Survey says internet hotel sector overhyped

The survey says that short-term revenue growth in the sector is very high but market perceptions of a huge and enduring excess of demand over supply are false.

Investment bank Granville Baird’s latest technology sector research publication, Colocation, On The Rack?, suggests that the European colocation or internet hotel sector is growing at a fast pace but has been overestimated in terms of market potential. It says that supply of colocation space in Europe is actually growing faster than demand.

The report says that short-term revenue growth in the sector is very high but the market perception of a huge and enduring excess of demand over supply is artificial. “In the medium-term, over capacity is certain. There is insufficient equipment sold to physically fill out more than a fraction of the space available. Even if space is rented by customers but left empty, consequent value-added revenues will be below current expectations.”

The report forecasts that the market size for colocation services in Europe will grow from $670m in 2000 to $1830m in 2002 but that this will be more than readily serviced by the forecast capacity of 18m square feet of colocation facilities that are forecast to be available by the end of 2002.

“The greatest danger is from over-ambitious build-out plans running ahead of demand, which could leave some companies with expensive but empty facilities. There is significant competitive advantage in being among the first few companies to open a site in any given city.”

The report suggests that within two years, a number of colocation players will scale back plans for huge site build-out programmes and will form partnerships to deliver higher margin technical services to their resident clients.

By contrast, Internet research consultancy IDC estimates that the European hosting market will be worth $5.2bn by 2004. A crucial difference is whether a company offers a simple “box and bandwidth” service – where margins look set to be squeezed by overcapacity – or is offering managed hosting services, where it provides full support services as well as the infrastructure.

Last week, DLJ European Private a £15m second round of financing for Attenda, the self-styled total managed hosting company. Attenda will use the finance for expansion plans into France and Germany early next year. The company is considering an IPO in 2001.

Hugh Lenon, a managing director of DLJ European Private Equity, said at the time: “We backed Attenda in its first funding round and we are delighted to have followed our money in round two. It has shown dramatic growth to date and is well placed to lead the market in going forward.”