Hosting Customers Prepare for Mass Exodus

A year after the web hosting market encountered mass consolidation, co-location leader Exodus Communications Inc. is finding new problems faster than it used to find new customers.

A year after the web hosting market encountered mass consolidation, co-location leader Exodus Communications Inc. is finding new problems faster than it used to find new customers.

The Santa Clara, Calif., company, best known for its expensive but high-availability data hosting, showcases clients such as Inc., eBay Inc. and Yahoo Inc. While executives still say they are just a few quarters from being profitable, the companys financial situation continues to look bleak.

Exodus over the past year has been hobbled by two rounds of layoffs, a 98 percent stock price drop, a $3 billion debt, the sell-off of data centers and several class-action lawsuits brought by shareholders. Adding to its woes, the company announced two weeks ago a second-quarter net loss of $583 million and that its cash balance would sink to $200 million by years end from its current level of $616 million. Furthermore, as rumors circulate that company Chairman and CEO Ellen Hancock may resign, a report released late last month by Gartner Inc. warned Exodus customers to "prepare themselves for life after Exodus." In an interview with eWeek last week, Hancock acknowledged past mistakes but painted a rosier picture.

"We actually believe that we are in a very good position independently," Hancock said, regarding Gartners and other analysts statements that Exodus needs outside funding or a buyer. "Clearly, there was an impact of the dot-coms [many of which were Exodus customers]. Im not going to cry about it. We did ... staff up too quickly. We thought we were going after a much higher revenue stream."

Hancock declined to elaborate on plans to pull the company away from the brink, though she said Exodus will continue efforts to become a true managed service provider. This has already begun with recent service programs for storage, security, wireless and dark fiber, all done in conjunction with specialty partners.

As for Exodus customers, there are mixed emotions. Most are pleased with Exodus service, but theyre ready to switch if the need arises. "We already have contingency plans in place. I can run [the business] out of my data center here," said Tom MacDougall, senior vice president of IT at WorldStreet Corp., a business-to-business service in Boston. "Were well aware of [Exodus] situation. Were very much in a wait-and-see ... stance."

WorldStreet uses Exodus for core hosting but not for managed services. Still, Exodus "has been [meeting] and continues to meet our fairly stringent expectations," although competitors such as Digex Inc., of Laurel, Md., have been aggressive in trying to steal WorldStreet as a customer, MacDougall said.

"If these things [about Exodus future] are true, then it seems like the path is inevitable," said Tim Tuttle, chief technology officer of Bang Networks Inc., in San Francisco, which also buys only basic hosting services from Exodus. "Its definitely a rocky road that theyre going down."

Meanwhile, Hancock, who held jobs at both Apple Computer Inc. and IBM, said she has not heard the rumors about her possible resignation. Gartner analyst Ted Chamberlain, in Stamford, Conn., said, "Part of me thinks itd be a good idea. ... Shes someone to be respected, but with IBM and Apple, she really hasnt proven that she can take companies to the next plateau. They lose managed hosting bids to Digex and IBM almost regularly."

Meanwhile, rival Intira Corp., of Pleasanton, Calif., filed for bankruptcy protection last week after having its assets acquired by Chicago-based Divine Inc. Intira CTO John Steensen warned that Exodus is in for a similar fate. Intira has three data centers while Exodus has 43. "The cash was burning faster than the revenue was coming in," Steensen said. "That just killed us. Exodus can very shortly be in the same boat we are."