Web hosting and the oil industry…

Web hosting and the oil industry…

What does web hosting and the oil industry have in common? Nothing? Maybe, but let me try to articulate my thoughts into a coherent argument that binds the two together.

The hosting industry is an extremely competitive market with notoriously low margins. Those hosts that struggle and eventually sell out or die usually do so because of lack of profits. Companies that make oodles of money
don’t usually up and go out of business, right :) Before these companies go the way of the dodo their service suffers first, their product suffers, and their investment in the future of the company suffers. This is what happens
when a company that you do business with doesn’t make a healthy profit. You WANT companies you do business with to make money. This is what makes your long term relationship with a company mutually beneficial.

Oil companies are the same. Big oil companies average between a 6-9% margin on their oil. 6-9%?? That isn’t that great of a return for a company. Would I run bluehost for a 6% margin? Absolutely not. I work too hard
for my money to get a 6% return. Why are we begrudging oil companies the same thing that all businesses strive for? I don’t care if Exxon made 89 billion dollars or 89 trillion dollars, 9% is still only 9%.

Let me tell you EXACTLY what will happen if a windfall tax is passed against oil companies. The price of gas will temporarily go down (less than 6 months is my guess). Future investment in exploration and drilling will diminish as these are completely profit driven, and the inevitable will happen: MUCH higher gas prices.
In 1981 we had over 300 refineries in the US. Today we have 142. Restrictions forced upon the oil industry have stifled our ability to be self sufficient. It doesn’t help that environment concerns (which are totally valid) have gone off the deep end in many aspects. We have dug this hold that we have to live in.

I guess what I am saying is that profit drives innovation. Innovation drives technological advances. Technological advances drives the price down through efficiency and increased supply. Interrupt the profit and you WILL interrupt this cycle. I sure wish there were a few politicians in DC that had actually run a legit business, instead of just taxing them to death. Maybe they would have an idea of how things REALLY work from a valid
business perspective. Anyone want to vote for me for Senator?

If you totally disagree, remember that I actually AM a nice guy, and yes you
should renew your bluehost hosting account :)

Thanks,
Matt Heaton / President Bluehost.com

22 Responses to “Web hosting and the oil industry…”

  1. Andy Rush says:

    You guys are a great hosting company, but seriously Matt, if you were making $89 billion you wouldn’t be happy with 6% ? Over $5 billion profit? Stick with talking purely about web hosting.

  2. Sylvaind says:

    I don’t think the high prices have much to do with the industry iteself or innovation. THey have everything to do with supply and demand. The supply is dwindling while demand is soaring. Prices will keep going up, and Americans are better get used to it.

    Industry innovation should be directed towards conservation and efficiency measures as well as alternative and renewable energy sources.

    Fossil fuels are a finite resource and the CO2 is killing the planet, two good reasons to ween ourselves off fossil fuels. So I, for one, think that as painful as the oil prices may be, they are a good thing, and I beleive and hope they get higher. Nothing else has been able to wake the people and the governments up to this reality. Perhaps high prices will.

  3. Fountain says:

    I agree with you in principal, but bluehost.com does not receive billions of tax breaks and incentives from the government. I personally don’t have anything against a profitable business but I don’t think we owe them anymore government handouts.

    And do they really need to drill in ANWAR?

    This post is totally comment bait…

  4. Dustin says:

    You know Matt, that kind of attitude is EXACTLY what the oil companies want us to believe. Oh, the poor Oil Companies! boo hoo hoo! BULL!

    Let’s take those figures, shall we. On $89M at 9%, that’s $8.01M in profits; $89T at 9% is $8.01T in profits. Now I don’t know about you, but with those kind of figures I could run my company for the next 100+ YEARS!!

    An interesting read for those that want to learn more about Oil Company Profits:

    http://www.conocophillips.com/newsroom/other_resources/energyanswers/oil_profits.htm

    and

    http://www.theprairiestar.com/articles/2006/02/15/ag_news/opinion/opinion10.txt

    Oh, and just so your wondering, ExxonMobil averages about $8 – $9 BILLION every QUARTER (Every 3 months) in profits! What do you think you could do with those kind of profits for YOUR company? I know what I could do with mine!

    Just my $0.02. Hope I didn’t ruffle any furr. =)

    -Dustin

  5. Matt – you are corrrect.

    The biggest windfall from rising oil prices is for the producing countries (sadly, mostly run nutty dictators) and the US Government from gasoline and diesel taxes. Given that we cannot do much about the former, we should all lobby our representatives for a return of the latter. It’s our money.

  6. Matt,

    I agree with part but somewhat disagree with with some of the thinking. If you offered hosting at $6.95/mo and all of a sudden started charging $13.90/mo how many renewals would you have before many months. A lot of the people would leave you just on the basis of principles.

    Now look at gasoline on a lot larger scale and as a necessity. People depend greatly on gasoline to get to and from work and to obtain other essentials and get to where they have to go.

