B10WH

“Statistically 2/3’s of all businesses fail, and I am one that has started over 12 businesses can say this statistic is true”, says in his interview with B10WH Jay Kramer who has run a few quite successful web hosting enterprises in his career. He is web hosting business since 1996, at the time when we used to use dial-up Internet access. Jay who now serves as a CEO of the wholesale data center service provider Colostore said something quite interesting about the popular web hosting automation provider cPanel.

“cPanel was not really a software package that was developed for the web hosting industry it was a software package that was written within the hosting business and was developed by people who did hosting tech support and had good reason to solve hosting issues”, explained Mr. Kramer. Read the whole interview below.

Hi Jay, I know you for almost 6 year, from the time I was CEO of Host Color. I found your company when I needed to find a data center solution. Now I’m please to do this interview with you for B10WH.com. Tell me how do you get into web hosting business?

We got into doing web hosting mainly from our client that came to us for Internet access which was back in 1996, since we were the only people in the Internet business in the local area we were naturally the choice to ask about hosting, and we originally offered it as a added benefit to out customers. Later we did get into it more heavily when the dial-up business began to get displaced by DSL and cable modems.

You said “we”. Who are the others?

The others are partners we had in the business originally it was family members, then when we got into web hosting only it included some friends. The first company was called “Simply Internet” then we sold it and bought a web hosting company called “Powersurge” which started “Fastservers” and then eventually got bought out by Layeredtech.

You keep using “we” form. I thought it was you and another one… or you were a team of professionals? I’m asking this because it is interesting how different people get into business – alone or with a number of business partners?

Yes, I suppose it is interesting to look at the evolution of how people flow in and out of business, let me see if I can clarify. The first business Simply Internet was Myself and 3 other family members, when we went to Powersurge / Fastservers we added in two partners and then we sold Powersurge/Fastservers and started Colostore with the original family group.

You have been in this business for almost 15 years. Since then the things changed a lot from a technical perspective. Tell me about web hosting in 1998, what did web hosting customers need to use at that time? There were no advanced hosting automation systems 11 years ago…?

In 1998 most of the website needs were mainly static sites with some CGI’s inserted here and there, an admin could easily pile on a server 300 to 400 sites and keep it running well, assuming mail was on another server. Hosting automation was really in its infancy at that time, although cPanel was around and we used it back when cPanel was based out of Burst.net (although not a part of).

We did have to create our own scripting and control panels to help with automating tech support, we did have scripts on the windows side to create websites and manage accounts. We also have created special control panels to manage email, mysql and mssql databases, backups and server monitoring.

I think cPanel was the first that we found the brought all the hosting automation together under one package. Although I believe Ensim was around at the time promising a winows solution, and we were one of the first companies to try out ensim as a control panel.

Why did cPanel become the most popular web hosting automation software in the industry?

I think mainly it was because of the response to the issues that kept coming up, I can remember seeing security issues popup with a Linux application and Nick would have a fix within several hours, for us it was really about that close relationship with the developers, cPanel was not really a software package that was developed for the web hosting industry it was a software package that was written within the hosting business and was developed by people who did hosting tech support and had good reason to solve hosting issues.

Hmm, this is quite interesting. Now tell me about your web hosting enterprises. Which one is the most successful one?

The second business was probably the most successful, when we took over Powersurge we were able to double the size in a year and had over 100K domains hosted, it was really quite a business to run, however hosting alone was not what we really wanted to do indefinitely, in my personal opinion Colostore although not as many accounts as the previous businesses is by far more successful. Measuring success is a interesting topic, when I was younger success was measured how many dollars you brought in, when I got older success is now measured in the amount of free time I can give to my family and business stability (important in this economy).

If you are about to provide consulting services to someone who wants to create a web hosting business what would you tell them if they ask you how to position the new company? Is it more profitable to target a individuals and/or small businesses, or it is much better to deal with those who need Dedicated / Managed Hosting or any customization on an enterprise level?

I think if someone is new to the business and wants to get into a web hosting type of business, definitely start with reselling, statistically 2/3’s of all businesses fail, and I am one that has started over 12 businesses can say this statistic is true. When you start a business make sure you develope relationships with paying customers first and dont dig financial holes right away. Once you get your paying ralationships stable and steady you can then think about integrating up the food chain by buying into servers and infrastructure. But, always look at getting cash in the door first and build a pay as you go model, pricing in the hosting business has always been a moving target.

