Web service vertical integration

I was chatting with Allie, the mad genius behind pajunas interactive the other evening, and she mentioned her search for a second network operations center for her business. Not that the current data center where her servers are located is bad (they're ISO-9000 and ex-military perfectionists, really), but rather nobody is perfect and contingencies are always good to plan for. I got to thinking about the whole end to end business of providing web content to end users.

At the lowest level are the the long distance communication technologies -- the Internet pipes as they are often called.

Next there are data centers -- the secure, climate-controlled, reliably-powered (one hopes) locations where racks of servers are installed and connected to the pipes above.

Often there is another provider, the hosting service, which provides the hardware and software location for the web site to be installed on those rack-mounted servers.

Above that, often there are the web site owners and administrators, between the actual content producers and the hosting services where their content is made available.

Sometimes, the site owner and content producer is the same entity. Sometimes, the data center and hosting service is the same entity. There are of course endless variations.

Largely, if one is a web site owner, there are usually 2 or 3 layers of businesses between you and the network. This is not a bad thing, per se.

It occurred to me most of the network pipes are owned and operated by the goliath telecom companies these days. Most are the very same companies trying to make life miserable for small businesses by destroying network neutrality via lobbying the U.S. Congress. They are pushing for laws allowing them to abuse their monopoly, common-carrier positions and charge extra to big businesses who can afford to pay more to make sure their content gets seen. There's no way this idea is Good for anyone but a few profit-takers at those large telecoms, and even for them, it's only in the short term. It should be opposed in every way and form possible.

That's not what this posting is really about. Those large telecoms are looking to increase their profits. In some twisted bureaucratic way, cheating the public by spending money on lobbyists looks like a reasonable way to do that to them.

But if they had any clue at all, they could have (and possibly still could) make much more money by just being smart about the whole content delivery industry. There's an old business strategy called vertical integration. It would have been not too hard at all for the telecoms, who have operated ultra-reliable telephone switching data centers for decades, to offer such data centers to the buyers out there (indeed, some have). Why stop there, though? Why not also be the hosting provider? Administering lots of computer hardware is also not a foreign activity to a large telecom.

Instead of the market supporting lots of middlemen making profit at each layer -- ISP, data center, hosting service -- a giant telecom could own the pipes (as most already do), the data centers (ditto), and the hosting services, taking those two layers of profit as their own. Why aren't web site owners buying hosting and bandwidth directly from the AT&Ts, Verizons, Bell Souths and Qwests of the world? With any sort of efficiency, they could undercut the prices of other providers, and still make more profit than they are today -- and more profit than they'd make by temporarily distorting the market in their favor with bogus legislation.

It might still be an opportunity for some of the telecoms. There are probably data centers and hosting services for sale at the right price out there.

This is not to say there are not good reasons for continuing existence and success of small, non-telecom hosting businesses. Just as in any industry, there is always room for niche players who can bring things to market that the larger and necessarily more generic businesses cannot. Even if the telecoms did as I suggested, I'd stay with pajunas because of their ability to meet my needs in ways no big company ever will.