    My wife is a professional person that has to do a lot of traveling on her job. The travel expenses are already figured into her pay but her pay has not increased.

    We live in a textile based area and as you know most of these jobs have left the country. The people in this area have tight budgets and have not been able to figure for doubling gas prices.

    In my opinion, the prices should not have doubled in the span of a few months. The oil industry has already lost the confidence of most people but dont seem to care since the oil products are considered a necessity.

    This is just my opinion and I still like Bluehost and what it has to offer.

    Thanks for the great hosting,
    Charles Oxford

  7. Geoff Gevalt says:

    Matt,
    I must say that this post leaves me a bit confused.

    My first response is why on Earth would you WANT to compare yourself to Big Oil? Is there a single industry or single group of companies right now that engenders more ill-will in the land than Exxon/Mobile, Chevron, etc which have been announcing profits that are larger than the GDP of most Third World countries? Isn’t there something wrong with that picture if hard-working stiffs are paying $75, $100 a week at the pumps just to get too and from work? Isn’t there something wrong if a company is annoucing 40, 50 percent increases in profits at a time when consumers are spending 100, 200 percent more than they were a year ago on a product they can NOT live without?

    And please show me the innovation the oil companies have sparked, so to speak… Have they put the money into better refineries? Have they put the money into alternative fuels? Have they put the money into solar technologies? No. We are in exactly the same place with respect to alternatives as we were in Jimmy Carter’s day. Why? And what has happened in, say, the computer industry in that time? Has there been profits in that sector? Has there been innovation? Hmmm, let me see, the personal computer was invented….

    I’d add this. I’ve looked through all your posts. Your analogy seems to go totally against the grain of what you’ve been saying on your other posts regarding your personal philosophy, business mission, etc…and against the grain of what your company seems to be about — good service, decent prices, innovate and evolve and, seemingly, treat your employees and customers well.

    I agree profit breeds innovation: Yes, I agree; a little money on hand certainly makes it easier to say, ‘Let’s try that. Let’s take the risk.’ The risk, of course, is much smaller if the money is coming in at a rapid clip.

    But I’m left wondering, what is your beef? What are you worried about?

    Sincerely,
    Geoffrey Gevalt
    The Young Writers Project
    http://www.youngwritersproject.org
    And a happy, loyal BlueHost customer

  8. Let me get this straight. You wouldn’t be happy with a 6-9% profit margin on an $89b company? You would either raise your prices to increase profits, or shut down shop?

    There’s a big difference in 6-9% in a small hosting company, and an oil company. A small company of any sort could barely survive with 6-9% profit margins, and innovation would be completely off the table on any major part, but an oil company making $89b can easily survive, and put forth plenty of innovations with a 6-9% profit margin, but have they? Not so many that I have seen.

  9. jrh says:

    Geoffrey poses some insightful questions. And begins with a good point: any comparison these days to big oil, well. It will just turn people off on principal, as I don’t think anyone has too much sympathy for them, raking in cash while the rest of us feel the crunch.

    I will continue to think of you as a guy trying to support himself with his own business. More like me, a working/published author/artist trying to live by his own steam—and less like a huge corporation that eats ethics on its way to brunch.

    PS, why no preview comment button?

  10. Jon V. says:

    Now, I will chime in too, as I waited to see what some of the others had to say first. One of the huge problems we have in the U.S. is not the cost of oil, it is our dependence on it. Europe has managed just fine with higher gas prices, it is just that they use more efficiently.
    I understand the profit margin involved and I am sure that oil business is no different. In many ways though, oil is like web hosting, as neither is truly the necessity we wish it were.
    Though not ideal, I could easily take the bus. I could cut back on the vacations. I could do a thousand things if I had to because gas became more of a luxury than a necessity.
    I think it is our responsibility as consumers to stand up a bit. Yes, the oil companies are raking in huge profits, but they are tied to resistance of the automobile manufacturers to make more efficient vehicles. Of course, they don’t make them because there is no demand.
    Anyway, I agree, and I think that with oil it’s demand that will fuel innovation. And that demand starts with us.

  11. Matt Heaton says:

    Hi Matt my name is Matt Heaton alsdid a google search and found you.Good day to you.

  12. Greg says:

    I agree with what Matt’s views are. Being an entrepenuer makes one fight for businesses and their rights. I fully agree with that. My father is a self-employed landscaper so please don’t think he doesn’t feel the pressure of gas prices. I feel them too while I have been working for him. Now you make ask, why not just buy a hybrid? Well the answer to that is they cost too bloody much and I have yet to see a hybrid that can haul a 4200lb pallet of stone in its bed.
    Here is another nifty little fact for everyone: Most states get more money in taxes per gallon of gasoline than the gas companies make. Just thought i would share that before everyone went off on the gas companies again.

    An OPEC minister stated recently that gas prices would be okay if politicians would just shut up. Now maybe everyone here can go send a letter to all their favorite represntatives and the leader of Iran and ask them all to stop talking so much because the gas prices are too high.

