I was just searching the web and came across this article mentions Loudcloud...............
Here is a very interesting statement from Jim Gant VP at IBM Global Services.
Gant says that IBM doesn't plan on buying any MSPs but could partner with some. "Loudcloud provides managed services at Exodus," he says. "It's not impossible they could do that with us."
A partnership with IBM would be a HUGE eye opener on Wall Street :-)
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Too smart for their own good
by Michael J. Ybarra
May 29, 2001
From the June 2001 issue of UPSIDE magazine
John Jazwiec, the CEO of Nuclio, walks into a room that has large windows overlooking the bleak landscape of suburban Chicago.
"The windows will be blacked out," he says. Plaster dust drifts through the air. Construction workers are hammering and banging a bland corporate office into a mini mission control.
In a few weeks, large screens will flash the statistics of websites around the world: visitors, congestion, traffic accidents -- everything that's happening to a customer's online business.
In favor of outsourcing
As the big bang of the Web continues to give birth to zillions of corporate sites, keeping an enterprise online and running has spawned a parallel universe of businesses that monitor and manage the Internet presence of other companies.
Simple Web hosting has evolved into complete Internet outsourcing, with an explosion of startups vying to handle the complex systems and the heavy traffic that has overwhelmed and crashed high-profile sites such as AOL Time Warner's (AOL) America Online and eBay (EBAY).
"Any serious business needs a Net presence," says Loudcloud (LDCL) CEO Ben Horowitz. "And it's just not rational for a company to reinvent all this infrastructure itself. It's like owning your own power generator or water system. It doesn't make a lot of sense to own it yourself."
Some companies, such as Loudcloud, offer complete packages of software and infrastructure that will get Web real estate for a company in a matter of weeks, for a monthly fee. Others sell specific monitoring applications or services, such as security and storage. Most call themselves MSPs, which stands for management service providers or managed service providers, although exactly what that means is up to whomever is throwing the term around.
"Everyone is saying they are MSPs," says Sharmila Shahani, vice president of marketing and business development at Totality, another startup. "But the level of what they do varies greatly."
MSPs galore
Last year, a handful of companies calling themselves MSPs bloomed into a hundred. The Meta Group expects that number to double this year and for the MSP market to reach $10 billion by 2005. This hasn't exactly escaped the attention of integrators, such as IBM Global Services (IBM), and Web hosters, such as Exodus (EXDS), both of which are making big plays in the management-service space.
IBM, for example, says it doubled its management-service business last year -- to between $700 million and $800 million, according to IDC -- and the company expects to keep doing so for several years.
While most individual MSP startups will probably fail, observers say the basic service model -- charging clients tens of thousands of dollars a month to run their websites -- will succeed.
"Not every company can be a technology expert," notes Treb Ryan, founder of SiteSmith. "It's like every company that wants to ship something having to become a trucking company. Nobody ships their own stuff, but, with the Internet, you are supposed to be a technology expert."
Management-service companies, he says, will eventually become ubiquitous. "Everybody," he predicts, "is going to run their architecture this way."
Traffic jams
In the spring of 1999, Horowitz found himself in suburban Virginia working for AOL, after the company purchased his employer, Netscape, the Silicon Valley startup whose Internet browser helped make the Web a mass medium.
Horowitz was in charge of Shop@AOL, the mall portal where users could click through to various e-commerce sites, many of which belonged to large retailers such as Barnes & Noble (BNBN) and Toys "R" Us (TOY). But, when AOL funneled its torrent of traffic to these online stores, their sites were swamped.
"Their sites would typically crash once we plugged them in," Horowitz says. "Most of these sites were poorly architected. We'd help them redesign, but they weren't ready to be customers or partners for a while. They were all doing just a real bad job of getting online. Everyone was reinventing the wheel -- load balancing, firewalls, clustering -- they all had the same problems."
Then, in September, Horowitz followed Netscape Founder Marc Andreessen -- who had become AOL's chief technology officer -- back to Palo Alto, Calif. They were joined by two other Netscapees, Tim Howes and In Sik Rhee, who also put in six months at AOL. The team decided to build a company that would make it easy to launch and run a website.
"The obvious way to build [this type of] company is to hire really good database administrators and have them run people's sites for them," Horowitz says. "But it's very difficult to scale; you have to hire people during the biggest IT shortage in history. That didn't seem like a good deal to build a company on."
