Sale speculation points to Web hosting turmoil

While Web hosting high-flier Exodus Communications' future reportedly hangs in the balance, stalwart telecoms may be readying themselves to dive even deeper into hosting with capital infusions that could well yield the spoils of this once red-hot sector.

Over the last several days, industry whispers about the future of Exodus have reached a fevered pitch. Lately fueling speculation was an August 21 change to the Exodus board of directors and comments from Exodus CEO Ellen Hancock.

Hancock's comments - carried in USA Today - have lead many to conclude that Exodus is seeking to shop itself around to interested buyers.

However, in response to this swirling speculation, Exodus officials said in a statement late this week that "Exodus expects to serve its customers as an independent company."

Further, the company said in the statement that it expects to have enough funding to continue running until it hits positive cashflow in the third quarter of 2002.

Amid this back and forth, some experts ventured that in many ways Hancock's statements that the company would consider any reasonable offers are not what's driving the horse race atmosphere that has developed around the company's fate.

"A while back in an earnings call, an analyst asked Hancock if Exodus would sell out. She said the same boilerplate thing, 'If it's in the best interest of the shareholders...' They've been saying this for a while," said Melanie Posey, an analyst at IDC Corp. in Framingham, Mass.

Instead, Posey and others hold that the near obsession surrounding Exodus' future has cropped up because the Santa Clara, Calif.-based Web hoster's prospects say a lot about the industry overall.

"What's going on right now is that anyone that is relatively stable is trying to hang onto their existing customers and find access to capital so they can begin positioning themselves at the starting line. That way they can take off and run when the economy rebounds," said Posey.

Any glimmer of hope for that necessary capital - not just for Exodus but most Web hosting players - now likely hangs on the telecoms, once the stark nemeses of hosters, many said.

"We totally see the carriers getting into this market very aggressively," said Counse Broders, senior analyst at Current Analysis in Sterling, Va.

But for struggling hosters, the telecom's increased appetite for a way to deliver hosted or managed applications is at best a mixed blessing, Broders continued.

"It will be especially challenging for companies like Exodus, which has just a partnership and limited connection to [carrier] Global Crossing Ltd. How can they go up against companies like WorldCom Inc. that has a solid connection with Digex Inc. or a company like AT&T Corp. with such an extensive network," Broders said.

Ron McMurtrie, Clinton, Miss.-based WorldCom's vice president of E-Services recently alluded to some of the company's next plans for Digex.

"We want to move up the applications stack to managed hosting," he said. "Managed hosting will change the way enterprises look at a company like WorldCom, which will begin to support mission-critical platforms."

In a recent interview with InfoWorld, AT&T CTO Dave Nagel said that his company also wants to get to the next stage of providing managed applications, and move well beyond just "hooking up equipment and blowing air conditioning" at customers.

"We want to move away from the collocation kind of hosting, which is very much like the grocery business," said Nagel. "We want to deliver higher value to our customers."

As giants like WorldCom and AT&T turn their attentions in the hosting direction, the smattering of hosters with substantial telecom backers are considered the lucky ones, sources said.

Aside from WorldCom's Digex, those include Genuity Inc., which has in its pocket financial reassurances from Baby Bell Verizon, and Digital Island Inc. snapped up recently by telecom Cable & Wireless PLC.

Indeed, more limited connections such as Exodus' ties with Global Crossing could be a liability at this point, said analyst Posey.

"Telecoms are really looking for hosting to be just another channel for bandwidth sales. If one of them buys Exodus, they get hosting customers but they also get the contract with Global Crossing as well," she said.

Therefore, any potential Exodus suitor would more than likely have to work out a way to buy out of the standing Global Crossing contract, making the acquisition even more costly, Posey said.

Though experts stopped far short of insinuating that the company would consider an Exodus acquisition, some sources pointed to Sprint Corp. as the telecom with the least traction in the Web hosting space.

"I'd expect somebody like Sprint to shop around, since they are behind the eight-ball," said Posey.

Though Sprint has launched its E-Solutions hosting group, the telecom has yet to see real growth in this area, she continued.

Other established telecom players pointed in the Web hosting direction are former Bells Qwest and SBC Communications Inc.

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