Small Hosters Reach For Managed Holy Grail

Now that Web hosting has landed among the most strategic business units at giants such as WorldCom, the best minds in the companies are looking for ways to squeeze every drop of revenue from the large server farms at the heart of this new industry.

For the first time, the telecom spotlight is on dozens of relatively small players that have developed coveted managed hosting services. And since Digex — the king of managed hosters, valued at $120 per share before WorldCom — dealing for its parent Intermedia — appears to have hit pay dirt, bigger players have begun to eye these smaller companies for acquisition or are trying to lure away their talent to develop managed hosting services in-house.

Newcomers into this space may quickly discover that offering managed hosting is more difficult than it seems, as it is based more on people than technology.

“We spent six to nine months developing capabilities to offer these types of services, but that was some time ago,” says Christopher Oliver, chairman, chief executive and founder of Vitts Networks, an up-and-coming player in Manchester, N.H.

Vitts belongs to a large group of network service providers that broke most of the trail that large players such as WorldCom are beginning to travel. Founded in 1996, the company was first in the market of providing Internet access to small businesses. Several years later, it realized hosting was a more attractive business and, in that arena, managed hosting rules.

The set of managed services that Vitts provides today includes outsourced e-mail and database management, with other services such as streaming media coming later. Oliver says even developing services as seemingly simple as e-mail hosting require a lot of back-end development work.

The key to making money in managed services is automating many functions, such as customers setting up new e-mail accounts. If a hoster were to perform these tasks for its customers, the work would quickly whittle away any revenue derived from the service. The same rule applies to other managed services.

One way to develop technologies to efficiently offer managed hosting is to build those solutions inside the company, as Vitts is doing. Another is to acquire a company that specializes in a specific set of managed services.

About a year ago Gregory McKown, then co-founder, president and CEO of Maxim Computer Systems, a data center operator, had an idea to merge with a half dozen pure plays to create a set of managed services for which his customers were asking. Acquisition allowed him to avoid the perils of learning new technologies, a process he compared to “stepping on alligators.”

From that strategy, Hostcentric emerged, offering database and server management, virtual hosting, streaming and supporting applications.

“We have accounts that range from my grandmas pictures from the last family reunion to complex, geographically load-balanced database systems. We do run the gamut of managed services from one end to the other,” says McKown, now Hostcentrics president and chief operating officer.

Hostcentric plans to get into managed security, storage and e-commerce outsourcing. Companies already selling such services, including HarvardNet, are able to charge almost $2,000 per month per customer.

McKown says a lot of the customers calling on Hostcentric that have less than $2 million in revenue have some of the same issues Hostcentric faced as it attempted to cobble together an operation from companies scattered from California to New York.

“How do you create and manage a virtual company? What we discovered is: What solved our problems in the New Economy solved other peoples problems,” McKown says.