Mass Exodus

Ellen Hancock steers the leading hosting company into new territory. Can the biggest be the best at managed services?

When you dominate your local market, what do you do next? Go global - and conquer new, more lucrative territory, of course.

As the undisputed market share leader in the hosting and co-location market, Exodus Communications has 32 data centers in eight countries - almost 2.6 million square feet of real estate. These numbers will represent Exodus' worldwide domain once the Global Crossing GlobalCenter acquisition is finalized, which could happen as early as mid-January.

Not satisfied with its chokehold on the co-location and hosting market, Exodus' next quest is to rule the managed services world, a known growth market.

Last October, Exodus launched managed Web hosting and managed application services that will thrust the company into a segment that IDC expects to jump from $17 billion in 1999 to $36 billion in 2004. These gains are significantly larger than the increases predicted for the hosting market, which is expected to be slightly more than $1 billion in 2000 and grow to just under $6 billion in 2003, according to Robertson Stephens.

Much of the shuffling seen during the last months of 2000 was the struggle to dip a toe in this profitable sector. Nippon Telegraph & Telephone's purchase of Verio, WorldCom's acquisition of Digex, Exodus' takeover of GlobalCenter - plus the rumors of Sprint looking at PSINet and Digital Island - are strong signals of a market operating in M & A mode.

Positioning the acquisition The GlobalCenter acquisition was integral to Exodus' managed services plan. The purchase relieved pressure to build out Exodus data centers and freed company resources to attack the managed services arena. Exodus gained 10 data centers - many in key locations such as New York; Amsterdam, Netherlands; and Dublin, Ireland. Not only do these data centers give Exodus a much-needed global presence, they reduce the company's demand for large capital outlays to build its own string of data centers.

"Now we have the strength to move into new market spaces. Our core business, complex Web hosting, is still an incredibly good business here and in Europe and Asia," says Ellen Hancock, chairman and CEO of Exodus. "We're laying a mosaic on top of that model, which is available through the complementary skills and talents that we've acquired during the past few years."

For the last two-and-a-half years, industry veteran Hancock has used her years of high-tech experience to guide Exodus' maneuverings. Hancock spent 29 years at IBM, plus two more at Apple and National Semiconductor before coming to Exodus. Being ousted from IBM by new CEO Louis Gerstner in 1995 and fired by Apple's Steve Jobs were not confidence builders for Hancock, but she does try to use her experiences at these very different companies at Exodus.

"Apple is a very creative company that helped me learn to make decisions without a lot of data. IBM had a lot of task forces, where Apple counted on people's instincts to make decisions. We use both models here," she says.

Since becoming CEO in March 1998, Hancock has led Exodus through a series of acquisitions that are the foundation for the new managed services plans. A quick glance at the Exodus purchase list reveals network security, performance testing and consulting and professional services companies.

"When the company started, managed services represented about 8% of our business," Hancock says. "Since then we've been shifting our business, and in our last quarter, 36% of our revenue was from professional services. It's been a long process that didn't occur overnight."

This years-long wait for Exodus to enter the market reflects the inherent difficulties of managed services. "Growing these services organically is difficult," says Rich Young, an analyst at The Yankee Group. "Exodus has made smart, strategic purchases, but it will take more money, more IT staff and more managed services acquisitions. At this stage, Exodus can't move quick enough."

Business realignment Exodus' shift toward services means making new alliances, shaking old ones and protecting its back from new competitors. Loudcloud was asked to leave the Exodus hosting facilities for competitive reasons when the two began offering similar services. Loudcloud now uses Equinix and AT&T for hosting services for its clients.

With its application service provider (ASP) partners and customers, Exodus must walk a fine line. Although the hosting company is not offering managed applications such as Oracle and SAP, its managed services often blur with its customers' services.

"In some cases, we may be providing the application but not selling it. We work with the people who do monitoring applications, for example," Hancock says. "These services sometimes are like a loop, and once the loop is closed, it's difficult to know which side you're on."

As Exodus builds new partnerships and focuses its attention on its managed services ventures, it may be open to attack from the new super centers being built by companies such as Equinix. As an operator of Internet Business Exchange (IBX) centers, Equinix has been building facilities throughout the U.S. where ASPs, content providers and enterprises can purchase bandwidth and interconnect with one another.

