Internet Titans Target Ad Revenue From Free Web Hosting

Free web hosting is hot again. Rejuvenated by the growth in online ad spending, free web sites bearing advertising are emerging as the latest battleground between the Internet economy's largest players.

On Wednesday Microsoft launched the beta version of Office Live, its free web hosting service for small business owners who agree to view ads as they maintain their sites. Ad-supported web services are a key ingredient in Microsoft's family of "Live" web services, while Google and Yahoo report strong growth in their existing free hosting programs. That trio is being joined by the domain registrar Go Daddy, which is now offering free ad-supported hosting accounts and blogs with every domain name it sells.

The free hosting ramp-ups by Microsoft and Go Daddy are a response to surging revenue from contextual ads on web sites. In its most recent quarter, Google reported $1.1 billion in advertising revenue from its own sites, and another $799 million from third-party sites using its AdSense program. The rapid growth of domain parking services has also illustrated the earning potential of large portfolios of web pages bearing contextual ads.

The focus on free hosting recalls the dot-com boom years of 1995-99, when GeoCities, Tripod, AngelFire and Homestead built massive communities by giving away free web space. The business model took a hit from the dot-com collapse and declining effectiveness of untargeted banner ads. Several hosts introduced pop-ups and other intrusive ad formats, which soon quickly became unpopular with users. The rise of text ads related to a page's content has revived the outlook for free hosting. But will the new focus on free hosting disrupt the paid hosting market?

As director of hosting products at Yahoo, Guy Yalif has a unique vantage point on this question. In Jan. 1999, Yahoo bought GeoCities in an all-stock deal valued at $3.5 billion at the time. Yahoo doesn't break out the exact number of web sites hosted on GeoCities, but they account for a significant chunk of a hosting operation that spans 30 million web sites and 50 terabytes of data, according to Yalif, who calls GeoCities "one of the most recognized brands online."

Yalif says the free hosting clients often have different needs than paid hosting prospects - but not always. "A decent chunk of GeoCities users will never upgrade to paid hosting," said Yalif. "They're happy where they are, and they don't mind the ads.

"But there's also a large number who are experimenting and learning about managing a web site," he said. "We get a healthy number of customers who have grown beyond the free plan and don't want the ads. The (hosting sales) funnel begins with domains and web hosting, but there's almost a separate funnel from free hosting to paid hosting." Of course, Yahoo also gets revenue from the ads displayed on GeoCities. "The income is nice," Yalif admits.

Microsoft's Office Live offers a free domain with hosting to users of its Basic service a free service which includes a domain name, 30 megabytes of storage, five e-mail accounts and traffic analysis software. There are no ads on the public web sites, but contextually-relevant ads will appear on the site the owner uses to maintain and update their web pages.

Go Daddy's free ad-supported hosting accounts offer 50 megabytes of web space, a 5-page Web site builder, and the ability to add photos and graphics to professionally designed templates. Go Daddy's free accounts display Google ads and links to Go Daddy services in a frame above the customer content.