An automated-software approach, they figured, would allow them to create a hybrid company that mixed technology and services. "What software companies did in their industry, we're going to do in a consulting business," Andreessen says. "It's a monster problem. When these systems don't work, you're on the front page of the Wall Street Journal -- for the wrong reasons. These systems have to work; if you're late on SAP deployment, no one notices."
Starting Loudcloud
And it didn't hurt that Andreessen's status as one of the Web's whiz kids guaranteed attention for whatever company he founded after Netscape, whose stock rocketed 169 percent on its first day of trading in 1995. Loudcloud raised $188 million in three rounds of funding, with the money coming from the founders and from Benchmark Capital, among other venture funds. The company's first customer went live in February 2000.
Loudcloud's IPO in March 2001 was one of the most eagerly awaited of the year. Unfortunately for those hoping that Loudcloud would rekindle the IPO market, the company's debut was tepid. After reducing the offering price from $12 to $6 a share, Loudcloud gained 3 percent on its first day of trading, closing at $6.16. This meant that the company wound up with a market cap of $450 million instead of the $1.3 billion it was aiming for when it originally filed to go public last year.
Still, raising $150 million in an anemic capital market was no mean feat, especially for a company that lost $58 million on $6.5 million in revenue for the quarter that ended on Oct. 31 -- by which time the company had already burned through $100 million. On May 24, Loudcloud closed at $4.38, with a market cap of $336.8 million.
By the beginning of 2001, Loudcloud had 46 customers -- mostly dotcoms, but also some more stable clients, like the Fox (FOX) television network. One client, Activa, went belly-up, and "they continued to pay us for three months after they went Chapter 11," Andreessen says. "We're the last thing anyone turns off. They unplug the refrigerator and turn out the lights before they turn us off."
Welcome to the party
The first time Darl Davidson heard about a job running an MSP, he passed. Davidson was a 23-year veteran of Electronic Data Systems (EDS), running a $750 million a year division that employed 3,000 people.
"No, thanks," he said, when a headhunter called him about becoming CEO at a startup called Mimecom. A while later, Davidson was in an EDS meeting when someone mentioned a number of niche companies to watch. Mimecom was on the list.
When the headhunter called back, Davidson listened more intently.
Last June, he joined the company, which changed its name to Totality in December and runs Kmart's (KM) BlueLight.com.
Totality, formed by a group of people from Four Points Partners, a consulting firm, raised $122 million in two rounds of funding. It had hoped to go public, but the chilly weather in the capital markets iced that idea.
Totality says it has enough cash to fund operations until mid-2002 and expects to turn cash flow–positive by the end of that year. The company, which has 200 employees, won't disclose what its revenue is, but says it should increase fourfold this year.
"Two or three years ago, the Web was a science experiment," Davidson says. "People weren't counting on the Web for their business. Now it's the supply chain. If your goods aren't at the plant, you could lose hundreds of thousands, if not millions, of dollars an hour. The Web has become truly mission-critical."
The startups keep coming
Plenty of other companies had the same idea. During the month after Loudcloud and Totality were born, so was another startup: SiteSmith. And, in January 2000, Nuclio was spun off from Forsythe Technology as a wholly owned subsidiary. Once again, the Internet seemed to be changing the way companies do business.
"The Internet is creating tectonic shifts in managing distributed, networked infrastructures," noted IDC Analyst David Tapper in a report last year. "The irony in these shifts is that they are moving management of traditional distributed-network and desktop systems away from the customer premise and back to the mainframe or 'timeshare' model of data center–based service delivery. However, the critical difference between the old mainframe model and this new data-center service structure is the centrality of the Internet as the conduit for service delivery."
Of course, both hosting companies and consulting firms are trying to fix the same problems. But companies have complained that hosters, such as Exodus, are filling football field-sized buildings with servers faster than they are building up their customer-service infrastructure.
"Web hosters are doing a really poor job servicing customers," says Forrester Research's Jeanne Schaaf. "Exodus has a ton of services ostensibly available, but it's still a do-it-yourself; it's the Home Depot (HD) of Web hosting. The customer has to pick the pieces and make it work together, and I don't think that works for customers. You end up leaving the customers to their own wiles. If the customers were that savvy, they'd probably do it in their own data center in the first place."