On the question of if its more profitable to target individuals or small businesses I would lean more toward small businesses, usually businesses are budgeted and do not seem to have as many cash flow issues as individuals do, also they tend to be more the 9 to 5’ers, so tech support does not get to crazy in the off hours.

Would advice anyone to start Reselling a hosting services provided from a Cloud computing class infrastructure or you’d tell them to start with good old rack-mountable servers?

Thats a difficult question because the definition of Cloud Hosting changes like the weather from person to person, my definition of Cloud Computing is simply a site or service that has a simple front-end point of access, and on the back-end has redundant geographic diverse servers. The minimum to implement this would be to get a few servers, put them in different datacenters and do some dynamic DNS with failover.

I think if your starting out wanting to do some cloud computing, you are at the choice of building your own flavor of clouc computing, or waiting to see which solution starts to become viable. Right now cold computing is a huge buzzword without any concrete definition.

Yes, it is true. But there are still a huge different between Cloud based infrastructure and traditional computing… as far as there is such thing like “traditional computing”…?

Well I think the jury is still out on the Cloud computing definition, however traditional web hosting from my perspective has changed quite a bit over the years, I think traditional hosting/computing would be defined as a provider hosting DNS/Email/Web on the same server, there are quite a number or variations on this, but when you really look at the packages that people offer on the web, mostly the $4.95 unlimited everything plans, it ends up being just another account on a cPanel box somewhere.

Do you accept the concept as selling “unlimited” to people who don’t now much of how does the Internet, websites and web hosting in particular work?

This has always been a thorn of arguement across the hosting industry and people seem to always have their opinion about it, from what I have seen and done early on, is that the term unlimited is simply a marketing term that hides limitation on a site, if someone signs up for a unlimited account and they use too many resources they will simply find their accounts dropped. To me it really is just a way to bring in lots of clients and sort out the ones you want to keep.

Do you have many friends who know that you do something related with computers and always ask you to “how to fix” something questions?

Lol, yes, yes and yes, the tech support curse has followed be around for years, however I am about to pull off the holy-grail of tech support technicians, I have almost got my family and friends to call up our tech support guys instead of calling me.

Tell me now have you ever thought of leaving this industry and to get down to any other business that does now require 12 hours to stay connected with your clients?

I think every day, although I would be happy just to be attached to the business for 12 hours, for me it is truely 24 hours, I dream of the day of turning my cell phone into a skipping stone. Although I don’t know what other business I would go into, the hosting business has been very good to me and I actually do enjoy it quite a bit.

Now last question. It is always about to make hard choices. You should either grow and grow and grow further or to sell and get down to something else. Has the web hosting become a traditional business, something that would become a family business for a few generations, the way hotel business is?

The interesting problem with growing is that usually companies always grow to levels of incompetantcies, meaning they always grow to the point that can be managed by the current management. In this case if someone has a hosting business that is growing and growing, you are given a choice to usually either sell out or get some professional management.

I cant really say web hosting is a traditional business, I do have quite a bit of experience in selling hosting businesses and evaluations usually seem to be based on revenue multiples and account values, unlike traditional businesses where the evaluation may be done on a discounted cash flow basis.

When we say “Ethics” we usually address questions about morality. In business the term “Ethics” (Business Ethics) refers to a form of applied ethics that examines ethical principles and problems that emerge in a business environment. Term “Ethics” applies to all  aspects of business… even to web hosting business, despite that many hosting providers obviously disagree with this (a conclusion we would make when carefully review their offerings, customer service and the way they promote themselves on the market).

I shall say that as any other markets of intangible business activities web hosting is quite unethical business. In general the web hosting market is more a competition of promotional techniques than a competition based on quality. The unethical competition was introduced into web hosting industry by the largest web hosts like Yahoo (the first major web host to introduce “unlimited disc space” in offerings) and many others who begun using disputable business practices to get customers and to fight competition. One of those practices is to give a hosting company a name which is very close to the one of already well-established market brand.

