Tech Savvy
Exodus Blindsides Hope of Corporate-Focus Success
By Jim Seymour
Special to TheStreet.com
6/20/01 12:57 PM ET
URL: thestreet.com
Boy, was I wrong about Exodus (EXDS:Nasdaq). You know it: the high-price/high-service/attitude-with-a-capital-A hosting outfit. The one that fell 25%-plus Wednesday morning, to a little over $2 a share.
The same stock that was trading at $69 last September (yes, September, long after the April massacre)? Yep, same one.
My thesis -- and the company's business plan -- was that by focusing on corporate Web site hosting rather than on the tenuous dot-coms for its customer list, Exodus would lock in its future. By offering super-secure server farms, reliable power no matter what and rock-solid customer service, Exodus could get away with its sky-high rate card and the snooty attitude of its sales reps.
Sorta the Bentley of hosting companies. And just the kind of premium-price/premium-service play that would attract multitudes of not-so-price-sensitive corporate customers for whom keeping their Web sites up on a "high-availability" basis made the pricing and attitude tolerable. The class act in the business, etc.
Or so we thought. At least, so I thought.
Turns out the market didn't agree. Exodus is now beset by a number of very, very difficult problems, some but not all of its own making:
Beyond Co-location. The hosting market has veered sharply toward what's called "managed hosting," as opposed to the bare-bones approach known as "co-location." In the latter, the host just provides space on a shelf or rack, or in your own cage, in its facility, for your server or servers, plus a fast connection to the Net. You do the rest.
But it turns out that many more customers are interested in the former approach, "managed hosting," under which there's not only a tenant-landlord relationship, but also one in which the hosting outfit provides many additional services.
Exodus is pushing hard now on managed hosting and says about two-thirds of its customers take some level of service beyond simple co-location. That's not good enough: It's the full-bore managed-hosting outfits that are doing well now. Exodus is very late to the party.
Overcapacity Blues. Consider this sobering statistic: According to CIBC analyst Stephen Murphy, only about 22% of all contract data-center (read: hosting) space in the U.S. will actually be rented to customers this year, leaving a 78% overhang as a drag on the market.
Seventy-eight percent? Can you imagine what that has done to hosters' rate cards? Right: prices are plummeting ... and there's no relief in sight. If these expensive data centers Exodus and others were last year racing to build now stand, on average, more than three-quarters empty, Let's Make a Deal pricing is going to be around for a long time to come.
Meanwhile, Exodus is continuing to build out data centers -- it just opened new sites in Dallas, Amsterdam and Paris -- and says it's actually raising prices. Huh?
With well over 5 million square feet of expensive high-tech space in 40-plus data centers and about 4,000 employees worldwide, Exodus is wildly overbuilt and overstaffed for a market suddenly questioning every nickel.
Exodus' Executive Exodus. In recent months, Exodus CFO Marshall Case has left, as have COO Don Casey and Executive Vice President Beverly Brown. No matter the quality of their replacements, that hurts.
So we shouldn't be surprised at Exodus' steep slide. We were fooled. I was fooled. Exodus, hooked on growth, was unable to track market realities in its business and couldn't -- or at least, didn't -- get off the build-them-and-they-will-come train in time.
And now trades around two bucks. Two lousy bucks.
I'm still unwinding my own once-large Exodus position. An expensive education, indeed.
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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long Exodus, although positions can change at any time. Seymour does not write about companies that are, or have been recently, consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites you to send your feedback to Jim Seymour.
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