The MSP market is consolidating, next steps?

The Dutch service provider market has been consolidating for some time. The consolidation started in the hosting market. Now a handful of large organizations dominate the market. More recently, managed service providers (MSP) are also consolidating. Wondering why, read our article on Why Market Consolidation.

But how to proceed? How is the market developing as a result? What will be the next steps of these larger organizations? And what will happen with the parties that remain independent? What is the next step? And how do you, as a hoster or MSP, adapt your strategy so that you make optimal use of this trend? In this article, we want to find an answer based on our knowledge of the market and our experience.

Influence on the market

An oligopoly is a market with a small number of suppliers (Wikipedia: Oligopoly). These parties have a strong influence on the market and the behaviour of all suppliers. They offer standardized products. Their main differentiation is in pricing, brand experience and/or geography. A well-known oligopoly in Europe is, for example, the supermarket sector.

1. Hosting Market

For the Dutch hosting market, you could say that there is an oligopoly. A limited number of large providers: Team.Blue, Hostnet/One, MijnDomein, TWS and the German provider Strato own a large part of the market. And are still expanding their positions through takeovers. These big five dominate the Dutch hosting market. There is still one thing that sets this oligopoly apart: providers package their services and products in a specific way. So it is difficult for the customer to compare the offerings. We call it a heterogeneous oligopoly. The strategic challenge within a (heterogeneous) oligopoly is to keep the customer.
 
A good market strategy within a heterogeneous oligopoly is product differentiation. Want to know more about product differentiation within the Service Provider market? Please read our article on Henry Ford. With product differentiation, the service provider gives specific proprietary characteristics to the service. The goal is to get specific customers excited about the service. This makes the customer feel more engaged and will remain loyal to the provider. This has a positive effect on the market share of the provider.

Dutch Hosting Market

This is also emerging in the Dutch hosting market, for example, by specializing for a target group (web agencies). Or add more value services for specific clients (website building software). And some stands apart by product specialization (WordPress hosting or Game hosting). Most larger hosting companies set up their labels in this way as well. This allows customers better to recognize not only the service but also the company. This creates specific customer loyalty.

Providers

Force21 sees that the hosting companies are getting started on this. The smoke clouds from all the acquisitions are descending. And the hosting companies are all (re)positioning themselves and thus differentiating themselves. This is a slow process. Technology, culture and size do not help in a rapid change of these organizations. Also, customers must feel “at home” with the new image. A further merger is not ruled out. But will run up against the limits of legislation. This means that the Netherlands Authority for the Financial Markets (ACM) will also closely watch further consolidation in this market.

2. IT Services Market

The Dutch market for IT services is somewhat more complex in compared to the hosting market. We use the following three categories:

De markt van IT services in Nederland is qua productaanbod wat complexer vergeleken met de hosting markt. Wij hanteren hiervoor de volgende driedeling:

  1. Workspace Providers, Managed Service Providers that provide services for and related to the employee’s workplace;
  2. Cloud Providers, Managed Service Providers that provide services for and in the data center. Focused on customer service;
  3. Full-Service Providers, parties that deliver both.

Besides this three-way split, we see 2 other passive providers from a different discipline. These are telecommunications providers and security providers. Currently not active in the entire market, but potential entrants.

1. Workplace Providers

The workplace providers have 2 important features, function-specific or region-specific. Two examples: A provider of workplaces for healthcare or a workplace provider in the north of North Holland. Since 2018-2019, we see a strong consolidation, especially among regional players. Whereby ‘regional heroes‘ seek each other out and move forward together. Investment companies have also joined in and are creating so-called ‘chains of pearls’. (MKB Fonds, Vincere). Many of the parties remain active under the “old” brand. Also, we are currently seeing consolidations under one label (hallo, Solimas).

Force21 - Provider s zijn local heroes

Due to the many providers in this market, we speak of perfect competition (Wikipedia: Perfect Competition). In a mature market, the competition will create price pressure. Now, this market is quite young and developing. Developments are following at a rapid pace, including the Covid’19 pandemic.

With further market consolidation and technological developments, Force21 believes that the standardization of services will speed up. A workplace is a workplace. This is going to have a big effect on price. One way to escape this is portfolio broadening. The large market players have more power to broaden their portfolios more rapidly, for example, with communication services, security services, technology adoption services, etc.

2. Cloud Providers

As discussed above, offerings in the workplace market are still diverse and evolving. Also, customers are still adopting an “online” workplace. But, this is no longer the case in the data center market. The market completely accepts the offer. And is already crystallized. The number of providers in this market is much smaller than for Workplace Providers. This is partly because the Cloud Providers have always profiled themselves nationally. Also, the start-up costs for a Cloud Provider are many mater higher. Given the smaller number of players, consolidation seems to be happening less. But also in this market, larger players are emerging (Sentia, Uniserver, Broad Horizon).

Providers

In this mature market with perfect competition (Wikipedia: Perfect Competition), price pressure is emerging. New entrants reinforce the market (Dataplace, Bytesnet, HeleCloud, Leaf.cloud), and the market is growing. In terms of technology, the market is still evolving in speed and convenience for the customer. Container technology, Machine Learning, Edge Computing and the further adoption and integration of Public Cloud. Plenty of things for providers to continue to stand out through technology.

With the rapid advance of new technology, portfolio development remains an important aspect for Cloud Providers. Portfolio Managers will remain busy phasing out old technologies and adopting new ones. The big opportunity in this market lies in the disruption. In which new technology makes all the old technologies obsolete. At the moment, this is not yet in sight. But, many parties are afraid to miss the boat and are now adopting many technologies. An important point of attention is to stay connected to your current customer base. Technological development is faster than adoption.

3. Full Service Providers

These parties offer both workplace and cloud services. They are created through portfolio expansion by looking at the customer’s IT challenges and developing products and services around them. These parties are customer-oriented. They build the offering around the customer.

From a consolidation point of view, this market is more difficult. Less standardization, more customer-specific solutions. But also in the market, we see consolidation emerging. Good examples are the Odin Group or Interstellar. We also see some of the Workspace or cloud providers ending up in this market through takeovers—for example, Broad Horizon.

Force21 expects that consolidation in this market will remain difficult in the absence of new technological developments. If technology can bring standardization, this hybrid form will merge with the two other. There is then a good chance that these three groups will come together again. Full-Service Providers’ advantage lies in their strong customer focus, together with a very differentiated offering for specific users.
Force21 believes that due to the lack of standardization and differentiation, this form of Provider exists.

Next step

Since the Dutch Hosting market is already an oligopoly, all eyes are on the IT Services market. In the Hosting market, Force21 does foresee further consolidation on a European or global level.

In the IT Service Markets, providers will capitalize on their volume, technology standardization and operational efficiency. All three elements will contribute to cost reductions and, thus, margin improvements or competitive advantage. Especially in the area of product rationalization, there is much to win. The products will become more comparable. So you can achieve distinction by brand differentiation or price. And the IT services market will also become an oligopoly.

Force21 - Conquer the world als provider

Force21 believes that innovation and the power of adoption will be decisive. Will the IT Service Providers develop into the ‘Digital foundation‘ partners of their clients? Or will they remain technology providers? If the IT Service Providers can emerge as Digital Foundation Partners, then they will be at the basis of the further digitalization of the entire society. They will also build up some of the credits attached to the value creation that digitization brings.

Want to know what the best strategy for your company could be? Please make an appointment with Tjarko Kwee or me to get advice on this.

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