Initial reaction was that this symbolized a lack of confidence on Dell's part in the future of Web hosting. The official reason Dell gave was that it felt that it was trying to play in an industry where it lacked the necessary expertise. It's interesting, though, that Sprint, the company acquiring the DellHost operation, hired 100 employees from Dell's hosting operation. That suggests Dell did have the expertise it needed to play in the hosting space. So why did Dell get out of the hosting market?

It Was a Learning Experience
Dell representatives were vague about the company's reasons and touted the silver-lining spin that it "learned a great deal about building Web hosting servers." They also said that the DellHost business was growing and was fairly successful. Spokesman Jess Blackburn agreed that early on in the relationship with Interliant there were downtime and infrastructure problems, but that they eventually "worked through" those issues.

The question that begs to be asked is this: What was the reason for pulling out of Web hosting if the business was growing. Dell had at least 100 staffers with the expertise to run the business, and, according to Dell, Interliant was meeting its service requirements under its contract with DellHost.

At the same time it was completing the sale of DellHost to Sprint, Dell announced it was pulling its investment in Interliant. Blackburn explained that the company had to wait to announce the divestiture until it had completed negotiations with Sprint for the sale of the hosting assets. He confirmed that the decision to divest from Interliant was made previous to the actual announcement.

Given the range of time these types of negotiations can take, it would seem to point to three things:

1. a dissatisfaction with the Interliant stock price (31 cents at the time of this writing with 52-week highs and lows of $12.75 and 26 cents, respectively)
2. a dissatisfaction with the company and its services
3. or a concern about the Web hosting industry and its future.

A Loss No Matter How You Slice It
Blackburn also said that it was "not fair" to term the investment in hosting and Interliant as a losing proposition. However, blowing $20 million on Interliant and selling a business in which Dell probably invested millions in advertising and staffing can chalked up only as a loss and should be revealed as such in securities filings. Blackburn reiterated the lessons learned about servers and said that Sprint will, under the terms of the deal, buy Dell servers.

Dell also said that Interliant will be involved with DellHost at Sprint, but declined to comment as to whether Interliant will garner any future hosting business from Sprint or will just handle existing customers. Sprint has the infrastructure and existing partners (Earthlink) to handle a virtual hosting business easily, so it would seem logical that Interliant will be cut off at some point. Sprint representatives refused to comment.

As for the timing of the Interliant divestiture, Dell Ventures may have waited until the sale of DellHost was complete. It could, of course, be a simple matter of trying to put all bad news out at once. But if you assume that the decision was made two months ago — based on time needed to negotiate the deal with Sprint — that is a loss of more than half the value of their Interliant shares. Interliant was trading at 63 cents on the August 1st and is trading now at 31 cents. When your company is announcing layoffs, the loss of enough revenue to pay several skilled employees can become an issue.

Lesson Learned
The lessons learned from Dell's brief test of the hosting water are fairly standard ones:

1. Stick with what you know, which is especially true in bad times. That may be all Dell is doing in this case — circling the wagons so to speak.
2. Right now the Web hosting industry looks negative to some of the big players and positive to the likes of Sprint. Based on current projections, growth is inevitable, but when you combine the Dell announcement with the problems Exodus (NASDAQ: EXDS) is facing, it can be a concern. That said, Exodus and Dell are playing on opposite ends of the hosting spectrum. Most of Exodus's revenues are being undercut, because Exodus still charges a high rate for co-location services that others provide much more cheaply. Did Michael Dell simply grow frustrated with hosting in general and Interliant in particular?
3. Buy customers — especially when you are buying them from a gun-shy seller. Sprint will be the only winner in this scenario, if they can ensure a graceful transition for customers.