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Exodus battles to keep customers

A day after the Web-hosting company filed for bankruptcy, executives are seeking to reassure some of the Internet's biggest names that their Web sites will remain functional.

A day after the company filed for bankruptcy, Exodus Communications executives sought to reassure some of the Internet's biggest names that their Web sites would remain functional.

Executives for the Web-hosting company made personal phone calls to top customers, created a hotline and held a conference call. The message: "Exodus is not going out of business."

So far, the effort appears to be working. Publicly, several customers said they would stick with Exodus. Privately, however, some said they were considering alternative providers and contingency plans in case the company doesn't make it.

Many Exodus customers contacted didn't want to talk about the company's business or their own plans largely because they "didn't want to kick them in the teeth," according to one e-commerce executive, who admitted his company is worried about Exodus and "looking around the hosting landscape."

Exodus' viability is no small matter for its customers, which number more than 4,000 and depend on Exodus to host their Web sites. Exodus provides Web-hosting and related services to some of the most heavily trafficked sites on the Web, including Yahoo, eBay, CBS SportsLine, Google and Compaq Computer.

The company filed for bankruptcy Wednesday, saying the move was the best way to maintain service to its customers. In addition, Exodus said it secured $200 million from GE Capital to ensure it would be able to keep its business running.

That cash infusion from GE Capital along with reassurances from executives have kept Exodus customers in the fold. Nevertheless, the company may soon find itself in a bind. To restructure through Chapter 11 bankruptcy and emerge a viable company, Exodus has to keep its customers. And that may take some convincing.

"Exodus has to grow their customer base," said Carrie Lewis, an analyst with The Yankee Group. "The last thing they can do is to let customers walk. If customers walk, they can potentially go down."

Assuring words
Realizing it must keep its customers if any financial restructuring is going to work, Exodus has been calling its customers to reassure them.

Dan Leichtenschlag, chief technology officer for CBS SportsLine, said Exodus CEO William Krause called him about an hour after he announced the hosting company's bankruptcy.

Exodus has more than 4,000 customers that depend on it for Web hosting and related services. Here's a partial list:

AC Nielsen, BestBuy.com, CBS SportsLine, Compaq Computer, eBay, FleetBoston Financial, General Electric, Google, Handspring, L'Oreal, MSNBC.com, Microsoft, Merrill Lynch, OfficeMax, Reebok, Starbucks, Sun Microsystems, USAToday.com, Yahoo

Source: SEC filings

"It was a good call assuring me the company had enough cash to maintain service," Leichtenschlag said. "They've done a good job of keeping us in the loop."

The company also set up a restructuring information center on its Web site, including a hotline for customers, complete with frequently asked questions about the bankruptcy.

"Let Exodus be clear that there will be no disruption to the delivery of customer services and support," the company said on its restructuring hotline. "We will earn and re-earn your business. Chapter 11 means reorganization, not liquidation."

On Thursday, Krause--on the job for almost three weeks since former CEO Ellen Hancock's departure--followed up with a conference call to customers.

"I've spoken with 26 customers over the first 18 days of being here and consistently heard three things," he said. "Our products are better than our competitors'; you're nervous; and in order to mitigate risk, many of you are considering contingency plans. Being a businessman myself, frankly, I would do the same thing."

He added: "There are no words I can say today that will flip a magic switch in your head and make you say, 'Phew, I don't have to worry about Exodus anymore.' It is important to emphasize that Exodus is not going out of business."

Sticking around--for now
Exodus customers such as Yahoo said Thursday that they are standing by the hosting company. Krause spoke of an "outpouring of support."

Although that may be true, there is evidence there are subtle changes taking place among Exodus customers.

Customers that don't already have contingency plans to replace the hosting provider will create them, making it easier to switch hosting providers at some point, Lewis said.


Gartner analysts Ted Chamberlin and Eric Paulak say the No. 1 target area will be Exodus' network services, where it largely buys and resells services of other providers.

see commentary

For now, many customers said they are sticking with Exodus because there's a lot of pain involved with swapping data centers. Changing data centers isn't as easy as swapping PCs. With better planning, these customers could reconsider, analysts said.

Leichtenschlag, who noted that Exodus has been "a great partner for three years," said he would be prepared to switch to another provider if the company went under.

SportsLine has five data centers: one in-house, three with Exodus, and one with WorldCom's UUNet. Leichtenschlag said the UUNet data center was expected to be phased out, but considering Exodus' bankruptcy announcement, it'll stay for a while.

"I have no desire to pack up my data center, but we do have contingency plans," he said. "I'll need a good reason to switch, but I'd be foolish not to be a little nervous."

Steve Baisden, a spokesman at OfficeMax, echoed that sentiment. "If Exodus goes out of business, we'll switch providers," he said. "But so far the service has been good, and we'll continue it for the intermediate-term future."

Poaching on deck
Leichtenschlag, who already had proposals from Exodus rivals, and other customers are likely to hear from established telecommunications companies, which have been circling Exodus for months.

Companies such as Qwest Communications International, WorldCom's UUNet, AT&T and Sprint are likely to try harder than ever to lure Exodus customers. Toss in competition from Baby Bells, boutique providers and regional telecom companies, and the hosting company will have its hands full.

"Exodus customers are going to see some sweet deals coming," Lewis said. "For two to three years, a lot of telecommunications companies have just been waiting for this."

Exodus rivals such as WorldCom and Qwest both said Thursday that they have seen an increase in demand for hosting services because of the economic struggles of hosting companies.

Ron McMurtrie, vice president of global e-services at WorldCom, said it's too early to tell whether his company will gain at Exodus' expense.

Calls about WorldCom's hosting services have increased, but that may be largely due to the Sept. 11 terrorist attacks in New York and Washington. "A whole lot of customers are looking for a safe haven, and WorldCom is well capitalized," McMurtrie said.

Can Exodus be saved?
Not surprisingly, Krause fielded a host of questions about whether Exodus could survive its bankruptcy restructuring.

His answer was an emphatic "yes," but analysts aren't so sure. Krause argued that the bankruptcy would allow Exodus to restructure its debt, write off unused facilities, and scrap expansion plans. He said that those moves coupled with layoffs could help the company eventually turn a profit.

Alexander Arnold, an analyst with Adams Harkness & Hill, agreed that Exodus' situation is "salvageable," but noted that much of the company's future "will be left largely in the hands of its creditors."

The big question revolves around how much debt will be restructured and whether it'll be enough for the company to keep running. Exodus did announce that it raised an extra $200 million, but it also has shown it can burn through $300 million in a mere six months. The company ended the second quarter with $616 million in cash and is still looking for funding.

Krause said Exodus is working hard to submit a restructuring plan and hopes to have one in four to eight months. In the meantime, he told his customers that Exodus will honor all outstanding contracts.

"If you felt secure in doing business with Exodus six months ago, you should feel even more secure doing business today," he said.