Exodus hangs onto customers for now

Most are sticking with Web host
despite analysts' warnings

Despite a shaky financial present and a questionable future, Web hosting and co-location giant Exodus Communications seems to be hanging onto its customers. Then again, where else could they go? Exodus is estimated to hold somewhere north of 20% of the Web hosting market, making any wholesale abandonment and relocation difficult though not impossible.

“A lot of companies… can fairly easily pull that back in-house [as a] stopgap measure for a short period of time,” said Ted Chamberlin, networking research analyst for Gartner Dataquest. He is also one reason the question of relocation has come up at all.

A lot of the concern is dramatically overblown because of the stock price. We're still showing that we're fully funded. --Dave Asprey, Exodus

Chamberlin warned his Exodus-based clients to start looking for the exits just in case. That just-in-case caveat was missed, and things got out of hand, said Dave Asprey, Exodus' director of strategic planning, noting, “There's a little bit of sensationalism out there right now.”

Exodus has done nothing to dampen it. The company reported second quarter losses that widened to $583.4 million and said it expected its cash net loss per share to widen by 1¢ to 26¢ in the third quarter, exceeding analyst predictions of a 24¢ loss. At the same time, Exodus said it had $616.8 million in cash at the end of the second quarter and would still have around $200 million at the end of the year.

With that news, the company's stock rallied to $1.18, which is nowhere near the high point of almost $90 that it reached in spring 2000.

“A lot of the concern is dramatically overblown because of the stock price. We're still showing that we're fully funded,” Asprey said. “We're still in a position to turn profitable without additional funding.”

Surprisingly, Chamberlin agreed.

“It's not dire panic time,” Chamberlin said he tells his customers. “Don't pick up and leave. But we have to entertain the thought that something dire will happen. Have the pontoon ship ready to go just in case [Exodus] sinks.”

That, countered Apsrey, is wise and “obvious” advice.

Nevertheless, while Exodus' big customers appear to be staying put, a trickle has been leaving the company for greener pastures. “We have seen an uptick in enterprise customers that when we talked to six months ago said, ‘I'm happy where I am. I don't need a replacement service,’” said Ron McMurtrie, WorldCom's vice president of e-services.

This uptick, though, is not just at Exodus, according to McMurtrie, who said other Web hosts like PSI.net have either gone under or are in precarious shape. “The tough business has forced people to have a long-term recurring business model where they heavily invest in their sales force and forklift the overall skills of their data center and their people, he said.

Exodus cleverly added some stickum to its offering that perhaps more than anything else, is holding onto customers. “We're a national infrastructure asset. The government counts on us to run a significant part of our national communications infrastructure. It's highly unlikely that our customers are just going to poof! go somewhere,” Asprey said. “The real reason they'll stick with us is we're still running operations for our customers.”

At least for now. But the covers are being taken off the lifeboats, Chamberlin said, who is watching closely to see if any of the big players jump into them and paddle away. “The minute you have a primarily managed hosting customer like Merrill Lynch or American Airlines leave, that will have a domino effect,” he said. “I haven't seen any of those guys want to leave yet.”

Perhaps they never will, suggested Asprey.

“It's not like you're staying in a hotel and you just throw all your stuff in a suitcase and move to another hotel,” he said, admitting that might have happened when Exodus was just getting started. “Today, pretty much you're in one of those assisted living places and you have people who come in four or five times a day and bring you meals and maid service and everything else. It's not like you just pick up and go to Motel 6 and have these same capabilities.”