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Exodus is on fire, but will it last?

The Web hosting firm's customer roster reads like an Internet celebrity poll, it's stock is thriving, and the company is growing 40 percent quarterly--but in this intense sector, can the company keep it up?

In Web hosting, Exodus is on top of the world.

Exodus's customer roster reads like an Internet celebrity poll: eBay, Fox News and Sports, Lycos, MSNBC, Nordstrom, and Reebok, for starters. The company's stock is thriving, its market value is a whopping $5.42 billion, and the company has been growing 40 percent quarterly.

The Santa Clara, California-based company, which went public last February and has built 15 warehouses that house data servers used to connect thousands of surfers to Web sites, is partnering with database giant Oracle and providing hosting services to hot applications service providers like Corio.

Wasserstein Perella upgraded Exodus to a "buy" today, while analyst Richard Juarez at Robertson Stephens reiterated his "buy" rating as well, with a 12-month target price of 138 per share. The company is trading at 65.25 today.

But for Exodus and other hosting companies such as AboveNet, Digex, and Verio, the market is becoming increasingly crowded, making their future less certain as giant corporations with big war chests and unlimited network resources join the hosting fray.

The growing list of companies expanding in the hosting market includes Intel, which recently made a $1 billion investment in a Web hosting effort called Intel Online Services; AT&T, which said last month it plans to build 26 data centers over the next three years; and MCI WorldCom, which also recently said it will invest $100 million in a data hosting business.

Meanwhile, Frontier's GlobalCenter is building six more data centers to add to an already thriving hosting business, and GTE has an established business in GTE Internetworking. Though their business models may differ, all companies that offer hosting services are providing backup power systems, multiple connections to Internet backbones, and some duplicate servers.

Having an advantage
Telecommunications companies say they have an obvious advantage as hosts: they own the network required to make any hosting operation work. Analysts say companies like Exodus that are required to contract for network services to move huge amounts of data may end up increasingly passing those costs on to their customers

"Telecoms could clean up in this market because they're already [contracting] in the companies," said Bruce Caldwell, an outsourcing analyst at Gartner Group. "They're known and trusted by small- and mid-sized businesses." But on the flip side, Caldwell said he has doubts about whether carriers have the background or experience to manage huge data center operations.

J.P. Morgan financial analyst Mark Langner agreed, arguing that the companies that will win are focused on moving quickly to grab new customers and meet their Internet needs.

"Just because AT&T sets up a bunch of data centers doesn't mean you'll see mass exodus of Yahoos to AT&T," he said. "At the end of the day, the people who make that argument are stuck in telecom think: 'I have a network; therefore I am.'"

Nonetheless, these telecommunications companies are busy building warehouses because they do see profits. Forrester Research expects the hosting market to grow at a 76 percent compound growth rate to $14.6 billion in 2003 from $2 billion this year. Langner notes that just 4 percent of small- to mid-sized companies now have broadband connections, leaving a huge opportunity for hosting companies to rent space on their servers to this potential customer gold mine.

Spreading too thin
While Exodus is flying high in the hosting market, Forrester Research analyst Jeanne Schaaf said she would rather recommend Frontier GlobalCenter and MCI's Internet unit UUNet Technologies, among others, to corporate clients, arguing that successful hosting companies will marry their proprietary networks with Web hosting facilities. Online auction house eBay, which has had recent outage problems, may have been remiss in contracting solely with Exodus for hosting services since 1997, according to analysts. Ebay recently moved some of its servers to AboveNet's facilities.

"What we would say to a company like eBay is you don't belong [at Exodus]," Schaaf said. "You don't belong in a company that's renting real estate."

Exodus's chief executive Ellen Hancock bristles at the idea that Exodus had anything to do with eBay's recent highly-publicized outages, which have been attributed the eBay's failure to upgrade its own server software.

"In our entire history with eBay we maybe had two minutes of power failure," Hancock said. Ebay spokesman Kevin Pursglove said contracting with several hosts is a common move companies make to provide more support.

Hancock said that 100 percent uptime is difficult for any company to provide, though Exodus guarantees 99.97 percent uptime per month to its customers. When service levels are violated, the customer gets monetary credit, she said.

"Take a look at MCI WorldCom lines, Sprint lines, some of those go down," said Hancock, a former Apple Computer executive who joined Exodus in March. "The Internet itself isn't up 100 percent of the time."

Despite that fact, Schaaf argued that Exodus and others are at a disadvantage without their own networks.

"It doesn't make any difference whether you're serving a dot com or a Fortune 1000," she said. "You need both the hardware, the data center that's up 100 percent of the time, and a network that can easily ramp to the demand they serve."

The bottom line, other analysts say, is that the hosting market is huge and relatively untapped and hosting companies will continue to refine their hosting services, their reliability, and their targeted customer base.

Gartner's Caldwell predicts it will take at least two years for the market to shake out.

"There's a lot of [issues] in play right now and a lot of dust has to settle until its clear for everybody," he said.'s Melanie Austria Farmer contributed to this report.