Evolution of the Web Hosting Industry - Stages Three and Four: Maturity and Decline

At the mature stage of an industry’s evolution, there is relatively little difference between the products offered by the big players. Think of the PC industry as an example; how much difference is there between computers sold by Dell, HP, and Lenovo, who purchased IBM’s PC business? Incidentally, if those names are familiar, that’s another sign an industry has reached maturity: with mass market saturation, the names of the major players in the industry become commonly known, practically “household names” in fact.

With customers perceiving little difference between the players, churn increases. Prices become more elastic, because that is now the main competitive difference. As a result, businesses experience lower profit margins. These are all symptoms of the commodity effect, which Furlow says is “the most feared of all signs in an industry.” Other flags to watch for include a significant decrease in the number of mergers and acquisitions, with a few larger deals still being made; public companies starting to miss their numbers on Wall Street; and relatively few changes in technology standards.

It is true that the web hosting industry went through a difficult period after 2000. Before that, customers were most concerned with performance from their web hosts; would they stay up, would they deliver content fast, and how fast? We even started seeing content delivery networks crop up, such as Akamai and Sandpiper, to fill this need. But after 2000, the industry found itself with an excess of capacity. In that same year, the dot-com bubble burst; that industry contracted, and web hosts who had overcommitted were hit hard. Then came the terrorist attacks on September 11, and the house began to fall apart, with a number of hosts declaring bankruptcy. Suddenly, customers of web hosting companies were concerned less with fast performance, and more with whether their web host was going to continue to be around. After all, they had their own problems to contend with.

These are signs of an industry in decline. The hallmarks include oversupply, products and services priced below cost (which is unsustainable), and churn overtaking customer adds. Bankruptcies become common; mergers and acquisitions, on the contrary, all but disappear. If Wall Street leaves the industry, you can be sure that it is in decline.

So if web hosting went through so many of the signs of decline, how can I say that it is in a growth stage today? The answer is that some industries can move back to an earlier stage due to technological innovation. The prime example of this is the cable industry. It had reached a mature stage of development delivering cable TV. Then, thanks to technological advances, all of a sudden the same wires that brought premium TV to the home could be used for broadband Internet access, voice over IP, and anything else the companies can figure out to send. As a result, cable companies were able to create bundles of services that slowed down customer churn and helped to differentiate them from their competitors. With the economy improving, many web hosting companies are engaging in a similar strategy, offering a variety of package deals of services at different price levels to help generate customer loyalty.