Web hosting sector to explode by 2002

Web hosting companies have become prime candidates for IPOs as analysts predict the sector will triple by 2002.

Michele Pelino, senior analyst at the Yankee Group's Internet Market Strategy Group, said the web hosting market will grow to $14.4bn by 2002 from $4.4bn in 1999, although it would take time for the companies to be profitable.

She added: "Vendors need to expand their customer base. The market will become more competitive, so it's important for companies to differentiate themselves and focus on what they do best."

But Joel Yaffe, analyst at the Giga Information Group, argued: "Web hosting company stocks are drawing interest for the same reason as many .com companies are valued at a lot more than they could hope to earn. People believe in the potential for high growth and that the companies can be profitable."

He added: "Some companies probably won't become profitable. The ones that do will be the ones that specialise in a specific niche, or own their own infrastructure."

Digex floated its shares on 6 August at $17 a share and ended the day up 31 percent even though the vendor is not yet profitable, despite rapid revenue growth. In this year's first quarter, Digex generated revenue of $9.4m, but lost $8.6m.

Yaffe said: "Whether Digex becomes profitable in the market is a matter of whether it's independent long enough to accomplish that with its web hosting services, or whether it will change its roadmap."

Data Return and Internap also applied to float their organisations last week, filing an $86m and $150m offering respectively.