Indeed, early on, MSPs found that their biggest challenge was convincing companies that outsourcing site management was better -- and cheaper -- than doing it in-house. "Most customers don't have good insight into what it costs to run their sites," says Totality's Shahani. "They have a huge staff waiting for a fire to break out. We can run their site at 40 percent lower than what it would cost them."
And, while outsourcing is often a no-brainer, the MSPs are going up against established competitors, such as IBM and Exodus, for the business.
"MSPs have certain risks beyond those that are typical and obvious for new startup companies," noted Gartner in a January report. "To be considered by a customer, an MSP needs to provide a clear definition of services. MSPs have not proven that their respective business models or … technology are scalable, which should be a significant concern for prospective customers."
But SiteSmith's Ryan, who spent several years trying to keep customers' websites running at Frontier Global Center before it was acquired by Exodus, says the company's consulting background gives it a depth of experience that can be melded with technology to provide a stronger and more nimble solution than those that old-line firms can offer.
"We didn't have to do surveys or ask customers what they wanted; we'd been talking to customers for two, three years," he says.
"They wanted a stable infrastructure -- not the Andersen model: six months gathering system requirements, six months planning, then a phased-in integration. They wanted fantastically complex site implementations in a very short time. They don't want to know there's a load-balance issue or a firewall issue. They just want to know it's not an issue."
DOA in the NOC?
Last summer, the nascent industry formed a trade group, the MSP Association, with 18 members. Six months later, the group had 100 members. The big question is whether the organization will have more or fewer members in another year.
"There's going to be a tremendous shakeout," says the Meta Group's Corey Ferengul. "The end-user pool just isn't there to support 100 different companies."
Let alone the 200 companies that analysts expect to crowd the space this year. "My biggest challenge is keeping track of all the names," says Joel Yaffe, senior industry analyst at Giga Information Group.
"There are no companies that I can see, for sure, who are going to win big. So much money has been thrown at this market. Whether these guys are going to be around long enough to leverage is the challenge. They all have illusions of grandeur and want to become the next IBM or get bought out. For most of the startups, the challenge of scaling and making a real go of it is almost insurmountable. It's going to be tough to get your head above the noise."
MSPs have been growing like weeds: InteQ, Logictier, SilverBack Technologies, SiteAlert, SiteLite and SiteRock, among many others. And, if things weren't confusing enough, IDC is touting its own acronym, NIMS (networked infrastructure management services), to describe the space.
But the acronym most startups in the field have to worry about is IBM. "Our biggest competitor is IBM Global," says Nuclio's Jazwiec. "I think we'll see the bigger providers moving into this space. They see this as an appealing business and will go after it. But there is a large group of clients who want to be big fish in a smaller pond. Those clients will always go to us."
IBM, the giant
IBM doesn't break out revenue for Global Services, but IDC expects it to do more than $1 billion in management services this year. IBM Global Services says it has 10,000 customers and that 2,400 of its nearly 150,000 employees work in e-business hosting. It runs the websites for Macy's and the New York Stock Exchange.
"A lot of the smaller [companies] will be exiting the market," says Jim Gant, VP of e-business hosting at IBM Global Services. "It's a very fragmented market. You have to go 20 or 25 names deep to get to 40 percent market share. We are more than doubling each year, and we see that continuing unless the world comes to a screeching halt."
Gant says that IBM doesn't plan on buying any MSPs but could partner with some. "Loudcloud provides managed services at Exodus," he says. "It's not impossible they could do that with us."
Then there is Exodus, which acquired Global Center -- the Web-hosting subsidiary of network builder Global Crossing (GX) -- on January 10, 2001, in a stock deal originally valued at more than $6 billion.
Exodus, which reported $818 million in sales last year, says the combined companies will have 4,000 customers and more than $2 billion in revenue in 2001. Management services are important to Exodus because the margins are much higher there than in its core business space.
In the fourth quarter, for example, Exodus says management- and professional-services revenue broke $100 million, hitting 38 percent of sales, up from 33 percent a year earlier. "Managed services are our highest-margin offering," says Chairman and CEO Ellen Hancock, "with space close to it, followed by bandwidth. In the fourth quarter of 2000, hosting services represented 42 percent of revenues, while managed and professional services represented 38 percent of revenues in the same quarter."
Exodus says that more than 60 percent of its customers, including General Electric (GE) and Merrill Lynch (MER), opt for at least one management service.
