Why Web Hosting is Here to Stay

Sometimes, I get a little nervous about this whole business of web hosting.

Not just nervous about the blank looks I’ll get when I tell pretty ladies what I do, either.

More nervous about the tingling feeling in the back of my neck that someday, perhaps not too far away, the entire web hosting industry is going to go the way of the betamax. Or, perhaps, that some collllooooossssssus will get into it and give it all away for free as a means to “capture eyeballs”.

When this nervousness overtakes me, I try and sit back, have a cheeseburger, and remember there’s nothing to worry about.

And then I feel better. Until I remember I’m probably lactose-intolerant. And then I start to get nervous again.

But hey, I’d rather ruin a new pair of underwear than worry about Google putting us out of business! And I don’t. Why? Because Web Hosting is Hard, and Google don’t want it! Nah, they don’t want it! They don’t want to give customers what is essentially a full-featured computer to run.. they want to give customers cool ajax-y websites that are easy to use and easy to mine for data.

And, even if they DID get into generic web hosting and give it away for free, there’s always going to be a (hopefully sizeable) market of people who don’t mind paying $8/month to know that the company they’re dealing with doesn’t make any money off them other than that $8/month.

So, that’s why I’m not much more afraid of Google than I am an average cheeseburger.

And I eat cheeseburgers for lunch.

But what about the entire industry?! It seems headed the way of the dodo, no?

After all, home and office connections are getting fast! Website-related software is getting better and easier to use. Already, the technically-savvy can host their own websites and email, and as time goes on, the bar to doing so will get lower and lower.

Great, I’m starting to get nervous again.

I’d better sit back, whip me up some pancakes, and relax.

Because, if you think about it.. the only way to have a succesful business is to offer a product or service for less than somebody feels like it’d be worth to do or make themselves. (Or else why pay you?!)

If everybody could pancake a pancake faster, cheaper, and better than the local IHOP, and liked cooking pancakes… there would be no IHOPs.

Fortunately for International Houses everywhere, this isn’t the case. And the reason is IHOP has expertise the average pancake-loving International-ite doesn’t. On top of that, the IHOP has spent capital to bring their cost-per-pancake to a level you’d be hard-pressed to match in the quantities of pancakes you’re likely to consume in a given Sunday morning.

Actually, those are the only two things you can base a business on. Expertise and Capital.

You can do something so well that people pay you for it only if you have more expertise in the field than them, or have spent more capital than them.

And in the web hosting industry, we’ve got both!

You may be able to set up your own servers at home, but can you for less than $8/month? Not unless you’ve spent the capital to be able to divide the costs among thousands of users!

And when a scsi card dies right in the middle of you flipping your pancakes, are you going to know how to fix it? Are you going to want to? Are you even going to notice? Not unless you’ve got a decent level of system administration expertise!

In ten years, thanks to good old Moore, everything we offer now you probably will be able to reproduce at home for $8/month.

But at that point, we’ll have even more expertise and have spent more capital, and it’ll still be worth the $8/month to outsource your web hosting to us, because we’ll have all kinds of cools stuff that ain’t even been invented yet!

And I still go to IHOP sometimes, even though I flatten pancakes for breakfast.

The Expert Speaks!

Last week, as I was lazily thumbing through the May 2006 issue of AmericanWay, the AWARD-WINNING in-flight magazine of American Airlines, a familar face caught my eye.

Who WAS that cheery-eyed elf peering back at me from the upper-right hand corner of THE EXPERT SPEAKS?

I knew I’d never met the man, and yet I’d seen his face many times.. and yet I also knew he wasn’t famous. Where was he from? I couldn’t quite place it. It finally hit me when I read the introductory text… of course!

It was none other than CEO and publicity-hound extraordinaire of our favorite competitor CI HOST, C.F.! (One must never actually type his full name, lest he suddenly appear in a flash of smoke, lawsuit in hand.)

Great! So good to see other hosting guys moving up in the world!

I practically quivered in anticipation of the gleaming nuggets of insight soon to be bestowed upon me!

My practical quivering was soon rewarded as I came across this beautiful passage:

(Personally, I prefer my UMPCs with Nintendo DS.)

The Truth About Overselling!

Whee-oo, judging by the popularity of that last post, it’d probably be in the best interest of our blog traffic to keep this “exposé” bandwagon rolling!

(You see, our business plan from the start has been to build up a successful hosting company as an audience for our eventual blog, which we then sell to Rupert Murdoch for $503.22241490 MILLION)

On to the goods.

