The Re-Changing of the Guard

Is the web hosting industry in trouble? On the contrary. This week we've seen three large deals that suggest it's as healthy as ever - if you're a huge brand name company. Think of it as the re-changing of the guard. The implosion of the New Economy Internet infrastructure companies is nearly complete, with Global Crossing a scandalized ruin and would-be survivors such as XO and Williams preparing to join about 45 of their competitors in Chapter 11.

Meanwhile, IBM, WorldCom and Sprint are giddily swimming in huge piles of web hosting cash as they book megadeals. IBM won a web outsourcing contract from American Express that will be worth $4 billion over the next seven years. Meanwhile, WorldCom signed a hosting/colo cross-marketing deal with Compaq, and Sprint lured WeatherBug, one of the top 50 Internet properties.

The chief remaining question concerns the size of the crumbs that will fall off these giants' table, what size industry this remaining business can sustain, and what kind of companies (beyond IBM, Sprint and WorldCom) can earn customers' confidence and business.

What's your opinion? Use the form below to share your comments.

A Global Mess

Unfortunately, the handwriting on the wall for Global Crossing has been writ large. Its legacy grows more troublesome by the moment, amid growing speculation that the scandal-plagued network service provider will be liquidated. When the company unveiled its reorganization, it was clear that the plan offered little of value to existing stakeholders. By following Enron through the bankruptcy courthouse doors, GX heightened Wall Street's bad case of jitters about accounting, bringing scrutiny and selloffs to any other major provider that relied upon IRUs for revenue.

The list of parties who have been burned by Global Crossing's collapse grows longer by the minute. According to a story in today's Wall Street Journal, many key investors see more risk in a reorganization, and want to cut their losses and liquidate.

"It is more than likely that Global Crossing will go into liquidation," Michael Kaufman, a fund manager with Capital K Partners in Boston, told the Journal. "And the sooner it does the higher the recovery for the creditors." GX had $1 billion in cash when it filed, but continues to hemorrhage cash and may lose as much as $500 million in the first quarter.

A liquidation of the huge network - which includes 1.7 million fiber miles, 249 points of presence in 25 countries and metro networks in 19 major cities - might save a few dollars for Global Crossing's lenders. But it raises fresh anxiety for carrier hotel and data center operators who have GX as tenants. Like they don't have enough headaches already?

Verado Goes Black

It's always a bad sign for a web hosting firm when its web site goes dark. That's the story today at Verado, which has shown few signs of life since a terse Jan. 4 announcement that it was laying off 63 employees. The managed hosting provider said in November that its was considering a prepackaged Chapter 11 filing, and would close six of its eight data centers.

On Dec. 20, Verado said President and CEO Thomas McGrath was no longer with the company. NASDAQ continues to list its stock, which was listed yesterday on the bulletin boards at 25 cents a share.

(NOTE: On Feb. 15, two days after this article was posted, Verado acknowledged it was filing for bankrupcty as part of a liquidation agreement with creditors. Rich)

The Denver-based company, previously known as First World, lost a total of $646 million. As of November, that investment yielded 123 customers who filled just 8 percent of the firm's data center floor space. Nearly half of those customers were in data centers targeted for closure.

During the past year, Verado changed its name and shifted its focus and customer base from colocation to managed services. The company also tried to raise its visibility with with sponsorship of NPR news programming. All things considered, it appears to not have worked.

Market Perform?

For some time, The Street.com has been an aggressive basher of all things telecom. Jim Cramer's anti-telecom tirades have contributed mightily to the "death spiral" mentality that has afflicted so many industry stocks. But an item that appeared on TheStreet.com this week is so astounding I simply have to pass it along.

It seems that Deutsche Banc Alex. Brown published a report at midday Monday which rated Global Crossing a "market perform." The problem, of course, was that Global Crossing had filed for Chapter 11 bankruptcy several hours earlier. The company's announcement made it clear that its shareholder equity would be wiped out in the reorganization.

I'm sure you'll be shocked (SHOCKED!!) to learn that Deusche Banc was among Global Crossing's underwriters.

In his book "Next," Michael Lewis examined the case of the New Jersey teen who faced SEC charges for an Internet "pump-and-dump" scheme, in which the 14-year-old touted penny stocks and made tons of money selling when the stock price was riding high. Lewis posed an obvious question - how is this any different from what Wall Street has been doing?

The defense has always been that Wall Street analysts have more credibility than a 14-year-old in an Internet chat room. But there's at least one major difference between research reports and the uninformed chatter on the message boards - even Internet touts can still type SELL, even when Wall Street seems to have lost the ability to utter the word.

As for the "market perform" ratings, let's hope the market fares somewhat better than Global Crossing.