It was supposed to be one of those safe, unglamorous ways of making money out of the technology boom, but over-capacity in the "internet hotel" sector is now likely to lead to a wave of collapses and mergers.
That was the warning delivered by business continuity specialist Guardian iT yesterday as it became the latest group to pull out of hosting web services for big technology firms after admitting that supply is outstripping demand by three to one.
Chief executive Peter MacLean said the retreat would force his company to write off £12m little more than a year after he thought it would generate millions in profits.
"For a number of the players left in this sector the future looks particularly bleak. There's massive over-capacity and very soon that is likely to lead to massive downward pricing on services.
"Expectations about this sector were set an incredibly high level and actual demand is only about one-third of the available capacity. Consolidation and rationalisation has to happen."
His comments come less than a week after the collapse of privately owned internet hotel chain CityReach and a warning from market-listed TeleCity that conditions in the sector were "extremely difficult".
Internet hotels are the warehouse-like buildings where firms rent customised space for their servers and telecoms equipment.
A year ago independent analysts were predicting great things for the sector as firms demanded faster, more powerful and more reliable internet access. Commercial estate agency DTZ forecast that 3.5m sq ft would be needed in London alone by 2003 but uptake is well below 1m sq ft.
Mr MacLean said that Guardian iT had secured 30 customers since it opened its internet hotel facility at Heathrow in January and was generating revenues of around £1m a year from it. "We needed about twice as many to make the venture viable." Shares in Guardian iT rose 7.5p to 275p.
Profit before tax, goodwill amortisation and exceptional items rose to £5.2m for the six months ended June, up from £4.2m a year ago. Turnover climbed 75% to £58.3m.
