Fierce competition, high operating costs and a loss of core dot-com clients have left web hosting market leaders facing bankruptcy, second-tier vendors scaling back service levels and many others raising prices. All in all, the $5 billion hosting market is suffering as much as any sector of the recession-hit technology industry.

Even before WorldCom, there was a long list of hosting service providers that have cut expansion plans (such as IP Powerhouse and Redbus Interhouse), retreated from the hosting market (Guardian IT) or have filed for bankruptcy protection (PSINet, Exodus, XO, Global Crossing and KPNQwest).

It is not just small businesses that have been victims of the fallout. WorldCom's customers include such key institutions as America's air traffic control system and the Nasdaq stock market. The UK's Foreign and Commonwealth Office had its fingers burnt when, after connecting all its embassies around the world to a virtual private network, its sole supplier, Global Crossing, filed for bankruptcy protection. And Ask Jeeves, the Internet search engine company, has the dubious distinction of having been a customer of two collapsed providers, first Exodus and then KPNQwest.

So which providers, if any, offer a safe haven? Given that even tier-one suppliers such as France Telecom, BT and Deutsche Telekom are laden down with staggering levels of debt, it is fair to say that all suppliers bring with them a degree of risk. That said, however, there are several names that most analysts agree are comparatively secure and offer generally acceptable levels of service, albeit sometimes at a higher cost to users.

This list of ‘secure' tier-one services providers includes: IBM Global Services, EDS/Loudcloud, BT, Level 3, AT&T, Cable & Wireless, Deutsche Telekom/T-Systems and France Telecom/Equant. Alternative providers still on a comparatively secure footing include Colt, Interoute, Triaton and Infonet. But even within that group, there will be some that will falter.

In June 2002, network managers and IT chiefs from across Europe gathered in a Stockholm hotel to discuss the imminent fall of KPNQwest, the latest telecommunications carrier to be buried under an avalanche of debt. As users debated the implications of a sudden loss of service, one industry executive stood up to reassure users about the health of the sector – as well as subtly encourage them to switch supplier. His company, one of the world's biggest telecoms and web hosting service providers, was no fly-by-night telecoms bubble start-up. It was the mighty WorldCom.

Within a week of the Stockholm meeting, WorldCom had disclosed an unprecedented bookkeeping fraud worth $3.8 billion (EU3.9bn). Within a month – underlining the speed at which a tier-one provider can collapse – it had filed for bankruptcy protection from its creditors.

That kind of experience has left users gripped by panic. "Who can you trust?" asks Ewan Sutherland, executive director of Intug, the Europe-wide telecoms users lobby. He attended the Stockholm gathering and, like many users, has now lost all confidence in service providers. "There seems to be very little hope anymore," he says. "One has to assume that there will be more [collapses]."

That sentiment will be enough to send a shiver down the spine of IT directors and network managers everywhere. The crisis enveloping the telecoms industry and its various segments, including the key market for web hosting services, has shot to the top of the list of IT user concerns. As Jan Verplancke, Dell Computer's European chief information officer (CIO), told The Economist's recent IT director summit in London: "What keeps me awake at night? Only one thing: the possibility of my web service provider going under."

The cost of losing a web hosting provider for a few hours, let alone days or even weeks, can run into millions of dollars. The stakes are so high for IT directors, particularly where their companies have a significant online presence, that many face strong pressure from the boardroom to select the right service provider. Getting it right is often thanks more to luck than judgement. But get it wrong, and IT staff face more than a slapped wrist from bosses.

Price pressure

What is so frightening for IT managers is the sense that there is nothing they can do. Some observers, when asked which providers they would recommend, shrug and suggest sticking a pin in a list of names; others compare the selection process, and the dire consequences of making the wrong choice, to a game of Russian roulette.

"Who do you know who can read and understand the subtler points of a balance sheet, even one you can trust?" says Sutherland. "It is difficult, very difficult, to go to the chairman, the finance director and the audit committee and say that this particular supplier is sound."

But users are not only worried about the loss of their supplier. A further concern is that surviving providers are desperately seeking to cut costs – and that may affect customer service. For example, the massive job cuts at WorldCom – 17,000 employees worldwide, including some 3,000 in Europe – seem certain to affect levels of service, despite the carrier's efforts to allay fears by creating the new post of ‘chief service and quality officer' to monitor customer service during bankruptcy proceedings. Mike Mikkelsen, chairman of the UK-based Communications Managers Association's special interest group for network availability and continuity, says the combination of a risk of reduced services and losing a provider altogether creates a ‘double whammy' for end-users.

But the emerging scenario could equally be described as a ‘triple whammy'. Analysts believe that market consolidation will push up prices of telecoms and web hosting services to end-users.

Meta Group, for example, says prices could rise by between 10% and 15% by the end of 2003. Intug's Sutherland says that providers are likely to try and justify increases on the grounds that more of them will go bust unless they can increase their margins. "We hope that it is a short-term development," he says, "but it is clearly a worry."

