If internet advertising completely collapses, how much of an effect do you think it will have on the web hosting business? Analysts love to focus on how the only way to survive online is through e-commerce, but I think they're missing the fact that a lot of the past transactions were made possible by revenue generated thru internet advertising. Everything's inter-connected, with advertising being an important link.

There's an interesting report on News.com on how web hosting companies are scaling back in light of internet advertising conditions: http://news.cnet.com/news/0-1004-200-5876734.html

Internet advertising is still in its infancy, most people ignore banner ads, the most common format is that of a 'come-on', that is supposed to pique the curiosity of a visitor and get them to click on the banner and find out who the company is and what they do.

Come-on advertising doesn't work that well in traditional media, and it works even less on the Internet, the ads need to give people a reason, other than curiosity, to motivate them to click on that link. Because cpm's were initially so overvalued, they are only now being valued correctly for what they a really worth. Click-through rates which average about one in a thousand, meant that a cpm of $100 bucks (for example) cost the advertiser that much per click. Targeting ads helps, but it's the ads themselves that really need improving.

In time, the advertising methods and pricing models will improve, so that the most bang for the buck can be garnered through banner ads.

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The article about the data centers came as no surprise. Last year, many companies frantically built out their data centers, many in very pricey real estate-Exodus has two large facilities around here and our real estate costs are second only to Silicon Valley's.

They spared no expense with elaborate security features rivaling those of Fort Knox. Most threats to the security of servers and sites are not coming in through the front door in an armored personnel carrier (but if they do, these facilities are ready to repel them), they hack in through the Internet instead.

Large staffs and very expensive marketing campaigns helped them increase their burn rates. These companies also charge outrageously high hosting fees, for average commercial-grade hosting (I've got a copy of a quote from Navisite for server colo that will make your nose bleed). Exodus recently had a very embarassing outage that caused headaches for Yahoo! and a couple of other high-profile customers.

This is not a recipe for success. One of our local competitors built themselves up a very upscale VC funded data center last summer, started selling server co-lo and managed hosting and almost immediately started circling the bowl. Between heavy losses due to focusing heavily on DSL reselling, and some nasty service outages, there was no profitability happening, and their IPO got postponed and then cancelled.

There are some interesting new entries into the hosting industry recently. A large CLEC bought up that company last month and a few others and is now poised to enter the market as hosting.com. It was a great exit strategy for the CEO brought in by the VC's, who now runs the new venture-not so good for the company's original founders who were kicked to the curb by the same person.

Another company in the area was also recently bought by a CLEC and they are doing managed hosting under a new name. We were nearly bought by a third CLEC early last year to allow them to enter the arena, but thankfully, the deal didn't go through-it was almost all in stock, and their stock is now worth a fraction of what it was then.

It will be interesting to see how this all plays out over the next few montsh. The large data centers with a lot of physical security are going to have value to someone, even if they are white elephants to their current operators, and they will be available at fire sale prices if these companies keep bleeding cash like they are.