Web hosting: Asian market ripe for harvesting

Web hosting operations in Australia and other western countries face a nasty double whammy in coming months. Not only are the various Internet markets in these countries heading towards saturation, but at the same time, many of the national economies are facing a slowdown. Asia on the other hand is, in Internet terms, so massively underdeveloped that any economic hiccups are unlikely to hinder regional web hosting growth prospects.

According to Forrester Research, by 2004 some 99.7% of US small businesses and 83% of America’s medium-sized companies will have some kind of web presence. Australia lags behind the US – but not by much. Although there’s still a long way to go before the saturation point is reached, web hosting operations can see an end to the rapid growth in customers and sites that has characterised their industry until now.

As far as Australian hosts are concerned, there are three likely drivers for further growth. First, there’s the option to sell a broader range of products and services to existing customers. Although there is plenty of scope for offering value-added services, this strategy largely depends on the still unproven ASP business model.

A second option is to expand by acquisition. In global terms the web hosting market could certainly do with a round of industry consolidation. There are currently more than 1000 hosting operations selling to international markets and while the intense competition has delivered low prices and spurred innovation there’s doubt about the long-term viability of many players.

The third option is to expand existing hosting operations into new geographic markets. Given that Europe and North America already have mature web hosting operations, for most Australian companies this means looking north to the Asian market.

Leading the charge is WebCentral. The company is Australia’s leading hosting business with 700 servers and around 40% of the local hosting market.

There’s certainly a strong business case for selling to Asia. According to a report by eMarketer and Dataquest, the Asian Internet market is still in its rapid growth phase. In 2000 there were some 49 million users in the region, by 2004 this will swell to 174 million users – that’s a compound annual growth rate of 38%. During the same period, Asian users will go from being 21% of the global online community to around 27%. More importantly e-commerce revenues are forecast to climb from US$39.4 billion to more than US$338 billion.

This is all very promising, but behind these numbers are even more compelling statistics for would-be Asian hosting operations. By world standards Asia has very low levels of business-to-consumer eCommerce – an area of great interest to web hosting companies. During the four years to 2004 this is set to rise twelve-fold. And according to Ovuum, a European-based research company, only 7% of Asian companies use web-hosting services compared with 37% of European companies.

Australian hosting companies will find the Asian Internet landscape is vastly different from the local scene. For example, compared with Australia, most of Asia has considerably less access to fixed line telephone systems. This means that for many consumers their only practical route to the web is through the wireless telephone networks. And the online experience for wireless users is considerably different to that for users with personal computers, modems and fixed telephone lines.

Another problem for local web hosting companies planning to expand into the region is that, while there is not a strong indigenous hosting industry throughout the region there are pockets of strength. For example, India already has a well-developed hosting market.

What’s more, many of the world’s largest telecommunications and Internet players already have their eyes on the yet to blossom Asian market. For example, last year Japan’s Nippon Telegraph and Telephone announced its intention to dominate the Asian hosting market when it acquired the US-based Verio hosting operation.

In December, France Telecom subsidiary Global One opened a major regional hosting operation in Singapore. This January saw Exodus Communications buy the GlobalCenter web hosting subsidiary from Global Crossing. The two companies formed a joint venture to supply web hosting services to Asia – a business which is expected to generate some US$4 to 5 billion in revenues over the next ten years.