Resellers must find their sole provider
VARs looking to make their mark in web hosting should look at the services a reputable hosting provider can offer, and how these services can be turned into profit. Paul Bray explains how, in the final part of our five-part series
There cannot be many branches of outsourcing where the advantages for the user are so clear cut as in web hosting. This seems to be the opinion of service providers, at least.
Chris Barling, chief executive of hosted e-commerce service provider Actinic, says: “Outsourced web hosting is widely used because the vast majority of customers will pay less for a faster and more reliable service than doing it themselves.
“Hosting is pretty risk free to outsource, yet it’s moderately difficult to professionally manage in-house, not least because of issues such as distributed denial of service attacks. So it’s a simple issue to outsource for all sizes of company in all industry sectors.”
The major benefits are a reliable, managed service, secure and resilient, with substantial cost, time and technical IT savings, says Jon Rodmell, operations director at converged telecoms and data services provider Eurotel.
“Feature-rich products are constantly monitored and updated, so customers are always getting the most up-to-date service and product. They get value for money because they don’t have to invest in their own costly server; almost immediate set-up means no need to acquire technical capabilities with steep learning curves; and it reduces costs in hardware, security and administration,” he says.
Companies generally start by having their corporate site hosted, says Neil Barton, director at web hosting provider Hostway. “As their needs grow, firms add e-commerce or other applications, increasing bandwidth as traffic to the site increases. Most organisations that have high volumes of traffic to their sites probably couldn’t cope if they hosted their own sites,” he says.
The more the user company relies on its web site, the more acute the need for hosting becomes, and the more reassurance the company’s IT manager is likely to require.
Andrew Michael, chief executive of hosting provider Fasthosts Internet, says: “Customers’ main concerns are around availability and uptime: they want many people to be able to view their site at once, and for it to be always available.
“This can be addressed by reassuring them that their web site will be hosted in a large, safe, secure, highly available infrastructure, and by quoting service level agreements. Of course, resellers need to satisfy themselves. They can avoid defaulting on these promises by going with a trusted provider.”
Security and longevity of the hosting provider are two key concerns for customers, says Christian Eckley, sales and marketing director at web infrastructure specialist Globix.
“If you’re providing mission-critical services, the long-term commitment of the reseller to continue developing its service offerings is also key,” Eckley says.
The key hosting requirements customers look for range from infrastructure (co-location, business continuity and networks), managed hosting and security (server administration, intrusion detection and distributed denial of service) and application management (databases, custom code and web servers), through to media services (streaming).
Many users do not really understand hosting, so there is plenty of scope for educating them, says John Tsai, vice-president of hosting provider Entanet. “A customer’s first concern is usually cost, but we also try to draw in issues of reliability and performance because this is where you start to see the real value of the hosting service,” he says.
The best place for resellers to start selling hosting is their existing customer base, says Tsai. “If you’re a real expert, you’ll be able to address customers with more complex or large-scale requirements. But smaller customers tend to trust the reseller with whom they have an established relationship, and they expect their reseller to be able to explain hosting to them and offer a service,” he says.
“The service provider takes on most of the technical burden, while the reseller takes ownership and overall responsibility for the customer. This gives the customer the best of both worlds: local support from their trusted supplier, and the service provider’s technical experience and capabilities.”
SMEs are a key target market, Tsai adds, especially very small firms that either have no current web presence or are using free services. Another potential market segment is existing web-hosting users who are dissatisfied with their current service provider.
Niche markets are also emerging. As broadband becomes cheaper, faster and more accessible, Globix is seeing growing demand from firms requiring on-demand bandwidth, such as multi-player gaming and live sports streaming. Online betting is also emerging as a growing market for hosting. Hostway believes remote storage hosting is becoming an attractive proposition as margins on selling storage and servers continue to fall.
Real-time communications software vendor WiredRed has found that web conferencing works well as a hosted service.
Tom Sloan, WiredRed’s UK managing director, says: “The beauty for the reseller is that not only is there no stock to hold, very little configuration and a recurring revenue stream, but there is also the opportunity of supplying peripherals and training.”
Other likely hosted services include voice over IP, security (spam and content filtering), CRM, ERP, messaging and mobile email.
Kam Dhillon, hosting solution specialist at Microsoft, says: “Our research suggests that collaborative tools such as email, shared calendar, shared contact list, secure instant messaging and CRM are key value-added services which customers are looking to consume as services, rather than deploy internally.”
Dhillon also suggests that resellers may wish to offer a package of services.
“This might include broadband internet access, hosted email, shared calendar functions and shared contact data, web site design and hosting, packaged in one price point,” he says. “Additionally, they might have a key strength, such as customer service, technical expertise or specialised industry knowledge. They can use this to add value and differentiation.”
Canny resellers could find their revenues growing with their customers, says Conleth McCallan, UK managing director of ISP Datanet.
“By choosing a paid for, dedicated web service, businesses can run more complex scripts on their web sites,” he says. “After a time, they become reliant on anyone who can manage their web services for them. This is when the revenue streams begin to grow. Soon you can make real money on connectivity, providing broadband to homeworkers, VPNs and firewalls.”
The more the reseller does, the more loyal the customer is likely to be, says Bert van der Zwan, EMEA vice-president of online collaboration vendor WebEx. “We’ve heard from our partners that the potential for churn of any single service decreases significantly when a customer is getting more than one service from the same partner,” he says.
Barton suggests two possible entry points for resellers. “Resellers already familiar with infrastructure, such as servers and load balancing, should find it easier to get into web hosting,” he says. “Security can also be a good road in. Recent research commissioned by Hostway from Vanson Bourne showed that many SMEs have poor processes in place for securing servers. Resellers can highlight these security issues, and show how they can be overcome through outsourcing server hosting.”
