The Digital Depression: Perception vs. Reality

New research on Internet traffic by Dr. Lawrence Roberts raises fascinating questions about the state of the Internet and the demand for Web-related services.

The findings of Roberts' study, which he says is based upon actual traffic data supplied by major carriers, stand the conventional wisdom on its head. Rather than slumping, use of the Internet is growing faster than ever, according to Roberts' data, with traffic doubling every six months.

The data - and Roberts' credibility as one of the 'fathers of the Internet' - raises profound questions about the current Digital Depression. Is the complete shutdown in financing and business activity based upon flawed perceptions of the market? Is the downturn in our heads, rather than the 'Net itself?

Nah! Couldn't be. Or could it?

History makes us pause and wonder. Conventional wisdom has been badly wrong in this sector before. Consider the irrational exuberance of 1998-9, when analysts and industry executives repeated the mantra of Internet traffic doubling every three or four months.

With 20/20 hindsight, critics now claim to have known it was too good to be true. If so, why were so many really smart people taken in? Because perception and hype are powerful forces. In the absence of hard data - which the National Science Foundation stopped providing in 1996 - perception and anecdotal evidence have held enormous sway in analyzing Internet activity.

Is the same thing happening now at the bottom of the market? Is this an irrational overreaction to the downside? Are the business decisions of today based on flawed assumptions, just like in 1999?

Time will tell whether Roberts' data is reality-based or just another case of optimistic filtering of numbers. Rollercoaster rides can be alternately giddy and nauseating. But once you've bought the ticket and climbed aboard, you've really no choice but to take the ride. Keep your seatbelts fastened.

A Grim Week

"Other shoes" were dropping all over the place this week, as a number of struggling colocation providers and data center operators saw their efforts at recovery thwarted by the brutal operating environment.

Even the most pragmatic industry pros had to be taken aback by the succession of announcements this week. Here are the lowlights:

- Chapter 11 bankruptcies by Covad, Wavve and USDataCenters

- Rhythms' announcement that it will shutter its DSL service, leaving 83,000 customers less than a month to find new Internet service

- iAsiaWorks' news that it has cut 300 jobs and missed payments to creditors

- MFN's stock collapsing in the wake of the company's failure to obtain additional funding

- Exodus' stock rallying on rumors of additional funding, and then receding again when it failed to materialize

The connecting thread running through all these announcements is the difficulty of obtaining additional financing. Sources of funding are few and far between, and almost no one wants to risk throwing good money after bad in hopes of resurrecting a battered web infrastructure company.

It's no wonder that shares of Exodus, Internap, Loudcloud, Terramark, Equinix, Globix and Verado are all trading at $1.50 a share or lower.

How much more bad news is out there? Can these companies avoid the "death spiral" syndrome? If so, how? Share your thoughts and comments below.

Why Not File Chapter 11? A Few Million Reasons ...

In a column on CBS Marketwatch today (Aug. 14), reporter Bambi Francisco recommends Chapter 11 as a solution for struggling telecom companies. In her second paragraph, she urges Exodus, Level 3 and MFN to "seriously consider this legal tool."

"So, why not just file?" Francisco writes in her column, titled "Why Chapter 11 Can Be A Good Thing."

"Chapter 11 should be considered by many debt-burdened firms to help nudge the process of creating social value, not just shareholder value," she adds.

Why not just file? There are millions of reasons - known as investors and owners. Sure, skilled lawyers and executives can use the bankruptcy code as a tool to negotiate favorable resolutions to a company's financial challenges. Yes, filing sooner rather than later offers certain advantages.

But bankruptcy also allows a company to escape financial obligations that ought not be shed so cavalierly. When they accepted huge amounts of money from venture capitalists, bondholders and the investing public, these companies made commitments that they should work long and hard to uphold - rather than racing to escape them once the business environment turns difficult.

It's a hard thing for a company to recognize when it is past the point of no return and needs to file Chapter 11. Some battle on too long, leaving little chance of a successful reorganization. In hindsight, some executives may wish they'd acted earlier.

Chapter 11 is a better option than liquidation. When those are the remaining choices, companies must accept the inevitable and use the courts to try and salvage a future for themselves, their employees and their investors. But Chapter 11 is never a "good thing."

What's Missing From This Web Site?

On Tuesday, August 7, Massachusetts managed hosting provider USDataCenters filed for Chapter 11 bankruptcy. But you'd never know it from the company's web site. Three days later (August 10) the company's web site touts a March press release about the company receiving $10 million in funding. But there's nothing about its bankruptcy filing.

USDataCenters is hardly alone. COLO.COM's web site didn't include a reference to its May bankruptcy filing for at least a week after its May 8 filing. Layer One Inc.'s web site still includes no reference to its July 6 Chapter 11 filing.

Even in the current environment, no company is proud of filing for bankruptcy. Issuing a press release that details business difficulties is never a top priority. But at the same time, a company's bankruptcy is important information for potential customers and business partners - not to mention current customers. It's a pretty big detail to leave out of the conversation.

Should companies disclose Chapter 11 filings on their public web sites? Or is it okay to wait until a later time to disclose that fact with prospects? Let's hear from you. Add your thoughts in the comment form below or click the "comments" link.

Exodus Shares On The Move

What's happening with Exodus shares? There's plenty of speculation but no news, as volume and price are both sharply higher over the past two sessions. The surge in Exodus' stock followed the publication of two online interviews with CEO Ellen Hancock, who is vehement in her insistence that the web hosting company is on course and can become profitable before it runs out of money.

Hancock has said this before, of course. But on Friday, Exodus shares rose from $1.29 to close at $1.65 on volume of 54.4 million shares, more than twice the average daily volume of 21 million. Today (Monday) Exodus shares shot up further, reaching $1.96 before subsiding. By 11:30 a.m., more than 26 million shares had traded.

Some Exodus watchers speculate that this may mean news is in the works - either additional funding or even an acquisition. It could also be a "short squeeze." Exodus has become a favorite of short sellers, who hold more than 61 million shares (12.9 percent of the float). As Exodus rises, some of those short sellers may be buying shares to cover their positions - providing further upward momentum.

As far as the managed hosting industry is concerned, it's a relief to have people wondering why Exodus is gaining ground rather than losing it.