Evolution of the Web Hosting Industry - The Second Stage: Growth

Near the end of the first stage, initial public offerings of stock increase. This heralds the second stage of an industry’s evolution, which is growth. IPOs become common; there is a shift as Wall Street becomes more involved in the industry, angel investors and venture capitalists somewhat less so. This is an extremely active and challenging time for any business, because lots of companies are getting into the industry; consequently, this is the time when the number of competitors is at its highest. Interestingly, so is merger and acquisition activity. Even so, the total market is still growing, so there is a lot of room for companies to capture share in a larger market.

Prices start coming down, as companies gain more customers and can thus spread out their costs some. You would think this would be a less risky time for many companies in this industry, but in fact they start taking larger risks than before, because capital is more available than in the first stage, and growth is more rapid. Both of these factors help to offset some of the risk. By taking risks, I don’t simply mean investing in more machinery or people to expand the company; in the growth stage, there is still significant innovation going on.

Arguably, the web hosting industry is currently in this stage of development. Those in the industry need to be very alert, watching for advantages – because this stage can end very quickly. Late in the growth period, mergers and acquisitions continue, but their nature changes; you see more vertical integration. In the web hosting industry, one example of this would be web hosting companies buying backbone providers, or vice versa. A company making such a merger or acquisition would gain advantages in cost/control over supply, or distribution.

If you’re a sharp business thinker, you’ll see that this is actually the best time for a private company to sell – if it is timed correctly. When the growth stage of an industry’s development ends, it can end quickly. Look for huge drops in stock prices – fifty percent or sometimes more. There are other signs as well; when innovation slows down and there is plenty of supply, the industry has reached the next stage of development.

Next: Stages Three and Four: Maturity and Decline >>
 

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