This was the case with RackShack, a popular dedicated hosting provider at the beginning of this decade. It attracted a lot of attention not just because of its aggressive dedicated server offerings, which included zero set0up fess cheap hardware and very poor technical support, but also because of manipulating the consumers by exploiting the concept and the name of an already well-established and very popular web hosting brand such as RackSpace.

Beginning with a conclusion that web hosting is in general unethical business – with both web hosting providers and their customers being unethical – in this “Have you say” story” B10WH will point your  attention to an ordinary discussion titled “Is it ethical web host practice?” which is taking place Web Hosting Talk forums titled. It was opened by a forum member signed as Jon.

“I’ll try to give my account as objectively as I can. I’m pretty upset/disappointed with my web host right now. What I want to know, is Is this how web hosts should treat their customers?” says Jon and explains that he went on vacation for 10 days, checking online for orders and was surprised that he hasn’t received any. He added that he was always on public computers and he had his emails forwarded to his Yahoo Mail.

When he got back for vacation, I found that I couldn’t access his e-mails directly and he also saw his website was “gone and in its place was a bunch of pay per click adds, with a note on top that the domain was expired”. Jon thought he had paid up for another year, and that decided that his web host would never treat him like. So he assumes that someone was pirating his website.

But when he has contacted his web hosting provider the company’s representative told him that he has paid his web hosting plan but his domain was for some reason left unpaid and expired. The Credit card Jon had on account with the web host has also expired.

At this point he would decide that it was obviously his fault that his domain wasn’t renewed in time. However Jon went to Web Hosting talk and said:

“At this point I’m somewhat tiffed that they would not only take down my site, but replace it with pay per click adds, but think “hey, certainly they tried to contact me. My email address I have on file with them must be out of date”. So I go into cpanel to update it, but no, it is current. They never even tried to contact me, not even sending an email.”

Jon explained to WHT members that his website “had no traffic for a week and a half” and at the time he opened a thread in the forum his site still “wasn’t showing up on Google searches”. “My traffic is down to 1/3 of normal. Seems I’ve heard that Google penalizes sites that are entirely made up of pay per click adds, and I think it likely that my site has been penalized because of my web hosts actions”, said Jon and asked “It’s impossible to determine how much this will end up costing me. I feel that when you hire somebody (i.e. a webhost) they should be on your side, not stab you in the back. I don’t know if what they did was illegal, but I certainly think it was unethical”. The he asked the forum members – “What is your take?”.

What have you said?

“Maniakaz” a WHT user from Lithuania responded: “If it is domain that expires, you should have received warning emails. At least I do get them from GoDaddy: warning, your domain expires after xx days, click there to renew it. Maybe these emails went to “spam” folder? re-check. Or ask a host if they did sent these emails. I think, you may want to change registrar to something more reliable, like Godaddy. And your host’s practices are weird. I can’t call it unethical: if client knows he will not receive any domain expiring email – customer should decide”.

Another forum member “Rumsfo” responded with these three sentences – “I assume uptime that is very important issue for the Google as for any other SE. I assume you need to move to another web hosting service and ask for the refund. I assume that would be fair enough”. This comment wasn’t very much on the topic, but the next one posted by member “Bihira” was pretty specific.

“Most hosting companies don’t use the email address in cPanel as the main contact for customer accounts. More than likely they have a billing script, you should look for this script and update your email address there. Also it’s pretty normal for registrars to put up ads on expired domains (e.g. I bilieve GoDaddy does this as well). Not saying it is right, but it’s unfortuantly the norm. Also I would never recommand GoDaddy as a registrar, just check out nodaddy.com for horror stories. Though generally it’s better if you keep your webhost and domain at seperate companies”, explained Bihira. The WHT user added that “there isn’t nothing your webhost could of done”, and explained that since Jon had an unpaid invoice for his domain the web host couldn’t renew the domain name before receiving a payment. “As they get charged a fee everytime they renew / register / transfer a domain. So they need to wait for you to pay the invoice” said also Bihira.

Another member with a forum name “fobic” singed as Chris said that he was “with Bihira on this one”. “To put it bluntly, you didn’t pay your domain renewal so it expired. Expired domains commonly show the registrar’s parking page – the ads page you saw is most likely the standard page for whatever registrar your host uses”, said Chris and added that the web host should have tried to contact Jon about the domain expiration and about the expired credit card on account. “I’m betting they did email you about this. For some reason you didn’t receive their emails and that’s unfortunate, but ultimately it’s still your responsibility to keep your details up to date and pay your bills on time” concluded Chris.