Rodmell recommends web site design as the ice-breaker. “Most businesses believe they should have a web site, but don’t understand how to get one. Designing and constructing the web site as part of the package is a major enticement for many customers,” he says.
Hosting provider Pipex estimates that there are about 10,000 hosting resellers active in the UK, although the figure changes constantly. Some are dedicated specialists, consultants or web developers, but most are general hardware and software resellers looking to add a new product line and revenue stream with little or no capital expenditure.
Dan Conlon, managing director of WebFusion, a division of Pipex, says: “You don’t need a dedicated sales team, just use your existing channels.
“Reselling success will be due to a strong brand, good customer service and a good customer base. Leave the technical expertise to the hosting provider.”
However, resellers should not leave everything to the host, warns Barling. “Resellers risk losing some control over their customers if web hosting is outsourced to a third party, and that third party supports and/or bills the customer directly. The other issue is that the relationship with the client is a hostage to fortune if the web host’s service deteriorates,” he says.
Choosing a stable, reliable hosting partner is critical, says Conlon: “A key thing to consider is that your service is hosted in the UK and not abroad, because this can cause many communication barriers with your partner and customers.”
The customer’s guarantee that the host will deliver – the service level agreement (SLA) – is likely to come as part of the package.
Conlon says: “If you’re reselling a service, it’s critical that any SLA or contract that you offer your customers agrees with the vendor’s.
“We have a master service agreement detailing commercial and SLA terms which the reseller, as a minimum, must adopt.”
Perhaps surprisingly, given the business-critical nature of web hosting, not all customers seem that bothered about SLAs.
Simon Davies, technical director at business ISP IDNet, says: “The majority of small businesses or consumers are unlikely to ask for an SLA, even though they perhaps should.
“Most are happy with a contract and assurances that you can keep their web site up and running. But large corporates will mostly demand SLAs as part of the contract. They will want to see evidence of disaster recovery provision.”
Hosting providers can list a number of good reasons why resellers should not attempt to operate hosting services themselves, usually focusing on the expense and technical complexity, plus the potential liability if anything goes wrong. Most providers also argue that resellers do not require much technical skill to resell hosting services, at least at entry level. ‘Lead us to your customers and we’ll do the rest’ seems to be a common motto.
But resellers may go further if they acquire some technical skills. Datanet’s McCallan says: “There are various VARs that are involved in different technologies such as Active Server Pages (ASP), XML or Java Service Pages (JSP).
“The deciding factor is what fits with the customer’s solution requirements. Making the wrong choice can cripple the whole development project. Resellers need to keep abreast
of all the available technologies, to understand where their customers are heading, and to grasp the relevant technology beforehand to help them make the right decision.”
Eckley says the level of skill required depends on the complexity. “Entry-level hosting solutions, such as shared hosting, are fairly straightforward. Dedicated, high availability, multi-tiered e-commerce platforms, with in-depth security requirements, are a different proposition,” he says.
Analyst firm Gartner predicts that prices for web hosting will increase for most of 2006. It is advising users to lock in prices for up to three years. But many resellers are finding that the low barriers to entry in the resale of hosting services are creating a commodity market where margins are thin.
Rodmell says: “As typical SME and consumer decisions on hosting are price critical, resellers who ‘pile ’em high, sell ’em cheap’, taking small margins on high volumes, have tended to do best.”
Davies says: “Margins at the lower end of this market are terrible, and will only get worse as there’s enormous competition. Resellers would do better to focus on the higher, e-commerce driven end of the market, where there’s money to be made on additional services, such as transactional, database driven services. The other disadvantage is that, particularly in the mid-market, it’s difficult to make the case to customers on why they should pay more for web hosting, rather than relying on the cheap option.”
The upside of hosting is that, once hooked, customers tend to be loyal. Rodmell says: “Due to the complexities of moving once committed to a web hosting supplier, customer retention is high, ensuring upselling opportunities have a greater chance of success.”
Whatever their focus, resellers will find that the hosting market is maturing and segmenting. This is based on which applications or infrastructure hosters are managing and how complex the configurations are, says Gartner. The analyst firm forecasts a compound annual growth rate of 12.5 per cent for web hosting services from 2004 to 2009.
“SMEs will start to migrate from shared hosting to low-end dedicated hosting as their business requirements shift to more e-commerce and web enablement,” says Gartner analyst Ted Chamberlin.
“Larger businesses have traditionally been large consumers of co-location services, but many will migrate to higher-end dedicated offerings because they need to offload more mundane hosting operations as they continue to focus on application development, regulatory compliance and e-commerce initiatives.”
Application hosting will also be a growth area, the pundits claim.
McCallan says: “In future there will more resellers who will deal in application hosting, along with web hosting, which will give web presence to the customer’s core business.”
Van der Zwan believes the range of hosted choices open to resellers will widen during 2006. “Hosted providers are now offering a broad range of services for every industry from collaboration to CRM,” he says. “In the future, resellers will be able to take advantage of the web to offer a variety of services in one common framework, regardless of platform.”
CONTACTS:
Actinic (0845) 129 4800
Datanet (0845) 130 6010
Entanet (0870) 770 9588
Eurotel (0800) 980 2345
Fasthosts (0870) 888 3500
Globix UK (020) 7611 3007
Hostway (0808) 180 1880
IDNet (0800) 026 7237
Microsoft (0870) 601 0100
Pipex WebFusion (0115) 917 0000
WebEx (0800) 389 9772
WiredRed (0870) 224 0415