Infrastructure providers revamp to face tough times

by Jennifer Mears

May 11, 2001 —

Some big Web hosting companies and infrastructure pro-viders are finding some rough going, laying off staff, reducing capital expenditures and announcing other cost-cutting measures, as they position themselves to ride out the shaky economy.

Last week, hosting company Digital Island and infrastructure provider Loudcloud announced layoffs. Exodus Communications saw executive changes and a week earlier said it would impose a hiring freeze, cut capital expenditures by $300 million and implement other cost-cutting measures.

"It's the indigestion period," says Carrie Lewis, an analyst with The Yankee Group. She says these companies are trying to find stable footing as they deal with market consolidation and a transition from dot-com customers to enterprise clients that demand more advanced services.

"There have been a lot of partnerships formed, mergers have occurred, and everyone is transitioning from a dot-com customer base toward an enterprise customer base. They're building out their offerings from a collocation situation to a managed services situation," she says. "There's a lot going on. Everyone is trying to do a lot of different things and it doesn't happen overnight."

In the past, Web hosting firms had plenty of business serving dot-coms. But, now, with many dot-coms going bust, hosting firms are turning their attention to corporate customers, which are feeling the pinch of a tight economy and may be reluctant to outsource. As a result, the once cash-flush hosting companies are forced to pull back, analysts say.

"Companies that had been growing at tremendously high rates, are running into a brick wall of tougher sales and diminishing demand," says Joel Yaffe, a senior analyst at Giga Information Group.

There's no question Web hosters are making some inroads with the enterprise market. Exodus, for example, says corporate customers now represent 62% of its monthly recurring revenue and bookings, compared to 44% a year ago. But that doesn't mean cuts aren't necessary, Lewis says. She says any organization not thinking about cost-cutting, streamlining operations and enhancing services is going to be in trouble. She predicts most hosters will put off data center buildouts in the near future.

Aquisition season

Analysts say Exodus seems to be the strongest of all the stand-alone Web hosting companies, although its acquisition of GlobalCenter pulled down its first-quarter numbers.

Still, Yaffee predicts corporate customers likely will be more willing to outsource with a company they know and trust -- such as an IBM or an AT&T -- rather than an independent Web hoster with a shorter track record.

Fleeing executives

CEO Ellen Hancock says Case and Brown left for personal reasons, while Casey's departure resulted from organizational changes stemming from Exodus' acquisition of GlobalCenter and its focus on the global marketplace.

Casey's duties will be split between Hancock and other executives, including Laurie Priddy, former COO of GlobalCenter, Hancock says.

Dick Stoltz, who has been a senior adviser for strategy and finance at Exodus since he stepped down as CFO and COO last year, will serve as CFO until a permanent replacement can be found, Hancock says.

Loudcloud, a managed infrastructure provider that doesn't own its daata centers, also announced cost-cutting measures last week, including a 19% reduction of its staff, or 122 positions. The cost-cutting measures will help Loudcloud "reach cash flow breakeven" with its existing resources, company officials said in a statement. The cuts follow Loudcloud's disappointing IPO in March. The company says the cuts won't affect its customer support or research and development efforts.

Exodus: www.exodus.com; Digital Island: www.digitalisland.com; Loudcloud: www.loudcloud.com; Digex: www.digex.com

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