    Sorry if this seems cynical or sarcastic.

  13. Tarek says:

    Thomas –

    Gas taxes are usually a set price per gallon, not a percentage like income or sales tax. (18.4 cents/gal federal + state and occasionally municipal taxes on top of that)

    see here:
    http://www.gaspricewatch.com/usgastaxes.asp

    (actually, on closer reading, it looks like there’s around 17 states that charge a sales tax on top of their cents per gallon)

  14. p m howard says:

    Personally, I feel too much of the rise in oil prices is fuelled (!) by speculation rather than true costs.

    In the long run, this isn’t any better for the oil business (and consumers) than the Internet bubble was for the telcos and hosting companies.

    As long as traders continue to “pump” the system we’ll have an unreasonable amount of volatility that will obscure the true situation.

  15. Steve says:

    I agree with Matt. I don’t care what the margin is and what a person would be happy with. Bottom line is Matt nailed the issue with long term prices skyrocketing as drilling and such is profit driven. Most people don’t understand the oil companies and how they work. Most people hate the idea of paying at the pump $3/gallon so they can’t think clearly on what the real issue is.

    Thanks and I am a nice guy too…

  16. Kevin says:

    You are brave to take on such a hot topic on your blog. I am not a fan of windfall taxes and think that is a bad idea. I do question oil companies record profits and level of reinvestment into oil infrastructure. More refineries need to be built and soon.

    When CEO’s walk away with 400 million in severance pay and billions upon billions in profits a quarter one has to question their motives.

  17. Larry says:

    I wonder why it’s okay to give tax breaks to oil companies but not tax their profits. Oil companies use their profits to further our dependence on oil. They want to find new places to drill like in ANWAR where the majority of experts agree it will take ten years to get six months worth of oil. The writing’s on the wall. Oil is on it’s way out. It’ll take a while. Our leaders, especially this administration with two oilmen at the helm have no vision for the future like the leaders of Brazil, a country who no longer needs to depend on foreign oil. Right now we have to lick the boots of the leaders of Saudi Arabia and Iran just to ensure a continuous flow of oil. The smart thing (heaven forbid) to do is to place our energies on alternative fuels and not wait for market forces. We are presently at the mercy of middle east wackos. Is that how we want to live?

  18. Hercules says:

    I hope the hosting business will not end up like the oil industry since cheap oil (less than $200 a barrel) will be history within a few years.
    Let’s not hope cheap hosting will be gone too.

  19. Dawn Becker says:

    I just wanted to make a few comments to this conversation. First, let me just remind people that we began stockpiling oil during Senior Bush’s term and we stockpiled oil thereafter. We do not have a shortage of oil and yet the prices at the pump have skyrocketed. The main suppliers have received tax incentives and do not pay taxes on their sitting inventory as other companies are forced to do. The suppliers then use the FIFO inventory method, which for those who are not familiar with the term means (first in-first out) What this means is that the suppliers ship out their earliest inventory which was bought much cheaper and they benefit due to the higher prices currently being paid. This allows the suppliers to reap huge profits. The other problem is that the tax incentives are not warranted. Companies that are yielding these significant profits due not require incentives that the majority of companies due not benefit, as well. The government and the suppliers have invested significant amounts of funds in finding alternatives. How long do you think we need to research alternatives. It is like the cancer cure. We have been researching for many, many years. we can find expensive treatments to temporarily cure but with all the information we have at our access, we cannot figure out why a damaged cell mutates out of control. I might sound cynical and as I have gotten older and wiser, I often question will we ever come to any solutions regarding these problems or is there too much money at stake?

  20. Matt, I just wanted to let you know that I LOVE BLUEHOST!!

  21. Matt, I just wanted to let you know that I LOVE BLUEHOST!! I sign up all of my customers because of the fantastic services you offer for FREE, the great customer service and the low price. You make it easy. I just wanted to say thank you for continually imporving your services and making my job easier!! Liz Johnson

  22. Robert Williams says:

    First off, I dig your hosting. Bluehost is what I’ve been looking for, for 2 years. Glad I finally found you.

    As for oil companies and their sacrifice for the people of this country by only taking 6%… honestly I couldn’t care less. I’d love nothing more than to see those same companies go out of business ASAP. Mostly I’m just thinking that sticking to oil is the fast track to failure for this country. Instead of us spending hundreds of billions of dollars (and lots of military assets and lives) on opening up oil fields to the market (read Iraq), lets spend that money on the next major energy source. Whether we move to hydrogen or ethanol or any other of a hundred replentishable fuel sources, is really irrelevant at this point. We just need to get away from oil instead of finding new completely absurd ways to continue to deplete a nearly depleted supply of oil. I’m pretty much sick of all politicians and their personal agendas but if one stood up and said, “We’re going to fix this fuel problem before the end of my term”, he’d get my vote. But I suspect that we won’t be hearing that from any of the fine men and women that get their election year “donations” from the oil companies.

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