Hosting Industry Perspectives: Issues, Trends, and OpportunitiesMelanie A. Posey

Research Director, IDC

May 9, 2007

Presentation Title (Manually Change in Master Slide)2

Agenda• Service Provider Landscape, 2007

• Forecast and Market Segmentation Update

• The Demand Side: What Do Businesses Want?

• The Supply Side: What Works?

• Q&A

Service Provider Landscape, 2007

IT Services/Systems Integrators

Pure-plays/MSPs

Application AggregatorsNetwork Operators

SMB Hosters

Colocation Providers

Diversity of Vendors, Diversity of Value Propositions

Hosting Offer Landscape, 2007

Application Hosting

Infrastructure-as-a-Service

Online Business Enablement

IT Outsourcing/ Consolidation

SaaS-enablement

Hosted Applications

Service Providers’ Dilemma: Is What You’re Selling What Customers Need (or Think They Need)?

Market Highlights Increasing enterprise willingness to outsource hosting/management

of infrastructure for both public-facing Web sites and internal enterprise applications and platforms

Growth in small businesses Web site implementation and evolution of shared/mass market hosting into comprehensive online business solutions

Demand for content, particularly Web 2.0-type applications, is fueling interest in dynamic hosting and networking solutions to improve performance and reliability.

The return of colocation: increased power/cooling requirements of next-generation architectures are generating new enterprise interest in off-site solutions. Supply constraints in key metro markets result in increased service provider pricing power.

Utility/Virtualization computing: customer interest and adoption is expanding, but service provider delivery and pricing models are still evolving

U.S. Hosting Services Market Sizing

Revenue by Service Type, 2006

Dedicated Hosting

5%

Shared & Virtual Private

Server20%

Colocation17%

Complex Managed Hosting

58%

Revenue by Service Type, 2011

Colocation14%

Shared & Virtual Private

Server15%

Dedicated Hosting

4%Complex Managed Hosting

67%

Source: IDC, 2007

Total Market: $8.2 billion Total Market: $16.4 billion

Outsourced Hosting

59% 20% 15% 6%

55% 24% 18% 4%

55% 20% 17% 8%

45% 28% 25% 3%

0% 20% 40% 60% 80% 100%

<100 employees

100 to 999employees

1,000 to 9,999employees

10K+ employees

In-house Fully outsourced Partially outsourced Don’t know/Refused

Source: IDC Hosting Services Survey, 2007

• Drivers include interest in flexible service options, data center power/cooling requirements, networking needs, and utility/virtualization

• Overall adoption of outsourced hosting has remained constant over past 2-3 years, but companies that do outsource are shifting more and more responsibility to service providers

• Among small businesses, some of the in-house hosting segment is actually leveraging DIY tools and free/low-priced hosting from online service aggregators

Farming it Out: Outsourcing Decision Factors

48%

58%

59%

64%

66%

66%

67%

72%

0% 20% 40% 60% 80%

Performance and scalability

Improved backup/redundancy capabilities

Cost savings

Improved security

Facilitate technology upgrades/migrations

Time-to-market/speed of implementation

Lack of internal skills and/or resources

More efficient way to meet regulatorycompliance mandates

Decision Factors for Outsourced Hosting

• The largest businesses surveyed (>10K employees) cited security and regulatory compliance as the Top 2 decision factors. In prior years, the key issue was cost savings

• Performance improvements and skills augmentation are key decision factors for smaller companies.

• Smaller companies are also more influenced by the cost savings aspect of outsourced hosting

Source: IDC Hosting Services Survey, 2007

10%

59%

61%

67%

69%

74%

77%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Lack of cost savings

Sufficient in-housetechnical skills

Security

Maintain control

Lack of flexibility

Regulatorycompliance concerns

Other

Inhibitors to Outsourced Hosting

Why Aren't They Outsourcing?Why Aren't They Outsourcing?

