IBM targets Web hosting as key growth area

Rajiv Yvas

NEW YORK: International Business Machines Corp. widened its lead last year in the U.S. market for Internet hosting services as it won a greater share of the medium-sized business market, according to data recently published by market research firm IDC.

The Armonk, New York-based company has identified Web hosting as a key to boosting overall revenue growth. As the hardware business that had been its mainstay has matured over the past several years, IBM has focused on services.

According to the most recent report from IDC, published in late July, IBM's Web hosting market share in the United States rose to 24.8 percent in 2003 from 23.5 percent in 2002 and just 15 percent in 2000.

IBM's Web hosting business has grown at a compound rate of about 20 percent over the past three years and appears to be accelerating. In the most recent quarter, the business grew by 30 percent from a year earlier.

In 2003, IBM Web-hosting revenue, at $1.37 billion, was more than that of the next five biggest players put together, according to IDC.

Melanie Posey, program manager for Web Hosting Services at IDC, said IBM, the world's largest supplier of computer services, is taking advantage of its growing base of corporate customers who turned over management of technical operations.

"IBM's ability to leverage its existing base of strategic outsourcing customers" is one of the reasons for its success in Web hosting, Posey said. IBM can spend fewer marketing dollars than competitors must spend to win customers, she said.

Among companies that have lost market share were Cable & Wireless Plc, MCI and NTT's Verio. Companies gaining share included: AT&T Corp. and Equinix Inc.

Using economies of scale, IBM and other Web hosting companies host and manage Web sites for clients less expensively than what it would cost most companies to run their own sites.

"We will save our customers 20 to 30 percent," Mike Riegel, director of IBM Global Services, said of how IBM's Web hosting business helps customers lower their costs and get flexibility.

BOOSTING SLOW GROWTH


IBM has long been considered a powerhouse of technology, but its revenue has been anemic by high-tech standards.

Between 1989 and 2003, IBM revenue grew from $62.71 billion to $89.13 billion, a compound annual growth rate of about 2.5 percent. During the same stretch, average inflation was 2.99 percent, according to government data compiled by Economy.com.

IBM's hardware revenue fell to $28.24 billion from $41.59 billion over the same period.

Since the tech bubble burst in 2000, IBM has been using its heft to clean up the mess left by dozens of start-up players who ran out of funding and left customers high and dry.

In the intervening years, IBM has gobbled up market share while independent market leader Exodus struggled. While each company had about $700 million and a 15 percent share of the market in 2000, IBM used its broader set of offerings to drive beyond its traditional base of Fortune 1000 companies.

Exodus, acquired by Cable & Wireless in early 2002, dropped to about $500 million in revenue and 11 percent market share that year.

Early in 2004, Savvis Communications Corp. acquired Cable & Wireless' U.S. hosting and Internet businesses, making it the second biggest player in the market. Based on its second-quarter revenue of $173 million, Savvis could generate annual revenue of nearly $700 million.