If you’ve ever visited webhostingtalk, or maybe slashdot, you’ve probably heard all about the other dirty little secret poisoning the web hosting (and ISP) industry…

OVERSELLING

AIEEEEEEEEEEE! Just typing the word strikes terror deep in the heart of my butt!

OVERSELLING

There, I did it again, just to be brave.

So, what IS overselling? I guess a definition is in order.. I’ll make one up now.

Overselling is when a business (or individual) offers more of an product or service than they currently have.

Yuck! Overselling is TERRIBLE!

Just imagine if you bought a house in a new development, put in your deposit, waited two years, and was about to move in when the developer told you “Sorry, we don’t have a house available for you after all. We sold 40 houses but only built 10!”

You’d probably slap him right in the face.

Overselling is the WORST!

Just imagine if you bought a ticket on an airplane flight and when you showed up, they told you they’d overbooked (nice EUPHEMISM, airplane jerks!) and would you be willing to take a later flight for a free round-trip ticket anywhere in the continental US? Well, sheesh! Maybe I would!

Overselling is still pretty much the SUCK!

Just imagine if you went to a big house party at your cousin Jose’s, and the idiot only has ONE bathroom! I mean, how can he expect to have 50 people in a heavy drinking and eating environment for four hours with just ONE bathroom?! What if two people have to pee at the same time?! Or even worse…

Poop?

Clearly, if you’re going to have a group of people, you better make DARN sure you’ve got (at least) one bathroom per person! Or else, you’re just another CRAZY OVERSELLER!

Alrighty. By now, you probably know where I’m going with this… so I might as well just get it over with.

“Overselling” is not terrible at all!

In fact, it’s one of the primary tools that makes a zillion very useful (and critical) business models possible! One of those business models is web hosting.

You see, in web hosting at least, customers have WILDLY varying usage levels. To top it off, no customer even knows what their own usage level is going to be like beforehand.

Any business with this sort of customer profile, simply MUST “oversell”.. it comes with the territory. You’d be crazy not to! In fact, one of the PRIMARY values you’re providing to your customer base IS the “overselling” itself!

Let me illustrate why they must “oversell” with a reverse example.. and let’s use us!

Imagine we didn’t “oversell” at all. We still offer 20GB of disk space and 1TB of bandwidth on our $7.95/month plan because that’s what the competition has forced us to offer. 1TB of bandwidth is about an average of 3Mbs. 3Mbs for a month costs us about $90/month. The 20GB of disk space actually costs us about $200 (BELIEVE IT OR NOT!), because of the level of availability and backups we provide. So, we’d be losing about $200 up front and $82 / month on each and every customer!

And, all in the name of not “overselling”, our disk arrays would sit 98% empty and our network pipes 1% full!

What if you went to get a gym membership and they were like “We have a state-of-the-art facility with an elliptical machine, complete set of free weights, stairmaster, treadmill, yoga class, kickboxing, rock-climbing wall, and olympic sized pool.. per member! You’ll never have to wait to use anything, anytime, seven days a week, 24 hours a day! Membership fees are $45,000/month with a $300,000 set up fee.”?

It’s the same thing.

But our “overselling” is even better then a gym’s. At a gym, sometimes you’re going to have to wait to use a machine. A machine you are PAYING hefty membership fees to use! That’s not right.

But with us, you really CAN use all the stuff we’re offering. You won’t be disabled for it. You won’t have to wait. Your performance won’t suffer. It’s just a good thing for us there’s a difference between being able to use something and actually using it!

“But what if, let’s just say, everybody DID use it one day? Just WHAT IF? Then you’re screwed, eh?! Then the house of cards all comes crashing down around this charade of a pyramid scheme scam!!”

That’s true. I guess it’s a good thing we live in this universe, where we have the law of large numbers, and not in your universe where ANYTHING THAT CAN HAPPEN, DOES!!!

Of course, we do actually do have people who use their full 20GB, and actually DO stream porn and use the TB of bandwidth, all for just $8/month. And we actually DO lose a crapload of money on these people! But we only lose it on these people. And there are very few of them. And, as a bonus, they love us. And they refer their friends. Who, on average, don’t use their full 20GB and 1TB.

Guess what? We keep our file servers 90% full at all times, and our peak traffic times at 85% of our capacity! Why? Because despite the wild variations among all our customers, on the aggregate our disk and bandwidth usage grows very predictably. It’s easy to add another disk shelf and it’s easy to add another gigabit uplink, so there’s no reason to do it before we need to. Performance doesn’t suffer and it keeps our costs nice.

And it all works out! And we are ALL happy. Us, because we’re living on the edge and making a profit. You, because for only $7.95/month you know you could use up to 20GB of disk and 3Mbs of bandwidth should the need ever arise. And that’s a pretty small price to pay for such peace of mind!

