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Web players win big in hosting business

The web hosting market is being driven by the strong demand to get companies online, and hosting firms are capitalizing on that overwhelming demand.

There's gold in the Web hosting hills, and ambitious companies are investing hundreds of millions of dollars to make sure they're leading the prospecting pack.

The market is driven by the race to get online--and the inability of most large companies to maintain the equipment needed to support a sophisticated Web site on their own premises. A booming market has thus emerged for companies willing to build "data centers" that host and maintain the equipment and networks that bring top-level Web sites like Yahoo to the average user.

The market is still small, averaging about $2 billion in business this year, according to Forrester Research. But by the end of 2003, the market is expected to be worth $14.6 billion.

That's a big financial Cable nation chart carrot dangling at the end of a short string, and all the industry's players are scrambling to make sure they get a bite.

MCI WorldCom, which has trailed other large players in the industry, is the latest to announce grand expansion plans. Its UUNet division will invest $100 million to expand its hosting business by the end of this year--effectively doubling its hosting capacity, company officials said.

But competitors are also building out quickly. Qwest Communications International said today it had opened two new data centers in California, and would continue to build more centers around the United States this year.

Frontier Communications' GlobalCenter is in the process of building five new data centers across the country, and is looking at expanding overseas as the company's merger with Global Crossing is completed.

Even Intel, the leading PC microchip manufacturer, announced recently that it would throw its hat into the hosting ring.

Pure hosting companies like Exodus Communications have seen their stock valuation as much as quadruple this year as Wall Street has recognized the demand for web hosting services. Underscoring the demand, Frontier's GlobalCenter was reportedly one of the most desirable pieces in a recent bidding war between Qwest and Global Crossing, executives in those companies have said.

But even with all of this investment, the leading players are having a difficult time keeping up with the demands for hosting space, bandwidth, and new services, analysts said.

"This is a very immature industry today," said Jeanne Schaaf, an industry analyst with Forrester Research. "They're all building out data centers with a vengeance."

New demands, new networks
But even as these companies sink huge amounts of money into building storage and network capacities, the character of the market is changing.

Early in the game, companies focused heavily on farming out their e-commerce sites and basic Web hosting duties. This niche is evolving as Web sites become more complicated, and offer more catalog, database, and application services, the hosting companies say.

UUNet's Mitch Ferro, who heads the company's hosting division, said two-thirds of existing customers use the relatively simple e-commerce and basic hosting functions, but a majority of new businesses are now seeking much more complicated services.

Even more critical, analysts say, is the growing need for Web hosting data centers to be just one part of a full telecommunications infrastructure, to provide the bandwidth that the customers need to send their data to users.

"They need to be part and parcel of a network," Shaaf said. "Data vendors without networks are not going to be well positioned in this market."

Ferro confirmed that customers are increasingly asking for bandwidth requirements along with their basic hosting needs. "I think that will be more and more important in the future," he said. "We are seeing customers ask for gobs of bandwidth."

That development could bode ill for some newcomers like Intel, which does not have its own proprietary network, some analysts say.