But others are not so sure that there will be a significant increase. "Companies forced to switch service providers due to bankruptcy or change of ownership should not expect price hikes from the present low levels, as the international bandwidth glut continues to exert downward pricing pressure," says Bernt Ostergaard, an analyst with Giga Information Group.

However, one consequence of WorldCom's potential demise that has been overlooked by most commentators may add to the pressure on prices.

The bankrupt telecoms company is arguably the leading advocate of the band of alternative carriers that emerged during the 1990s in the US and Europe. For many years, the US giant has used its power and influence to push for changes to telecoms market rules and regulations in the European Union, extending its tentacles into a wide variety of pressure groups and special interest bodies.

Now, its possible collapse threatens to leave a power vacuum in Brussels and elsewhere that is likely to be filled by the increasingly powerful ‘incumbent' lobby – the erstwhile European monopoly holders such as BT, France Telecom and Deutsche Telekom. Unchallenged by the likes of WorldCom, the fear is that it will be easier for ‘incumbents' to milk users in future.

The big telecoms groups in Europe are quick to play down such suggestions, however. "Companies do not want to be held hostage by their particular provider," says Sally Davis, president of portfolio strategy and applications hosting at BT Ignite, the web hosting subsidiary of BT. "It is not in anyone's interests, least of all ours, that these difficulties are occurring. It is not in any of our interests that carriers go bust and customers lose faith and confidence. That is why our strategy is not to destabilise [rival] carriers."

Whether or not the telecoms regulatory environment in Europe favours the incumbents or the alternative carriers, one thing is beyond doubt: it has consistently failed IT users.

Users in the US are far better protected. Telecoms carriers wishing to close down a network are required by law to first notify the Federal Communications Commission (FCC), the US regulator. Once notification has been acknowledged in writing, a service provider still cannot shut off services for a period of at least 31 days. There are loopholes – the regulations do not cover cable networks, for example – but FCC chairman Michael Powell indicated recently that he wanted to close those and hinted that lawmakers will consider extending the grace period beyond 31 days.

In Europe, however, providers can shut off services virtually without warning. Now, in the wake of the Global Crossing and WorldCom scandals, European governments and national regulators, including the UK's Department of Trade and Industry, are examining whether they should introduce FCC-style rules. A number of consultation exercises are underway in the region. But it seems that any changes to the law will come too late for businesses caught up in current cases.

Who can you trust?

The question everyone wants answered is: Which web hosting and telecoms service providers will survive the shakeout and offer acceptable levels of service during the economic downturn? The answer is proving difficult, if not impossible, to find.

"The only certainty in this market is that all service providers, including the tier-one providers, face a difficult 12 to 18 months," says Lisa Pierce, a Giga analyst. During that time, she says, providers will have to balance the provision of high levels of service and customer support while paying close attention to the bottom line: "Customers should consider worst-case scenarios and adjust their service provider selection and new service implementation plans accordingly."

Even many suppliers admit as much. "What is clear is that it is very difficult for CIOs and network managers to identify the safe bets in the telco and ISP markets now," says Guy Willner, CEO of IXEurope, a UK-based web hosting company.

Given that, all the talk is of minimising risk. "Many companies are expanding their disaster recovery plans to accommodate not just catastrophic events affecting buildings and infrastructure but also the potential bankruptcy of their service providers," says Willner. "The only way to protect against the business failure of a service provider is to have easy access to multiple providers so that services can be transferred quickly."

A degree of self-interest may be clouding Willner's judgement, however. As a provider of so-called ‘carrier-neutral' hosting services, IXEurope's London data centre provides an interconnection point for 15 fibre networks. If one of its carrier partners shuts down its network, "it really is as simple as unplugging a cable from one socket and plugging it into another."

But while literally switching provider may be relatively simple, this does not in itself tackle the thornier issues of contract termination, back-up and recovery and data migration.

The safest option, unfortunately, will probably cost users more money. The consensus of opinion among experts seems to be that spreading bets by using different providers for different services is the best course of action. But it will almost certainly prove more expensive than using a single, tier-one provider for all telecoms and hosting services.

Giga's Pierce, for example, says that mid-sized and large organisations spending less than $3 million a year on telecoms services should use a tier-one provider as their primary supplier and employ a second tier-one provider to back up critical applications or network routes. Companies spending more than $10 million on telecoms and hosting services, however, should bite the bullet and split traffic among multiple tier-one providers.

Most observers also urge users to renegotiate their existing contracts to make them more flexible and cover a shorter time frame, such as six months. In addition, companies are generally advised to set up a management team, including the IT director, finance director and network manager, to monitor develop-ments and draw up contingency plans. But this team should be under no illusion as to the task in hand. As Pierce says: "There is no safe haven in today's turbulent telecoms environment."