trouble shooting capabilities that could reduce their support costs.

Hosted Services Are Complements, Not Competition
So, while the market for hosted services is not the gold mine it was originally portrayed as, it is still a valuable business model for VARs looking to supplement their traditional lines. "Hosted services have a much simpler cost-justification model than traditional system sales," concludes Carman. "When buying a traditional system, a customer needs to come up with a large amount of up-front capital. Some of the new pricing models for hosted services require virtually no initial investment and allow the customer to stop the service at any time without penalty. This is a much easier model for end users to sign off on."