Interliant Knows When to Host ’em ….

Interliant announced today that it is selling its retail Web hosting operation to Interland. The Purchase, N.Y-based Interliant will continue to sell branded hosting services to companies instead of selling direct to the end-user. (See Interliant Sheds, Interland Grows).

Speak Out
Talk about the Interliant-Interland deal in the ASPnews Discussion Forum.

As a former Interliant executive who spent a frustrating year and a half with a company that showed no vision or real strategy, I have to admit that the recent moves (including today’s announcement) by CEO Bruce Graham continue to impress me.

Although terms of the deal were not disclosed, Interliant’s sale of its end-user hosting customers is a smart move that frees it up to focus on a more lucrative strategy. Its branded offering has certainly stumbled over time, but that was primarily because the company had no focus and didn’t dedicate the proper resources to engineering, marketing and support.

Worth the Risk
Interliant does run the risk that by selling off part of its business to Interland, it is giving up a huge base of customers that provide recurring revenue. However, Interliant’s support of those customers was always below acceptable levels and their churn rates were at times enormous.

The beauty of the OEM-only strategy is that Interliant will not have to worry as much about whether or not it will need to support end-users. The companies buying branded Web hosting services from Interliant pay for the support costs. The biggest headache of any hosting service is support, and while Interliant will still have to provide that to its branded customers, it has been transformed from a cost center into a revenue generator.

Additionally, the strategy is smart, because it is vertical marketing at its best. Now the company can focus on training and supporting what are basically resellers or channel partners. Unlike traditional partners, though, these channel partners pay hefty upfront fees, support costs and their own marketing costs for the hosting service that Interliant provides. Interliant can now focus on helping its clients sell hosting services to its existing markets.

Learned Its Lessons Well
Granted, early on Interliant almost blew it with its first OEM customer, Dell (see Dell Sprints from Hosting), but it also had an opportunity to learn from its mistakes. By working with resellers, the company can enjoy the following benefits:

  • Support costs becoming revenue
  • Lower marketing costs
  • Fewer personnel required
  • A vertical strategy without having to buy market share.

Historically Speaking …
The history behind Interliant is as interesting as today’s deal. Several years ago Brad Feld of SoftBank and a few others companies, including Charterhouse, decided they were going to build the largest Web hosting company in the world through an acquisition strategy. So they set out with a company they named Sage Networks and a wad of cash and stock and bought 15 or so Web hosting companies within a year and a half.

Then in March of 1999, Sage Networks took a detour. It bought Interliant. At the time, Interliant was a Lotus Notes ASP, one of the first ASP’s in the world. A few months later the entire company went public. Behind the public company image, chaos reigned supreme, and no one was getting anything done. There was no strategy, no plan, no vision and the missions of both companies (Interliant and Sage Networks) were taken way off course.

It was a mess. Interliant began trying to integrate the hosting platforms of all the Web hosting companies. Most of those platforms were home-grown, scripted environments with no reliability. Additionally, when you combine the CEOs from 15 semi-successful Web hosting companies, the turf wars and fight for money became the dominating force internally.

Bruce Graham was brought in to clean up the mess. The CEO at the time, former Verio vice president Herb Hribar, was dumped shortly after the first round of layoffs. Those who were laid off complained about what they described as the incompetence of the company and watched for the announcement that the company was either closing down or being bought in a fire sale. It never came.

While Interliant is not out of the woods, and it is barely alive on NASDAQ , its recent renegotiation of debt and its move to sell off the high-cost hosting operation bodes well for its future. It’s a very impressive move.

Not for Sale?
Interliant also bears watching for a short-term acquisition. It may be getting everything cleaned up for a sale. However, I think the new leadership team is proving it can come back from adversity and make a run at long-term value. Though not publicly disclosed, sources within Interliant told me that the company has turned down acquisition offers. It seemed at the time incomprehensible that it would not take whatever was on the table, but evidently they knew something we did not.

Interestingly enough, Interliant still owns, despite having abandoned it when it laid off the team that ran it. The model for that small business ASP was to brand out to vertical channel partners. Looks like a good fit when so many other small business ASP’s have failed miserably. The market is wide open, and Interliant seems finally to have it together with branded hosting. It could be a nice package.

The industry will be watching to see what Bruce Graham and the team at Interliant do next, but the recent moves look to keep Interliant rolling for some time to come.

Brad Nickel is a consultant and editor of CEOStreet. He has more than 16 years experience in the technology industry. He is the former vice president of for Interliant and director and product line manager for Equitrac Corp. He has advised corporations large and small on their
technology and marketing strategies. His expertise includes technology trends
analysis and strategic focus, Web application development, Web site design,
development, promotion and publishing.

News Around the Web