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You Don't Want to Start a Hosting Company: A Parallel From History

Recently I drive by a place where I was a salesman back in the 80s.

I was an office supply man.  Which today would be like being a hosting provider.  The parallels are eerie.

Back then, the market was dominated by mid-sized, multi-store chains with a few mom-and-pops.  Stores had outside salespeople that called on offices and arranged deliveries of pens, paperclips, staples, and copier paper (it was the 80s…add thermal fax machine paper, too).  Most businesses got their office supplies this way.  These companies had one or more office supply retail stores, and then out of the back rooms they’d run delivery and customer support.

This was at a time before Staples, Office Max, or Office Depot.  However, the industry did have what the National Office Products Association once termed “price cutting fools” in one of their monthly newsletters.  These were people who jump in to the office supply industry because they figured they could sell for 20% cheaper than the existing companies.

And indeed they could…for a while, until they realized that all the long hours for low profits was not how they wanted to spend their lives.  Then they’d sell and move on to something else, and a little while later a new player would enter.  I saw this personally for years.

Now consider this was the 1980s and even cheap, opening a new store, stocking it, getting a delivery vehicle, etc. was a $XXX,XXX endeavor.  And it was an intensely physical proposition: setting up a store, your own trucks, etc.  Yet new players were constantly entering.

Now imagine you’re in the hosting business.  Those that can enter the market are not just people willing to move to a city and open a store, but anywhere in the world, from their own living rooms.  And it doesn’t cost $XXX,XXX+ to enter the market, but rather just a fraction of that.  That’s the hosting market.  Not only does it naturally attract many players because of the low cost, but there is a constant rotation of “I’ll be the cheapest” people who come and go.

What these “win on price” players do is drive all the easy money out of the market.  Yes, a lot of people will still shop at the company providing superior service or other services, but another percentage will try out the cheap provider, and everyone that does takes a sale from the guy who’s sustainably offering service year after year.

In the office supply world, Staples and Office Depot were founded in 1986, and OfficeMax in 1988.  Just like the DigitalOceans, Amazons, Googles, and Azures, they swept through the marketplace, putting unbelievable price pressure on traditional office supply companies.

Oh, we salesmen told a good story: you don’t want to go to them!  Why waste the admin’s time to drive there and back when we can deliver?  What if she slips and falls on the ice, and then it’s a workman’s comp claim…

And then the big warehouse started delivering.

Well, you don’t want to go to them, we already know what sizes of forms you need, and which pen refills you need, and…

Turns out that if it meant saving money, people could type up a list of their sizes and refills and take it to the store themselves pretty easily.

Another angle that was tried: They require $50 minimum.  We don’t!  (Imagine the economics of that with a few delivery vans…driving all over the city for a $3 box of pens, just to “keep the account” which was sending an admin to the store once a week to get most of what they needed).

The Stapes/OD/OM competition ended small office supply dealers, the way Home Depot and Lowe’s ended most hardware stores, though some soldier on as members of associations like Ace Hardware (something the office supply world never quite got together).  The office supply mega-warehouses were the “price cutting fool” who never went away, and they were far more credible as well.

So do you really want to join the hosting industry?  I worked for three different office supply companies.  The first two went bankrupt, and the third left the market to focus on other lines.  I’ve known even more hosting companies.


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