• Lack of cost savings emerged as a more important outsourcing inhibitor in 2007 than in previous years’ surveys

• The largest businesses surveyed are most concerned about retaining control of their infrastructure and believe that the security of the infrastructure and applications is best handled in-house

• Smaller companies are most confident of their ability to handle Web infrastructure in-house

Source: IDC Hosting Services Survey, 2007

Service Provider Selection: Who Gets The Call?

Other3%

Don't know3%

Pure-play hoster7%

Web designer16%

Application services/mgmt.

provider13%

Shared/dedicated hosting provider

10%

Telecom provider18%

ITO/SI22%

Web services/software

company 8%

• IT outsourcers/systems integrators are well represented among larger companies, especially the 10K+ employees segment

• However, telecom carriers are also key service providers across the market, including large enterprises

• Position of ITOs/SIs, telecom carriers, application management providers’ is partly a function of how large enterprises buy hosting:

Nearly 50% of large enterprises procure hosting as part of a larger network or IT outsourcing engagement

Source: IDC Hosting Services Survey, 2007

What Else Are Hosting Customers Buying?

8% 5%

29% 30%

30% 32%

30% 32%

31% 37%

34% 41%

34% 29%

37% 35%

39% 31%

44% 30%

0% 10% 20% 30% 40% 50% 60% 70% 80%

None of the above

Desktop management/help desk services

SaaS-based business apps

Enterprise application management

WAN/data networking services

Disaster recovery/business continuity

IT outsourcing

Hosted email/messaging

Storage

Network security

Other Services Purchased from Current Hosting Provider

Source: IDC Hosting Services Survey, 2007

• Disaster recovery/business continuity is a key growth area, especially in the small business segment

• Hosted email, already the primary hosting add-on for SMBs, is set to pick up steam among large enterprises

• Large enterprises indicate continued interest in bundled hosting, networking, and IT outsourcing services, underscoring the central role of hosting in enterprise business processes

Hosting Spending, 2007• <100 employees

Average: $1,900/month

Median: $630/month

• 100-999 employees

Average: $10,000/month

Median: $1,150/month

• 1,000-9,999 employees

Average: $16,100/month

Median: $6,400/month

• >10,000 employees

Average: $35,000/month

Median: $22,100/month6%

11%

20%

20%

13%

12%

6%

11%

0% 5% 10% 15% 20% 25%

Don't know/Refused

Less than $100

$100 to $999

$1,000 to $4,999

$5,000 to $9,999

$10,000 to $24,999

$25,000 to $49,999

$50,000 or more

Monthly Spending on Web Site/Applications Infrastructure

Source: IDC Hosting Services Survey, 2007

Modest year-over-year growth in adoption of outsourced hosting, but healthy year-over-year spending growth highlights the importance of upselling/cross-selling and providers’ ability to position hosting as the foundation for convergence, SaaS, and other key IT transformation initiatives.

New era of business critical systems New business trends

New usages New consumption models New environment

New era of business critical systems Real-time, network-centric IT applications “Anywhere, anytime, always”-enabled business processes Business-criticality as a key driver: reliability, availability, security

Enabled by technology innovations▪ Content delivery networks▪ Application optimization/acceleration▪ Virtualization▪ Broadband▪ IP Convergence▪ Mobility

Hosting as the foundation

Customers

Employees

Partners

Suppliers

Hosting

Storage

CDN

SOAApps.

Security

What Works? Levers of Differentiation• Build a better value proposition: hosting as a means toward an end…

Dynamic, flexible IT infrastructure Functional software apps (your own or someone else’s) Community Advertising

• Automated service delivery and process development Repeatable solutions or “factory” infrastructure Certified libraries of hardware, software and applications Portals for customer self-management of on-demand functionality

• Integrate virtualization and service-oriented architectures into your own business model: creation of infrastructure-based “aggregation ecosystems” with services laid on top of utility platforms or plugged in from the side (partner-developed services)

• SaaS-enablement: But be clear on the hosting provider’s role – is the hoster provider the mall, the mall’s anchor tenant or both?

• Hosted applications: must be more than “software-as-a-service” -- the functionality must solve a key business problem

The differentiation dilemma: no one wants to be “just” a hoster but a clear, sustainable value proposition means service providers must be careful and not overreach