October 28, 2004 -- (WEB HOST INDUSTRY REVIEW) -- Web hosting is a remarkably price conscious business. Pricing is the criteria by which we define market segments like budget hosting and discount dedicated servers.
For all but the most sophisticated hosting customers, price will always be the foremost consideration when evaluating services and, as a result, is the platform from which a significant portion of the hosting business competes.
Pricing influences Web hosting from so many directions it can be tough to separate cause from effect. It may no longer be exactly clear whether hosts are creating or responding to the demand among customers for the lowest of prices. But it is clear that a tremendous amount of calculation goes into the pricing strategies of Web hosting firms, making them particularly susceptible to the influence of a hosting model that did away with price altogether.
Free hosting, the term, describes a collection of different Web hosting models — a story arc that, along the way, has a variety of impacts, both positive and negative.
In its earliest incarnation, free hosting emerged as more of a novelty than a serious challenge to paid hosting services. Sub-domain-based and banner ad-supported services in the vein of GeoCities, Tripod and Angelfire offered free Web space, displaying banner advertisements over user Web sites.
As a learning tool for novice Web users, these services were exceptional. But with limited storage, inconsistent service, pop-up advertising and long, complicated URLs, sub-domain-based free hosting was never a realistic contender for business Web sites or a serious threat to paid shared hosting services.
In fact, the opposite was probably true. By providing novice Web users the means to experiment with Web design, these free hosting services created a whole new market for Web hosting among users who were ready to move beyond the limits of a free account. GeoCities would seem to be the best evidence of that ability to produce hosting customers. Acquired by Yahoo!, its services now serve as the entry level in an up-selling strategy that has seen Yahoo! (yahoo.com) emerge as one of the fastest-growing shared Web hosting providers in the business.
"Eventually, Yahoo! got smart and said, 'we've got this collection of free hosting customers. Why don't we try to upgrade them to domain-based services?' And they sort of got into the business," says Franc Nemanic, president of Hostopia (hostopia.com). "It can be done. If you do it right, and you create it as an explicit strategy and have a true value path."
Nemanic isn't so complementary of the next wave of free hosts. Companies like BigStep (bigstep.com) and FortuneCity (fortunecity.com) saw opportunity in taking the free hosting concept one step further. They began offering more powerful advertising-supported free hosting services that allowed users to incorporate their own domain names.
A domain based free hosting service was a different product altogether, and an obvious threat to shared hosting providers, many of which were charging monthly rates of $20 or $30 for services customers would have difficulty distinguishing from the free offerings.
While customers certainly benefited from domain-based free hosting, the services put shared hosting providers on the defensive, forcing them to rationalize charging for services that other companies were giving away for free.
"How do you justify charging $30 a month when somebody else looks like they're giving the same service away for free?" says Nemanic. "And when you're dealing with people who are maybe unsophisticated technically, they're used to buying computers or whatnot. And they compare on price."
Ultimately, the flaw in the ad-supported domain-based hosting business was that the ads couldn't support it. None of the domain-based free hosting services could generate enough advertising to offset the costs of operating. After spending millions in venture capital or IPO money, they shut down, sold or started charging for their hosting services.
"A lot of these guys were from backgrounds that made it look like it would make sense," says Nemanic. "Advertising backgrounds. Sales. E-commerce. That sort of thing. At that point, CPM rates were probably 10 times what they are today, so you could probably build a business plan that said, 'if we continue to get these types of rates, and we get this many users, we'll make a fortune.'"
The threat passed, but the impact did not. The free hosting era had left its mark on the business, in customers who had come to dramatically undervalue Web hosting, and were skeptical of the service, having experienced the questionable quality of the free offerings.
But some good may have ultimately come from the domain-based free hosting experiment. Many of the Web hosting customers who tried the free services likely recognized the boundaries they were forced to accept, and a portion of the free hosting customer base fled to paid hosting services.
Paradoxically, while these businesses may have brought down the value of paid Web hosting services with their free services, they may ultimately have reinforced the value of paid hosting services with their inability to deliver.
