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Web Hosting
News
The Web Hosting Price War
October 25, 2004
In the Web hosting industry, where many businesses compete on price
above anything else, the "loss leader" strategy of offering a service at a
loss as a means of drawing in customers was simply a logical extension of
a price-cutting culture that had already taken hold. Selling at a loss has
allowed hosts to break into new markets and expand their customer bases,
raised the industry's profile and pushed forward the commoditization of
certain segments of the business.
"Hosting companies use loss leaders to grow the customer base
exponentially," says Barbara Branaman, vice president and general manager
of the hosting unit at XO Communications (xo.com), "with the ultimate goal
being to up-sell these customers to more profitable business."
Hosting companies also use loss leader strategies to break into markets
where they lack brand identity, says Helen Chan, senior analyst at the
Yankee Group (yankeegroup.com). Loss leaders, with their eyebrow-raising
effects, are usually useful in generating publicity for a brand and
boosting its profile.
Frequently, the motivation is competition. Companies undercut prices to
stay competitive amid constantly dipping prices. Some hosts have embraced
loss leader strategies because of their upside. Typically, domain
registration or low-priced shared hosting plans are offered at a loss,
targeting the price-sensitive small and medium-sized business market.
Domains, in particular, have been a popular vehicle for this strategy
because their smaller margins make the losses easier to absorb. In the
past two years, EV1 Servers (ev1servers.net), Hostway and Go Daddy have
all dropped prices to under $10, losing money on registration to attract
new customers for other services.
1&1 Internet's US division (oneandone.com), launched this year, is also
selling domains at a loss, charging only $5.99. But that's not the boldest
example of the company's use of loss leader strategy. To promote its entry
into the US market, 1&1 offered free three-year trials of a $29-a-month
shared hosting plan, a value of $1,000, to everyone who signed up.
Europe's largest host chose to break into the crowded US market and raise
the profile of the 1&1 brand by selling (or giving away) its services at a
dramatic loss.
"1&1 Internet has used [loss leader] campaigns ... as a way of raising
awareness and allowing people to experience our products and services for
themselves," says Michael Frenzel, vice president of public relations for
1&1. He says the company has made up some of the losses as customers happy
with the free hosting promotion have purchased other services. 1&1 also
hopes to create permanent customers, who will remain beyond the three
years.
While there are arguably benefits to drawing in customers with unbeatable
prices, it's still a risky strategy. Hosts are betting that the expanded
customer base brought in at loss leader prices will help create economies
of scale that eventually make the price levels profitable, says Haralds
Jass, CEO of Superb Internet. But, obviously, not every host possesses
1&1's scale.
For many hosts, such strategies are gambles that have to draw in enough
customers to create the right economies of scale, and assume that
customers will stay. Many hosts, says Jass, are unable to deliver on their
promises, given their below-cost prices. Failure to deliver not only gives
the company a bad name, but can create a black eye for the industry in
general.
Loss leaders can also "attract the wrong type of audience," says Branaman,
leaving a host with a "base of customers that are not loyal to the
services or interested in additional services, therefore making the
overall business unprofitable."
Just as the service-at-a-loss strategy has distinct advantages and
disadvantages for the individual Web host, the consensus seems to be that
the strategy is both good and bad for the Web hosting business.
Loss leaders certainly bring attention to the industry, says Jass, and
help create new customers. They also push hosting providers to operate at
a greater value and efficiency. But aggressive loss leaders can hurt the
industry by creating a lower price floor that may commoditize the market
in the long run, forcing new companies to come in at lower price points.
The strategy can put undue pressure on smaller hosts who feel compelled to
sell at slim margins, or at a loss, in order to stay competitive. If hosts
in this position attempt to compete by overselling storage or bandwidth,
they may stretch their resources too thin, putting themselves in position
for an embarrassing or expensive collapse.
Certainly, the constant downward pressure on the price of standard hosting
services and related products has played a significant role in shaping the
landscape of the hosting business. And, with price as one of the chief
areas for competition in Web hosting, it only stands to reason that loss
leader strategy would emerge among the most aggressively competitive.
Whether those companies are able to turn losses into profits, however,
still remains to be seen.
Cogent
Acquires Aleron Broadband
October 25, 2004
Cogent Communications (cogentco.com), a provider of Internet access to
service providers and Web hosting companies, announced on Monday that it
has acquired the assets of Aleron Broadband Services, formerly known as
AGIS Internet. Financial terms of the deal were not disclosed.
The assets acquired include Aleron’s customer base and network, in
addition to $18 million in cash that Cogent says will be used for network
expansion, marketing and sales in the US. Cogent said it would retain all
of Aleron's 25 employees and move its headquarters from Virginia to
Washington, DC.
"By acquiring assets at cents on the dollar, Cogent continues to add a
significant number of customers and large amounts of traffic to our
network," says Dave Schaeffer, CEO of Cogent Communications. "Cogent has
reached critical scale through a rapid acquisition strategy that continues
to increase our network efficiency and allows us to remain competitive in
a consolidating marketplace."
The acquisition is Cogent's sixth this year.
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