Today’s initial public offering by Google has been touted as a bellwether of investor confidence in Internet companies. It arrives as web hosting appears to be back in favor on Wall Street, with Business Week recently anointing the U.S. hosting industry “one of the hottest sectors in tech today.”
Speculation about hosting IPOs is natural, since many of the industry’s strongest recent performers are privately held, including Go Daddy, Rackspace, EV1Servers and The Planet. But the history of public companies and hosting is a tortured one, featuring more bankruptcies and dashed hopes than breakout successes. Despite Google’s 20 percent jump in today’s first day of trading, prospective hosting IPO prospects are treading carefully, weighing the pros and cons of public ownership amid market conditions that have caused several tech companies to postpone offerings.
Go Daddy President Bob Parsons discounts reports that the company is preparing for a public stock offering. “Sure, we think about it,” said Parsons. “Do we expect to go public in the near future? No, we don’t. But we’re always looking at all our options.”
Rackspace is another provider that has grown rapidly and been the focus of IPO conjecture. Co-founder Morris Miller has said an IPO “is something we may consider in the future.” But that isn’t an overriding goal for the San Antonio firm. “Instead of focusing on an IPO, we concentrate on building our business for the long haul,” Miller said in a December interview.
The need to meet investor expectations on a quarterly basis is a challenge. That’s particularly true on the downside of a business cycle, as evidenced by managed hosting provider Inflow, which withdrew a planned public offering in the fall of 2000. In retrospect, that was a good thing, according to Inflow CEO Art Zeile, who says remaining private placed Inflow in a better position to survive the data center downturn.
Public companies such as Exodus, Global Crossing, WorldCom, Metromedia Fiber Networks and Cable & Wireless America were among the wave of hosting-related bankruptcies in 2001-2003, reflecting the failure of the “Field of Dreams” business model shared by numerous public companies - build it, and the customers will come. Funded by venture capitalists and Wall Street, these companies took on huge debt loads to construct networks of massive data centers.
The new construction exeeded demand for mass-market hosting, and empty data centers became a huge financial burden. The shaky finances of “new economy” providers unsettled enterprise companies, who instead sought out familiar three-letter brand names - IBM, EDS, AT&T and CSC (Computer Sciences).
But in recent months Wall Street has taken note of the improving environment. IBM and AT&T recently reported strong results for their hosting operations, and post-crash consolidator Equinix, has seen its shares soar from $3.39 last May to $32. The stock of United Internet, the parent of 1&1 Internet AG, tripled in 2002-03 but has been flat over the past 12 months. This week Yahoo issued a majorvote of confidence in the hosting market, unveiling a new push into hosting featuring $9.95 domains as a lure for small business cusomers.
The trend hasn’t floated all boats, however, as Interland has seen its shares slide from $10 last September to around $3.75 today.