The effect of the current American – and global – economic downturn on hosting

As we all know, America (and most of the world as a consequence of America and some of its own doing), is in a recent economic downturn – quite likely on its way to becoming a recession, caused by alarmingly high default rates on recklessly issued sub-prime mortgages by many American and some European lenders. A number of well respected financial institutions and lenders (not to mention, naturally, hedge funds) that are perceived to be stable have already gone under or have required emergency funding. It is only going to get worse, and the world – especially,
America – better get in the mood, as this will be the economic outlook for the immediate to mid term foreseeable future.

So what will be the effect of this, if any, on Web Hosting services?

Before answering this question, there are two facts that one has to recognize:

  • Hosting, same as any other business, is, at least in part, reliant on the global market conditions
  • Hosting, in most of its forms (especially the various forms of business hosting), has become an essential or at least very close to essential service (same as, for example, food or fuel supply, electricity, and other such “necessities” of modern life). This is quite different from, say, half a decade or more ago when hosting was not yet fully viewed as a necessity.

Previously, when the “dot com bubble” burst, the effect was sizeable; spending on hosting (then not yet a true necessity) dropped considerably (mostly as a result of “dot coms” no longer buying overbuilt hosting), and the M&A activity almost ground to a halt, as did data center construction. Many unprofitable hosting companies went under, due to lack of further financing for their unprofitable operations.

Financially stable, profitable and self-sufficient companies, such as Superb Internet Corp. (www.superb.net), experienced some of their best growth ever at that time; while spending on hosting as a whole constricted, a number of hosting companies were also effected by the burst, and a lot of real business customers looking for alternatives to their now or soon-to-be defunct providers took their business to the few companies left in business.

Will the same happen again? Not quite.

Hosting is recognized as a necessity. There will be some reduction in hosting spending as a whole, as part of the overall drop in demand due to the economic downturn, but this will mostly be classified as excess as companies, hit by a financial squeeze, have to cut all expenses that are not absolutely necessary. This also presents an opportunity: some organizations hit by a financial squeeze may decide that this is the time to outsource their in-house enterprise hosting, if doing so results in cost savings. All in all, the net effect on spending on hosting will be negative, but only by a slight margin.

Some market-driven (investor and/or debt financing reliant) hosting companies will likely go out of business, be acquired for less than they’d like to be acquired for, or at least reduce their own debt and investor financed (but not-yet-profitable) expansion, to focus on more immediate ways to become cash flow positive.

For stable, independant companies (not reliant on outside financing and investors) this is good news, just as it was nearly a decade ago when the “dot com bubble” burst. Companies such as Superb that are not at the mercy of the whim of the markets stand to gain during times of such uncertainty. However, it looks like the gains this time around will be smaller than when the first bubble burst, mostly due to the fact that hosting is now more of an essential service (the demand for which can still even grow, in some fields, during an economic recession), that data centers are no longer in over-supply (in fact, if anything, just the opposite), and since the industry itself is stronger and is commonly understood, it is less likely to be in for a turbulent ride.

Time will tell, of course, how things will work out for our industry over the upcoming economic recession. The above is how it is most likely to turn out, based on previous somewhat similar events, and given the current state of the industry.

All that being said, the current state of the overall American economy, namely the huge and rapidly growing national deficit, the great current account imbalance, and the spending-more-than-making habits of the average American consumer (and, of course, the government) over the last few years (and an expectation to continue being able to do so indefinitely at the expense of the global markets propping up the American ones – as is not likely to continue for much longer), are a worry for any business in America, or that depends, in any shape or form, on the American market – and even for ones that do not directly depend so, given how changes in the US can effect the global economy.

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