“NeutroHost [Nix]” posted that since it was a domain name issue, it was probably not the host’s fault. “The reality is that most webhosts resell through a domain name registrar like Enom or Namecheap and the ads are placed on your website by the domain name registrar when your domain name expires, not the host” said Nix and added “I can understand your frustration with the matter though, but it’s been the norm for a long time”.

“Sorry to hear about your troubles. Did you find out if your host tried to contact you? I would think at the very least the domain registrar send out a notice, unless your name and email address isn’t on the domain. You should make sure that your the registrant contact for any domain you own and keep the contact email address up-to-date at the domain registrar”, said “SphereWebHosting” in their post.

Then a pretty harsh but true comment came. A WHT member named “ieee488” said:

In all likelihood this is what happened. All domain registrars that I have used, and I have used about 6+ different ones, they notifiy you 60 days, sometimes 90 days in advance that your domain is expiring. That you didn’t get an email tells me either those emails went into your spam folder or you used a different email when registering your domain.

The person Jon should be pointing the finger at is HIMSELF.

The “ieee488” added that before Jon start throwing words like ‘unethical’ he had better know what he were doing and understand the actualy workings of webhosting and domain registration. “Otherwise, you look like an idiot”, said Ieee488. and added “My take is that you stabbed yourself in the back unless you for some reason pay for webhosting and domain registration combined”.

Jon obviously got affected from the last comment and responded: “This is why I posted the experience and asked if it was unethical, as it seemed to me. It’s also why I didn’t identify the web host. There is no need for name calling. I appreciate the comments about contact emails other than on cpanel. I’m sure that messages didn’t get sent to my spam folder, but I’ll look for other places they may have my email address on file”, said the troubled site owner.

“Jon, a hard lesson learned, unfortunately. IMO, (and I know many hosts will hate me for saying this), but I would never register my domain via a web host. I want complete autonomy for the domain registration. Register all your domains directly with an authorized registrar, and then buy your hosting from a web host. Keep them separate. And then make sure you stay on top of your domain renewals to ensure you don’t go through this grief again”, said someone with forum member “Vito” and his opinion was one of the best to the thread.

Then “ieee488” came again posting in aggressive style: “I repeat. No need to use the word ‘unethical’. You should have asked what could have happened and just leave it at that. I have no use for people who hide behind “what do you think?” after they have just accused someone of being ‘unethical’. Gutless.”, was his next post to the thread.

A WHT member “HostColor” suggested in the next post that that Jon must not be disappointed and must not blame his web hosting provider. “You are responsible for the domain name as it is yours. Even if the hosting provider didn’t send a notification you still had to take care of the domain renewal. It is your web address, your property”, explained “HostColor”.

THe user added that the domain registrar was probably the one to point the name servers to page different from Jon’s index page and displayed ads there. “This is another way for domain registrars to make money of expired domain names”, added the WHT user. His final suggestion to Jon was “Just keep everything into account. A reasonable question would be “Why did I miss to renew my domain name?”

These are only a few selected opinions expressed from WHt members in the thread titled “Is this ethical web host practice?“. I would say that it shows very clear that not just the providers are those who act unethical in web hosting industry. In fact Jon didn’t been unethical and didn’t harmed its web host’s reputation by posting company’s name in the thread in which he expressed his disappointment of the service. Although Jon haven’t been responsible enough for renewing his domain name on time he was decent in his WHT thread, something that is ethical in an unethical market.

We all know what investment banking is, or at least most of us have learned something about investment banking… thanks to financial crisis. Well today “Investment banker” is probably not the most appreciated job in the world. Sadly most people are tending to think that investment bankers are guilty for the current global economic slowdown. Well I’m not one of them. So when I met Frank from Cheval Capital I was interested of his business. I asked them whether he would talk to B10WH and Daw Blog readers and he said “Yes!”.

Hi Frank, good to talk to you. There is a lot of things anyone would like to ask an investment banker (or at least I think so), during the current crisis. Let me start with this one. Is the financial crisis affecting the web hosting industry? My impression is that web hosting industry looks pretty much as isolated island, that does not need bailouts… It that true?