"Equinix brings all the components together in facilities that are designed to interoperate in the open marketplace. We put all the players together into one room and offer interconnectivity," says Jay Adelson, chief technology officer and co-founder of Equinix. "At Exodus, customers can't get connectivity to all the network borders. They can't create business deals, and they can't get the same level of network performance."

These new centers are attracting some of Exodus' oldest customers. Since Yahoo's launch, it has housed its Web servers at GlobalCenter. The servers still are located at GlobalCenter, but Yahoo will use Equinix IBX centers in Dallas and the Silicon Valley for Yahoo Broadcast. These deals may be signals of future change in hosting as content distribution networks become more prevalent.

Money matters In mid-December 2000, Exodus joined the NASDAQ-100 Index. On the day before its entry to the index, Exodus stock prices rose almost 18% in anticipation. This upward swing is typical among companies just joining the index and was one of the few rises Exodus stock holders witnessed during the rocky last quarter of 2000. Even after the GlobalCenter announcement, the Exodus stock price continued to fall.

Despite the economic downturn and dot-com decline, Hancock has positive predictions for Exodus' financials. For the past two years, the company has been moving its customer base away from dot-coms and toward enterprises. Microsoft, for example, was one of Exodus' most recent - and largest - customer wins.

"When we went public, 80% of our revenue came from dot-coms and 20% from enterprise customers. In our last quarter, 53% of revenue came from enterprise and 47% from dot-coms," Hancock says. "We are shifting the balance within the company. Last year, a strategic account would have been Yahoo. This year, the account is Ford. The sales force has changed its position and is spending a lot of time on enterprise bids. Almost every quarter our exposure to the dot-coms declines."

Exodus also has been making investments it expects will yield positive returns. In March, the company will take a 15% stake in Mirror Image Internet after making a $637.5 million equity investment in the content distribution provider.

"Our services give Exodus a value-add. They can offer streaming media or content delivery, in addition to renting space at their facilities," says Larry Moulter, chief marketing officer for Mirror Image. "We get a partnership at all levels - marketing, executive and sales."

With Exodus' investments and growing customer base, Hancock is confident that the company can continue to keep its stockholders happy. "For 2001, we've slightly increased our revenue projection from $1.8 million to $1.9 million," she says. "We're showing nice revenue growth, and our equity has held up better than others in our space. We're still an acquirer, and our stock is still good for acquisition purposes."

Exodus has been openly exploring acquisition possibilities in Japan, Australia and China. With little left to conquer in the hosting market, managed services providers will be at the top of Exodus' list of potential acquisitions. No doubt 2001 will see Hancock continuing to lead Exodus on its march across the globe.

When Exodus executives faced the Global Crossing team in September, they must have had flashbacks to similar talks that took place only two months earlier. Having walked away from a deal for GlobalCenter in July because of price and shareholder value disagreements, Global Crossing committed to a $6.5 billion exchange of Exodus common stock.

The agreement includes other trades as well. Exodus signed a 10-year network services plan to purchase bandwidth from Global Crossing, which will be available at preferred prices. The price cut will help Exodus compete with hosting and backbone companies such as AT&T and Qwest Communications.

In addition to the network services contract, the two companies are forming a joint Web hosting and managed services venture in Asia. Exodus will own 67% of the venture, and Asia Global Crossing will own the remainder. Global Crossing will also have a 16% to 18% percent holding in Exodus.

Global Crossing's divestiture of GlobalCenter was no surprise. The company had been trying to shed the hosting facilities for months so it could focus on its long-distance service. Even after the initial talks with Exodus broke down, Global Crossing announced that it would break GlobalCenter out as an Internet tracking stock.

"Obviously, Global Crossing could not get where it wanted. They had the geographic footprint, worldwide breadth, but they couldn't scale properly," says Rich Young, an analyst at The Yankee Group. "Global Crossing put up their hands and said, `we can't handle it.' Ellen Hancock thinks she can."

Because of the sequence of acquisitions, many analysts saw WorldCom's purchase of Digex and Intermedia last fall as a motivator for Exodus to return to Global Crossing's deal table. Melanie Posey, an analyst for IDC, disagrees.

"It wasn't an `instead-of' acquisition. You really can't compare the two. Digex would have provided certain specific capabilities, but Global Crossing provides scale," she says. "Exodus could have acquired both companies without overlap because they fulfill different objectives."