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Exodus joins "old economy" suitors

Demand for high-end Web hosting services is expected to quadruple within three years as "old economy" companies embrace the Internet, says Exodus Communications' CFO.

Demand for high-end Web hosting services is expected to quadruple within three years as "old economy" companies incorporate the Internet into their business models, said R. Marshal Case, chief financial officer of Exodus Communications.

By 2003, the total market for Web hosting will reach $14.6 billion, with high-end services accounting for $4.6 billion. In 2000, the hosting market is expected to reach $3.5 billion, with high-end hosting accounting for about one-third.

Santa Clara, Calif.-based Exodus derived more than 50 percent of its 1999 revenue of $242 million from companies on the leading edge of Internet technology and e-commerce, such as Yahoo, eBay, Quote.com, Lycos and Pets.com. Less than half of its revenue came from traditional companies, such as Nordstrom, Merrill Lynch and USA Today.

But Exodus, which hosts more than 40 percent of the top 50 Web sites, according to research firm Media Metrix, expects about 80 percent of revenue within the next several years to come from old-economy companies.

Business-to-business (B2B) sites will account for less than half of Exodus' revenue, but the more complex B2B sites will take up more than half of the company's available bandwidth.

"We're expecting a major shift as traditional companies get online," Case said today at the Chase H&Q Technology Conference in San Francisco.

Case wasn't the only executive at the widely followed tech expo to sing the praises of the old economy--a stark reversal from past conferences, where tech executives would brag about the revolution they were fomenting at the expense of the button-down world of smokestack industries and traditional retailers.

But as the Nasdaq slumps and new-economy companies watch their market capitalizations and even venture funding dry up, many technology companies are switching gears to court old-economy businesses, which typically enjoy stable valuations and large cash reserves.

According to Sun Microsystems chief financial officer Michael Lehman, about 90 percent of Sun revenue comes from Fortune 1000 companies eager to build their e-commerce divisions and bolster their Internet infrastructure. Only about 10 percent of revenue comes from Internet start-ups and Silicon Valley dot-coms.

According to Chase H&Q chairman and CEO Dan Case, public companies represented at the seminal Chase H&Q Technology Conference this week are trading about 40 percent lower than their 52-week highs. Case and other experts predict a shakeout in the technology sector that will give small players few choices other than to be acquired or to go out of business.

Exodus is among the Internet companies facing ferocious competition without the benefits of profits. According to Chase H&Q analyst David Levy, earnings per share are expected to be negative through 2001. The company is expected to lose 89 cents per share in 2000 and 5 cents per share in 2001.

"We believe that investors have been concerned with the perception that Exodus would be unable to exploit the opportunity for edge content-distribution services," read a Chase H&Q report on Exodus. "Furthermore, we believe that, in time, companies such as Akamai and Digital Island could pose a competitive threat to Exodus."

Exodus' CFO is aware of competitive threats but hopes to use the company's market-leading position to lure new customers. As of March 2000, Exodus had more than 2,800 customers, generating annual revenue of $220,000 per account.

"That recognized leader position--it creates a pull to get new business, rather than just having to push to go out and get new customers," Case said.