Postscript

But what about CPU minutes?!

Oh yeah, that. Ever since we quadrupled our disk space and octupled our bandwidth there seems to be a lot of reports of “Yeah, but you’ll never be able to use it, they’ll shut off your site for cpu resource abuse as soon as you get popular!!”

Here’s the thing. People who are getting disabled for “cpu resource abuse” are people who are crashing their server. It’s completely unrelated to the disk/bw limits, except for the fact that those higher limits got us a lot more customers, so we are a lot bigger now, so a lot more people (not percentage-wise, just overall) are causing problems, possibly getting disabled, and then possibly complaining about it.

Some people point to our CPU Minutes FAQ in our wiki and say “Aha, you can only use up to 60 cpu minutes a day and then you’re disabled!” But that’s not true either. The truth is, it’s really always handled on a case-by-case basis. However, our customers really want to see a hard number.. so we put up 50-60 because you’re definitely not in trouble if you’re under that.

Just like disk and bandwidth, we’d LOVE to offer every CDI customer the ability to use like, I dunno, the equivalent of a dual xeon 3.5Ghz to themselves. That only costs us like $2000 plus $25/month for power+ space.

.01% of our customers would actually use it, and be AMAZED at the deal they’re getting, and the other 99.99% would use close to 0 cpu minutes, just like it is now.

The only problem is technical. It’s a lot easier to share disk (file servers) and bandwidth (that’s just how it works) then it is to share cpu. And if one user starts using up an entire shared server’s worth of CPU, everybody else on that server is affected. It’s not possible for a single user to fill up ALL our shared disk pool, or ALL our bandwidth (not counting DDOSes), but it’s not too difficult for one to “fill up” an entire CPU.

Which is why we have to act on it.

Ideally, we’d be able to have a set up where you can use up to X (an insanely high amount) of CPU, and each additional “cpu minute” would cost a little extra, just like we do for storage and bandwidth. And actually, we’re working on it. But until then, we’ve just got to cap some problem people. And we’re really sorry about it!

Web Hosting’s Dirty Laundry

The world of web hosting is magical and wonderous. Having a website lets you show the world extremely important things like pictures of your cats, and also lets you share your not-at-all-crazy political views with the WORLD!

But let’s say you’re Joe Schmo.

Let’s say you don’t know a whole lot about web hosting, but you really want to get into the business because this guy your brother knows runs some porn site and he “totally never has to work and dude he just made like a grand yesterday. The guy drives a Ferrari! I’m so super cereal dude.”

That doesn’t sound like a bad idea! Your first thought would probably be to search around for reviews of some of the more popular web hosts, and then you’d probably wind up signing up with a highly-rated host. Google around for “hosting reviews” and you’ll see a plethora of helpful web host listings.

These sites are a dime a dozen, and there ARE dozens. That’s a lot of dimes! Well we’re here to drop some dimes!

What do all of these so-called “review” sites actually do? They make money. A lot of money.

Nearly every web host that’s listed on these totally unbiased and completely objective sites have one thing in common – they all have affiliate programs. Each unsuspecting visitor that clicks through to a “highly rated” web host earns the site-owner a hefty little commission. The hosts that pay out the biggest commissions are usually the ones that you’ll find listed near the top of all these lists.

They’ll make it sound like they’ve done all the research for you, and that their top ten picks are the absolute best web hosts in the industry! But in reality all they’ve done is researched how much cash they can squeeze out of any given web host’s affiliate program.

Of course we’re generalizing here, so not all of these types of sites are as bad as they may seem…oh wait, yes they are. Some of these sites produce little fluff “reviews” of web hosts, and some don’t even bother to go that far, instead making lists to the “Top 10 Web Hosts” and waiting for unsuspecting prey to come along and make their next yacht payment for them.

We’re here to bust this thing wide open.

We had always suspected these sites were crooked, so last month we decided to prove it when we were approached by hosting-review.com to appear on their “Editor’s Picks” page.

Here’s what their sales manager sent us:

Good to hear from you.
It is clear that you guys are a major player in the hosting industry, and I believe there is huge potential to drive a lot of sales to DreamHost. Not surprisingly, we make the most sales on www.hosting-review.com from the home page Top 10 list.

We also use Top 10 category lists to promote specific strengths of different hosting companies, and now we are just about to launch our Editors' Pick 2006 award page.

We also have handed out many 2005 Hosting Awards.

I need to get a sense from you about your typical affiliate relationships and what kind of conversions your best affiliates are bringing.

