Exodus Pins Future Health on Fresh New Face

Company eyes new services, enhanced offerings, stronger customer base.

Exodus Communications Inc.s slide over the past year has mirrored that of many other companies born out of the rapid rise and fall of the dot-com world.

Once the kingpin of the highflying Web hosting industry, Exodus has tumbled, felled by its own business decisions and the contraction of the industry. Saddled with $3 billion in debt and a plummeting stock price, the Santa Clara, Calif., company late last month filed for Chapter 11 protection.

The bankruptcy filing by the beleaguered company took no one by surprise, but it could still have far-reaching effects. Many users said they will stick by Exodus for now but are still putting contingency plans in place if the need to opt out arises. And larger rivals such as WorldCom Inc.s Digex Inc. division and networking companies such as Qwest Communications International Inc. will push their offerings in an aggressive move to pick up Exodus customers.

For rivals, Exodus bankruptcy is an opportunity to clarify their messages and grab a bigger piece of the managed service pie. Hosting companies want to avoid appearing as mere co- location players, something Exodus tried to do too late in the game. They will also advertise their proprietary networks more, a major feature that Exodus lacked.

Competitors might also benefit from the timing of the bankruptcy, which occurred just two weeks after last months terrorist attacks. The attacks on New Yorks World Trade Center could make companies realize that the need for disaster recovery goes well beyond a power outage or a hurricane and will want geographically varied data center locations, said Kurt Cohen, Qwest vice president of product management, in Denver.

L. William Krause, who took over as chairman and CEO of Exodus earlier last month when Ellen Hancock resigned, said the bankruptcy protection filing gives the company a chance to regroup and emerge a stronger, more focused organization.

Building new services will be a key to getting the company back on its financial feet, Krause said. Exodus will emphasize such services as server security, network management and monitoring, and virtual private networking.

Exodus already has offerings in those areas, but theyre "not very well done and not very well defined. We can do better," Krause said.

Another key will be getting rid of customers that arent paying their bills or dont need what Exodus offers.

"We have a lot of customers who dont qualify to be customers," Krause said. "We shouldnt have had them as customers in the first place, [although] virtually 90 percent of that [was] self-induced."

Exodus will give notice to such customers "to go be a burden on someone elses balance sheet. If you cant pay your bills, please go away. Quickly," Krause said.

Moreover, he said, the companys new $200 million in emergency funding from GE Capital Corp. will be only in a buffer account and wont be touched otherwise. In addition, 10 data centers under construction will be canceled, and there will be more layoffs, which this summer reached high into the executive ranks.

At the same time, Krause said that while he intends to rebuild the company, he will consider any reasonable offers to buy it.

"If anybody wants to buy our company, please let them know were open for business," Krause said.

Analysts say an acquisition is the most likely scenario. Possible suitors include network providers, telecommunications companies and professional services companies, such as Electronic Data Systems Corp., Sprint Corp., SBC Communications Inc., Qwest, Level 3 Communications Inc. and Global Crossing Holdings Ltd., which already owns about one-fifth of Exodus.

For the time being, many users are staying put, despite aggressive courting by Exodus rivals and words of caution from analysts. But that act comes more out of user need than user generosity—switching providers is expensive, so many users will only do it if they have to.

"We work with a variety of partners already. If we need to expand those relationships, we will, as well as consider other new partners," said MSNBC.com spokesman Peter Dorogoff in Redmond, Wash.

"We have a rather significant footprint with Exodus. We estimate it would cost us about $250,000 [to switch providers]. Weve run through that fire drill," said Steve Widginton, executive vice president of operations development and marketing at Neoforma Inc., a health care supply chain management company in San Jose, Calif.

Neoforma has a backup contract with Exodus rival UUNet Technologies Inc., which is owned by WorldCom, Widginton said.

However, not all are staying. A Qwest spokesman said at least five large Exodus customers have signed deals with Qwest.

"The advantages to adding scale would be there," Qwests Cohen said. "Thats definitely an advantage to anyone who courts them."

Exodus problems were many, from infighting among executives and building out the infrastructure too quickly to focusing on growth instead of profits and being late to the enhanced services niche. All those troubles contributed to the staggering debt, three rounds of layoffs, numerous executive- and board-level shifts, poor stock performance, and mass customer churn.

But those problems are lessons for all in the hosting field, Cohen said. "One of the things to take away from this is that having a full set of product offerings that meets customer demands over a full range of solutions is important and not just relying on one thing," he said. "The hosting business has to leverage all the rest of the capabilities. Anyone that wants to do hosting well has to make that seamless for the customer."