Verio, the leading small-business hosting company, spends about $100 million annually on hardware to keep its customers' sites up and running. Yet following Dell's announcement that it would enter the Web hosting space, Verio is now a direct competitor to the PC maker--and says it may soon be an ex-customer.
"Why should we support one of our competitors?" said Laura Zung, vice president of project management at Verio, which hosts more than 300,000 Web sites.
Verio, which is expected to report $257 million in 1999 revenues, also buys hardware from Sun Microsystems, Cobalt Networks and SGI. Zung would not disclose how much money the company spends on Dell equipment, yet said Verio is one of the computer maker's larger customers.
"If Dell wants to sell servers to Verio, they have shot themselves in the foot," she said. "We're looking at other vendors now."
The launch of Dellhost.com yesterday underscores a larger conflict that both hardware and software makers face when moving into new businesses. As the lines between technology industries continually blur, partners in one niche could become competitors in another.
Analysts say hardware companies that decide to also provide hosting services walk a fine line, since firms that operate large server "farms" used to host Web sites are often key hardware customers for Dell, Compaq Computer, Sun, IBM and others.
In the past, software makers Oracle, SAP and even Microsoft have faced similar problems balancing work for consulting and integration services partners--such as Andersen Consulting, KPMG and PricewaterhouseCoopers--with the amount of business they keep for themselves.
Dell is only the latest hardware maker to move into the hosting market. The PC maker provides services through Interliant, in which it also holds a minority stake.
Concentric Networks, Verio's closest competitor in the small to midsized hosting market, partnered with Compaq to sell a co-branded hosting service to Compaq Presario users. Separately, Compaq and Microsoft together invested $100 million in hosting company Digex. Computer maker Micron Electronics also has acquired several hosting companies, including Lightrealm, and plans to target small to medium-sized customers.
Part of the lure of services is the huge profit possibilities. Research firm International Data Corp. estimates the Web hosting market for small and medium-sized businesses will reach $16 billion by 2003. Looking to offset declining prices for hardware and PCs, many PC firms like Dell are offering Web services to garner extra revenue.
Tim Mattox, vice president of the Dell Hosting Group, said Dell's move puts the company on a level playing field with its rivals. He argued that "coopetition" among hardware makers and hosting companies should be expected.
"I think people will step back and say, 'Gee, Dell's a competitor with me,' but if they look around they find that companies cooperate, but they also compete," he said.
IDC analyst Roger Kay noted that Dell will offer more hosting services for less cash, effectively squeezing margins for competitors such as Compaq, Micron, Concentric and Verio.
Despite the lure of profitability, Josh Greenbaum, analyst at Enterprise Applications Consulting, argued that hosting is a complicated business and that Dell is placing itself at odds with many of its customers.
"For every two (services) sales Dell does, it loses one sale as a hardware manufacturer," he said. "They undercut their own sales. They're now competing with a bunch of low-level ISPs. This is so far from their core competencies, so down-market. It's almost like: 'What was Michael Dell thinking?' "
Mattox said the profit margins in hosting make the endeavor worthwhile for Dell, which is selling the new service direct from its Web site. He added that Dell has the expertise required to run a hosting business.
"The people running Dell.com know how to run a site," he said.