Can you tell me how many sales and what conversion rate your best 3 affiliates bring you from your pay per referral links/banners? I don't need to know who they are, just what they produce so I can better gauge how your company converts on sites similar to mine.

Can you also tell me if you work out special commission payouts with affiliates you believe will bring you high sales volumes?

I think it would be good to speak on the phone to discuss how we can best work together.

I would be happy to take your call, or send me your number and a good time to talk to go over some details.

Do you have a personalized email, or is sales@dreamhost.com the best way to contact you by email?

I hope to talk with you soon.

Best regards,
Dave

Conversion rates? Why would an unbiased hosting review site care about something like conversion rates? He sure seems eager to talk on the phone… It’s almost like he doesn’t want us to keep a record of this sleazy backroom deal! Imagine that!

After all, what are we gonna do? Post everything on the DreamHost Blog?

That would be…GENIUS!

So, I guess I'll get right to it then...

Hosting-Review is capable of driving anywhere from 1 to multiple hundreds of sales to a good hosting company in a month depending on positioning.

I have 3 options to work with you...

1. I can put your review up on the site with the tracking link and send affiliate referrals. (I thought DreamHost might convert well and be a potential for the home page, but that still needs to be decided) Can you tell me how robust your affiliate stats are? Can I see a daily running total of clicks and sales in your system? I would still be interested to hear what your best affiliates are converting like. A $15,000 check would be about 155 sales at $97/sale, but is that off of 10,000 clicks, or 3,000 clicks? I know very close how many clicks I will send you at any position on my site, but the key number is the conversion rate. The companies that we feature on our home page are very good companies and have earned there positions. $97/sale payout to affiliates is very generous, but also very low compared to your competition, but if you can convert much better than they can, I can justify positioning on the home page. Please send your thoughts.

2. I am putting up an Editors' Pick page which will feature hand picked hosting companies to receive the 2006 editors' pick award. You could put up our 2006 Editors' Pick award banner with a text link on your home page or awards page and pay $99/month, or just pay $299/month without putting up the award banner and text link.

3. We can talk on the phone and work an arrangement that combines the above/waives some fees/makes sense for us both. After all a deal is no good unless it benefits both parties...

Now it’s all clear. Our $97 affliate payment is small potatoes but they’re eager to work with us! Let’s earn their trust by showing up on that Editor’s Pick page. $299 for a month? Whateva! We’ll pay you $349 to show you we’re serious.

May 1st rolled around and we set our sights a little higher. We asked what it would take to appear in the coveted front page Top 10 list.

It is possible to work something out for May 1st to get you on our home page Top 10 list.

2 ways to approach it:

1. Pay an advertising rate for a position on the home page Top 10 list. For May 1st I only have 1 spot available.
2. Establish an affiliate deal that addresses commission per sale and payment terms.

Please let me know which direction you would prefer to discuss.

Best regards,
Dave

We again offered up our super sexy $97 payment, but that just wasn’t good enough.

1. The lowest I could go for the #10 spot is $3200, and that's only because you would be paying up front for the spot. I know you are trying to keep your cost per acquisition down, but we drive a lot sales to our home page web hosts and it costs us a lot of 'cake' to do it.

2. In terms of an affiliate deal for home page placement, $97/sale doesn't match up. In addition, I was reading on your site that there is a 5% charge for taking affiliate dollars out as opposed to applying it against your account, and something about only receiving $65/sale if you take it out before a certain time.

3. Right now I still have you listed #1 on the Editors' Pick page. I need to know if you still want to hold this spot, and if so, I will need a payment today. (Still $349)

At that point we had enough dirt for our exposé so we cut our ties with hosting-review.com and took a much-needed shower.

$3200 a month to appear on the top-10 list? In the 10th spot? We can only imagine how much cash these types of sites are raking in…and how much some of our (desperate!) competitors are paying them.

Phoney baloney sites like hosting-review.com are skidmarks on the underpants of the hosting industry and we want to expose them for what they are – totally biased money-making fronts. They may all swear up and down that they provide a helpful and fair service, but when you’re getting kickbacks from every single company that you recommend it’s hard to take that claim sitting down.

Of course DreamHost DOES have an affiliate program of our own and in the end we do benefit from the additional business that these sites bring us. However we don’t solicit placement on any of these lists (except for last month to prove what we had suspected all along!) which is probably why we don’t appear on many of them.

The bottom line is that anyone can show up on just about any of these sites for the right price, and it’s deceptive, misleading, and unfortunate. But hey easy money always trumps editorial integrity, right?

You know your brother’s friend…the one with the Ferrari? Are you sure he isn’t running a hosting review site?

DBSOD-V