And Forrester predicts that management services will make up 55 percent of revenue for Web hosters this year.
"Extending the range of services that we provide for our customers is a critical element to ensuring that we remain at the forefront of our industry," Hancock says. "Customers increasingly want our help in architecting and launching their Internet operations, as well as monitoring, managing and scaling these operations."
State of consulting companies
Yet another threat to the startups are the big consulting companies, which haven't gained much of a beachhead in the industry but could eventually launch a forceful assault. Meta's Ferengul says that the big players, such as EDS, will eventually gobble up much of the business. "This space is a year old," he says. "They won't jump in until they figure it out, and then they'll jump in with their deep pockets and own it."
So far, there's been one big buyout: Last October, Metromedia Fiber Network (MFNX) purchased SiteSmith in a stock deal originally valued at $1.36 billion. SiteSmith had already raised $50 million in venture funding and attracted Mark Spagnolo, from Internet-backbone carrier UUNet, as its CEO. Early in the year, SiteSmith had approximately 170 customers, including Wine.com and Brooks Brothers.
"Metromedia was already our favorite network, but we still use other networks for about half of our business," Ryan says. "Now we can go into megadeals involving tens of millions of dollars in hardware that we couldn't afford before."
And the startups have started swallowing their rivals. In January, Nuclio made its first acquisition, buying the Revere Group's MSP business for an undisclosed cash sum. And CEO Jazwiec says the company is planning five to 10 more acquisitions this year. "We are currently in talks with almost every MSP about acquiring them," he says. "Of the 100 or so MSPs out there, we see one going away each day. I see four or five pure plays left by the end of the year."
"It's going to be very, very bloody," agrees Giga's Yaffe. "In six months, a lot of these guys are going to merge, be acquired, or fail. There are far too many companies saying the same thing."
The startups like to mention the Meta Group's prediction that all Global 2000 companies will hire at least one MSP by 2002, but the fact is that much of the market share is likely to go to a handful of well-funded companies, while the rest of the pack gets eaten or dies of starvation.
"It's an incredibly crowded and nondifferentiated field, and there's only room for two major players -- maybe three," says Paul Santinelli, the president of NoCpulse, a monitoring-software company that sells to MSPs. "It's a big dust ball. When the dust settles, those with intellectual property and a sustainable business in a poor capital market will be winners."
Prairie fire
Skokie, Ill., is as drab a suburb as you can imagine, and Forsythe Technology -- founded in 1971 as a computer-leasing firm -- is a pretty unsexy company. Forsythe's office is corporate-bland, and its employees wear suits and ties.
But, several years ago, something caught fire on the prairie. Forsythe expanded its service offerings in 1995, which has resulted in a fourfold increase in profitability. Last year, the private company hit $631 million in sales, and it expects to do $720 million this year. Four years ago, the company developed its own software tool for managing websites. Then, in January 2000, the button-down infrastructure company gave birth to a dress-down startup.
Nuclio, which had been operating for five years as part of Forsythe when it was spun off as a wholly owned subsidiary, set up shop in Oakbrook Terrace, outside of Chicago. Employees wear black. Overhead pipes are uncovered. Engineers paddle Ping-Pong balls back and forth at work.
In a year, Nuclio has gone from 10 employees and six clients to 100 employees and 60 clients. Revenue jumped from $2.9 million in 1999 to almost $33 million last year, and the company expects it to hit $88 million this year.
"We don't view our business as a technology company," Jazwiec says. "We're in the customer-service business. Our bet is we can use one Oracle (ORCL)-database administrator to service eight clients. We augment, not replace, their IT departments."
Jazwiec -- who was in charge of outsourcing at May & Speh and had been CIO of the savings and community banking group at Fiserv (FISV), a financial outsourcing company -- says the company is already close to breaking even.
"We started out the year, and no one knew who we were," he says. "We thought a credible business plan was more important than flash. A lot of people have spent money on billboards. We just don't understand why it costs $100 [million] for these other MSPs to make this a business. We just don't get it. Loudcloud has 400 people on a fraction of our revenue."
Forsythe has only put $10 million directly into the company, but it clearly has high hopes for its offspring. After all, it has 2,000 customers, of which only 20 percent to 30 percent are outsourcing their IT services.
"We started out as a leasing company that became an integration company," says Don McDowell, a vice president at Forsythe. "We expect someday to be a management service provider that does integration and leasing."
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