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Commentary: The data center glut

The Web-hosting market has become so saturated that hosting services are really commodities, with little to differentiate one provider from another.

By Ted Chamberlin, Gartner Analyst

The long building spree of data centers has come to an end--and the recent economic slowdown is only part of the reason. Gartner has, in fact, been predicting a dramatic decline in this market since long before the U.S. economy began to turn sour.

Providers of hosting services--riding a wave of seemingly ever-growing demand and ever-available venture capital--have continued to build more and bigger data centers. The result was inevitable even before the economy began to slow: massive overcapacity, declining demand and falling prices.

The market has become so saturated that hosting services are essentially commodities, with little in the way of value-added services to differentiate one provider from another. One important differentiating factor remains, however, though it is frequently ignored: quality. Many providers have found it difficult to build constantly and still maintain the service levels their customers demand--and the poor quality has cost them in the marketplace.

Gartner has long recommended that providers build fewer--and frequently smaller--data centers that offer more robust functionality and better infrastructure. The data centers that have taken this approach have generally fared better than those focusing on quantity at the expense of quality.

A few major providers have the resources to buck the industrywide trend away from new data centers. AT&T and Sprint, for example, are both committed to building very aggressively at least through 2001, and both have the deep pockets and the experience to make that strategy work. Very few of their "pure play" competitors--those that provide only hosting services--will be able to follow their lead, however.

See news story:
Building boom leads to data center crash
Many of the less dominant providers will have to look for better ways to do business--and one of the most important will be strategic alliances. Many pure-play providers will have to seek partnerships with large bandwidth providers--such as telephone companies and online services--and network services providers in order to remain in the market.

There are certainly difficult times ahead for many providers of hosting services, but the result will be good news for their customers. Gartner expects prices for such services to fall by 20 percent to 25 percent during the next two years.

(For related commentary on outsourcing Internet servers, see registration required.)

Entire contents, Copyright ? 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.