The European market for web hosting services has changed dramatically in the past 12 months. What was once a mere add-on service offered by ISPs has grown into a highly focused and specialised business operated by the major telecoms companies and a pack of smart start-ups.

As operators race against each other to roll out ambitious networks of data centres across Europe -- to house rack after rack of web-serving hardware -- many an old hand in the telecoms world is beginning to detect the first whiff of consolidation in the air. The demand for robust web hosting services has been driven by fear. Businesses on both sides of the Atlantic are becoming reliant on the internet for sales, customer service operations and even in some cases applications. With so much riding on their websites, captains of industry want assurances that their fancy-looking, e-commerce enabled urls will not keel over in the face of traffic surges. Enter the web hosters.

The web hosting business first took off in the more internet savvy US market. West coast web hoster Exodus quickly emerged as one of the leader from among a host of smaller start-ups; meanwhile an alliance between AT&T and IBM has shown that the industry stalwarts are prepared to hit back.

Earlier this year it became obvious that Europe was following in America's wake. Summer and autumn saw swarms of systems integrators and specialist building contractors descend on most of Europe's major cities. Their mission: to gut old warehouses or knock up sturdy-looking sheds to securely house row upon row of quietly humming web-servers. These new internet data centres (IDCs), each with specially fitted floors, air-conditioning units, fire-protection and security alarms systems are the physical encapsulation of operators' web hosting plans. They are designed to send a clear signal to customers that the company is a serious player in the internet space and has the ability to guarantee fast, secure access to their websites. The data centres also represent an important strand of their owners' business plans.

Growth area

Network operators keen to improve margins and build a place for themselves higher up the IP service chain have seized on web hosting as a godsend. As an added bonus it gives them something to crow about in meetings with analysts, as the implications of pricey 3G licences sink in and cause considerable downturn in the share prices of many of the European majors. Most operators rejoice in anything that will boost their popularity on the European stock markets.

For some of these hard-pressed operators, web hosting has been the fastest growing area of their business. Network-focused companies like Gable & Wireless are beginning to place a much greater emphasis on their web and application services. "There is no question that the market is there for these services and, in fact, there are not yet enough players to satisfy the demand. So we are not yet faced with the problem of too many participants," argues Hanco Bowmann, managing director, Iaxis (now operating as Extent) in the Netherlands. 'No, the problem lies in size. You have to attain a certain size to achieve economies of scale. The bottom line is you need a lot of cash. These specially built data centres do not come cheap, at least not if you do it right. To build a 10,000[m.sup.2] data centre requires an investment of [pound]25 m([epsilon]12 in)."

Earlier in the year it seemed that Iaxis was on the brink of collapse as it completed its first round of building out 19 small IDCs each between 100-200[m.sup.2] in size. A recent rescue by Extent, the telecoms wing of US energy company Dynatech, bought Iaxis the necessary financial injection. Bowmann's is therefore one voice of experience -- "The problem for all companies is getting their financial backing right. Even KPN Qwest, which has IBM as a hardware supplier, may find that it wants to bring in another partner [possibly Bellsouth] to help fund the required investment."

The funding game

The immaturity of the market seems to have driven most start-ups and even some established telecoms players to seek extra funding for their expensive roll-out plans. Metronexus is another example. The Paris-based company which began building a series of internet hotels or data centres earlier this year has now been bought out by Morgan Stanley. Digiplex is now funded by the Carlisle Group.

While major players may like to make a song and dance about the money they are diverting to this new area, it has to be seen in context. For example, some in the industry are dismissive of the [pound]100 m ([epsilon]167 in) investment in IDCs which was proudly announced by Cable & Wireless earlier in the year. 'With that kind of money they are looking at small sites across Europe' was the most common insider's reaction. In C&W's case of course this could be easily rectified. It has access to some impressive funds. After selling off Global Marine, Bouygues, One2One, Japanese Mobile, Bezeq, CWC Consumer and the biggest of them all, Hong Kong Telecom, it recently boasted that it has a war chest of some US$18 bn ([epsilon]21 bn). As the company's CEO put it recently, displaying a mastery of understatement, 'You can do quite a lot with US$18 bn'.