What's Driving Hosting Growth Trends?

The largest shared hosting providers continue to show strong growth, even as the industry faces challenges from new hosting services from Web 2.0 companies, domain registrars and free/cheap offerings from Google, Microsoft and Yahoo. Pingdom compared the recent growth of five hosting providers that are popular for shared accounts - DreamHost, IpowerWeb, Bluehost, Hostgator and Site5.

The Pingdom data shows strong growth for DreamHost, Bluehost and Hostgator, more subdued growth for Site5, and some slippage for Ipower over the past year. The most interesting story on the chart is Ipower, which showed strong growth in late 2005 through mid-2006, then a decline, and has now stabilized.

Pingdom notes that Ipower showed a "pop" in growth around the time that it slashed domain name prices to $2.95 in November 2005, and suggested that the subsequent decline may have been tied to expirations when those domains renewed at a higher annual rate. I think an additional factor in the trends at Ipower is the sale of the company to Endurance International in May 2007.

When companies are preparing themselves for sale, they'll often tighten expenses to make the financials as strong as possible. Ipower is known for its affiliate programs, which offer a high cash payout (sometimes north of $100) for a one-year signup. Annual billing is nice for cash flow, but can be an issue when selling the company, as the acquirer has to provide services for which the seller has already been paid in full. That could prompt sellers to reduce reliance on affiliate sales when shopping the company - which would also dampen growth. Note that Ipower's monthly growth rate rebounded after May 2007, when it completed the Endurance deal, and was presumably once again focused on growth rather than its balance sheet.

Bluehost and HostGator have also been major users of affiliate marketing programs. Affiliate marketing can be a powerful sales tool, but it's not cheap. Back in 2006 I noted that the most aggressive hosting commission payouts at affiliate hubs can run from $100 to $150 on accounts fetching $5 to $15 per month, meaning some hosts are paying referral fees equivalent to 16 to 18 months of revenue.

Are Google, Microsoft and the Web 2.0 services paying that much for customers? I'd be surprised if they were.

As for DreamHost, they seem to have found the sweet spot - the ability to acquire tons of customers who stick around despite lengthy downtime and huge billing errors. To some extent, low pricing ($5.95 a month) may mean low expectations. Pingdom wonders whether overselling is a factor in hosting growth. DreamHost is up front about the fact that it oversells, and defends it as a sound practice in a competitive industry - an argument that's harder to rebut now that Yahoo is offering unlimited hosting plans.

But overselling-driven growth also leads to resource challenges. Many DreamHost sites will be offline for at least 12 hours on March 21 as the company migrates an entire cluster of servers due to "continued space and power constraints in our primary data center."