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The likes of companies like Google and Microsoft could look to consolidate Australian hosting players to get a foothold in the market, analysts and industry executives said.
BBY analyst Mark McDonnell said the phenomenal growth of hosting and ”selling software as a service” internationally presents both a threat and an opportunity for Australian hosting companies. The likes of Google and Microsoft, setting up massive data centres, could lead them to consider offering hosting solutions too. While ”we can’t see the terrain completely just yet,” he said this could have implications for Australian hosting players like Hostworks, as well as companies like Macquarie Telecom, BlueFreeway and MelbourneIT, which also offer hosting services.
Paul Budde, an Australian telecommunications analyst agreed that ”in a new digital media environment the value-added infrastructure will evolve around IT, including data centres, content hosting, management, billing and outsourcing”. This, he said, is one of the fastest growing segments of the market.
”In their scramble to keep their monopolies in place, the telcos have taken their eyes off the ball and, for example, MSN, Google and Yahoo are building more than one million servers as we speak,” Budde said. Telcos ”should have been in this business”, but have chosen to see the Internet companies as enemies rather than customers, he said.
The market, he predicted, will evolve along different lines with the likes of Macquarie Bank being involved in large data centres and infrastructure activities.
Smaller players will operate within these centres, with some having their own centres. Some of the larger telcos, ISPs, content providers, media players, corporates and digital media companies will also play a role, he said. ”Over the next five years or so, we will see some rationalisation and clearer segments will start to appear along infrastructure and services lines,” he said.
Marty Gauvin, managing director of listed Australian web-hosting company Hostworks, which has a market capitalisation of AUD 37m (USD 31m), agreed with McDonnell, saying: ”That is absolutely true and likely to be a threat for those people providing services at the commodity end of the market.”
”Any part of the service that hosting companies provide that is able to be commoditised is able to be taken up by multinationals,” said Gauvin. However, he foresaw less chance of Hostworks itself becoming a takeover target.
”The good thing for Hostworks,” he explained, ”is that there is very little of our offering that can be commoditised. The fact that our service is customised and aimed at the critical end of the market where engagement is high-touch makes it much more difficult for that type of organisation to take that on.”
Macquarie Telecom chief executive David Tudehope agreed that there could be a threat from foreign companies including the likes of Microsoft and Google. Listed Macquarie Telecom has a services revenue of AUD 126m (USD 105.8m), with one-third of that comprising hosting revenue.
Tying up with local players would make more sense than going it alone, said Tudehope. ”Australia,” he explained, ”does not have the same opportunities for foreign entrants as bigger markets like the US and China”. He said this has been seen with foreign telcos that have entered the Australian market on their own and have not made significant headway.
”Geographic distance and the size of the market discourages them,” said Tudehope. ”But, there is no reason why they couldn’t tie up with local players. That would make more sense.” Tudehope said this could be a roll up of smaller ISPs at the low end, but the more sophisticated offerings like those of Macquarie Telecom would be a better fit.
”At the higher level,” he said, ”any [Australian hosting players] would be takeover targets and that would have to include Macquarie Telecom.” Tudehope added, however, that a tie-up might not necessarily only involve an M&A-type deal. ”That would be ”too simplistic [a view],” he said. ”It could also be an alliance or supply arrangement.”
Richard Webb, managing director of listed digital media and hosting company Blue Freeway, which has a market capitalisation of AUD 124.8m (USD 104m) said ”like any business, we keep an eye on the likes of Google and Microsoft who clearly have their own ”software as a service (SAAS)” strategies. He declined to comment specifically on whether BlueFreeway could be a target, however, saying ”we believe our independence is one of the unique strengths in our model and is a valuable attribute in the eyes of our clients.”
Webb agreed that the industry is seeing significant growth in SAAS and that BlueFreeway is positioning itself to take advantage of this opportunity.
Theo Hnarakis, chief executive of Melbourne IT, said his company identified the potential for growth in the Australian hosting and ”software as a service” markets about 18 months ago. He said the company’s acquisition of hosting provider WebCentral in September 2006 was part of its strategy to boost its capabilities in these markets ”and we are continuing to drive growth by pursuing further acquisition opportunities globally.”
He also declined to comment specifically on whether Melbourne IT would be a takeover target, saying ”we are confident Melbourne IT will continue to be a key participant in the Australian hosting market and the global online services industry because of the diversity of our business”. Melbourne IT’s market capitalisation is AUD 291m (USD 244.6m).
Meanwhile, Daryl Webb, investment director of Caledonian Investments, a Singapore based private investment entity with investments in hosting companies in Singapore, Australia and New Zealand, believes that the major search-engine portals like Microsoft, MSN and Google are likely to aggressively target the large, homogenised markets in North America, parts of Europe, and possibly Australia. But, ”because the offerings of the typical hosting provider will not overlap”, he said that those companies were unlikely to make significant acquisitions in the hosting space.
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