Hi Dimitar.  Its great to talk with you as well. I think your impression is largely right (at least so far.)  We’ve talked to a lot of hosters and our sense is that while most are doing fine, growth has slowed.  A line from the recent Microsoft conference that rang true was “steady is the new growth.”

After two years of web hosting mergers and acquisitions are the investors still interested of buying hosting companies? Which is the most interesting market niche – data centers and collocation providers, dedicated and managed hosts, VPS providers or Shared hosts?

While we have seen fewer buyers, there are still a number out there.  Keep in mind that the most common type of buyer is another hosting company that is choosing to add customers by purchase versus marketing.  As this type of buyer tends to buy out of cash flow, financing isn’t a problem.

Right now, we’re being most aggressive in buying shared hosting customers at good prices.  Overall, there seems to be demand in all the sectors we work in.

Do you think that once the crisis is over, there will be a growing investor interest in buying cloud computing and cloud hosting technology producers and providers?

I’m not great at predictions.  To me, it comes down to value.  If cloud operators can add customers at cost effective rates and thus create value, then investors will always be there.  Unfortunately, the tech sector is littered with great technologies that no one would buy.  All in all though, cloud computing looks pretty good.

I have seen that Cheval Capital have completed 29 transactions in 2008. Do you think you’ll make more in 2009?

I hope the trend continues but you never know ;-).  We’ve been very fortunate since we got started in the space in the late 1990’s and have completed over 140 hosting and ISP transactions.

How big web hosting company in annual revenue should have someone to be an interesting client for Cheval Capital?

We work with companies of all sizes.  A few years ago we started a small hoster program that is working quite well.  We’ve also been involved with some of the industry’s largest transactions.  So really, all sizes.

Would you tell me which are the most important things anyone should be prepare when selling a web host hosting company?

That is really hard to answer generically.  The key is to have the information that enables you to demonstrate the value of your business and that it has reasonable risk profile.  Typically the larger the business, the great the expectation by Buyers of financial and operating metrics.

As you know, there are two broad types of buyers, “Consolidators” that want to buy customers and move them onto their own infrastructure and “Strategic Buyers” that want to purchase the whole company and operate it largely as is.  Both will want to confirm:

(1) the amount of revenue that your customers generate and the stability of that revenue

(2) your ability to add new customers at reasonable cost and the ability of the buyer to continue doing so.

The Strategic Buyer will also care about the efficiency of your business and its assets and liabilities.

The top three things all hosters must have are:

• An general overview of you, your company, its operations, etc.  (We have a form that we ask sellers to fill out that covers all of these topics.)
• Income statements for the last several months and for the previous year with revenues broken down by the type of business; and
• Backup to confirm those revenues (e.g. paypal, merchant acct stmts, etc.);

What about buyers… what do they want to see when they are looking to invest in web hosting business?

It really varies by buyer and the type of transaction.  Some buyers are creative and flexible and will look at anything that gives them a feel for the two items above.  Others are less so and require the other extreme of audited financial statements, tax returns, etc.  Typically, most Consolidators require less information.  I can’t stress enough that the key is to provide the buyer with confidence in the existence and stability of your customer base.

Something about Cheval Capital. Why did you decide to form an investment bank that specializes in web hosting industry? I’m curious how an investment banker decided to come to web hosting market.

Luck.  Our specialty has been working with venture capital backed companies that are consolidating industries or markets.  In the late 1990’s we got hired by Verio and the Centennial Funds to do ISP acquisitions and it just went from there.

What is your projections about the hosting industry’s developments? Do you expect growth in 2009, or web hosting will be affected from the global crisis?

I think the industry is fortunate in that it is a recurring revenue business with strong margins and, for most, little to no debt.  It also provides a service that is absolutely core to business.  Those characteristics should protect the industry from major trauma.  However, in bad times new company formation will slow and customers will go out of business.  Whether this causes the overall industry to shrink or just grow more slowly I don’t know.

Finally, is there are any company/brand in web hosting that you’ll love to consult, sale or buy?

We’ve been very lucky to work with a lot of great companies in the web hosting business, both large and small.  My hope is that it will continue.