Spending on do-it-yourself, or collocation-style, Web hosting will grow at a modest rate, from $3.5 billion this year to $9.8 billion in 2005, according to Aberdeen. In the same period, managed Web hosting revenues will accelerate quickly, from $8.1 billion to nearly $31.6 billion (see "U.S. Demand for Hosting Services").

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This growth stems from a combination of factors, including the increasing acceptance of managed hosting services as a viable alternative to costly, often poorly conceived internal efforts. In short, managed hosting is coming into its own as a mainstream approach to realizing e-business objectives, even in companies that have traditionally been skittish about losing control by outsourcing. Service providers are increasingly perceived as a knowledge resource that is hard to replicate in the internal IT shop. This, in turn, raises confidence that managed hosting providers can get the job done faster and more reliably.

Whatever the explanation for analysts' optimistic projections, spiking revenue growth rates explain the proliferation of vendors in the hosting services space. Beyond ISPs turned Web hosts, this genre includes "new age" data-center providers with facilities built from the ground up to service a Web-facing clientele, as well as old-guard IT outsourcing and telecommunications providers retooling their existing services to play in the clicks-and-mortar era. Identifying the right provider may well become the key determinant of your e-business strategy's success or failure.

Not Your Father's Collocation Provider

The new hosting service providers have one thing in common: Most are working overtime to distinguish themselves from their predecessors -- vendors of collocation services that dominated the market from the late 1990s until the dot-com debacle of 2000.

Collocation providers rented facilities and Internet access to customers but drew the line at the actual development, deployment or management of the customer Web site. The customer's own IT organization or a surrogate, such as a systems integrator or management service provider, did all the heavy lifting of building and maintaining the corporate Web presence.

Today, however, collocation is a commodity business, with few vendors realizing adequate returns to cover the up-front investments they made to build and equip their facilities. The reasons for the failure of the collocation model of Web hosting are many, but they come down to two inescapable facts.

Fact 1: The massive build-out of collocation facilities has given rise to a glut of cheap, high-quality, data-center space in and around most major metropolitan areas. Just offering customers a world-class facility, an equipment rack and a high-bandwidth network on-ramp is no longer sufficient to differentiate services. To put their businesses on a paying basis, many collocation vendors are hanging out a managed Web hosting shingle. They are leaving behind the collocation model and endeavoring to add value, generate new revenue streams and one-up competitors by offering an increasingly robust set of management services.

Fact 2: Business planners are learning that collocation arrangements almost never deliver on their core business value proposition. Leasing space at a collocation vendor facility rarely results in sufficient cost savings to justify the arrangement. Strapped by personnel shortages, tight budgets and increasingly complex configuration requirements, most business planners now realize that they need not only facilities but also substantial deployment and management services to support their e-business efforts.

Marketers of managed Web hosting services have not missed these facts. Collocation services have become the proverbial whipping boy of the industry -- even in the marketing literature of vendors who were themselves providing these services only a few months ago.