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Analyst: Be ready to leave C&W data centers

On Dec. 8, Cable & Wireless USA Inc. announced its plans to sell its Web hosting and Internet solutions business, with an affiliate of Gores Technology Group being the likely buyer. Reston, Va.-based C&W hosts services for some of the country's largest corporations, including and eBay. C&W has also filed for Chapter 11 bankruptcy protection. Many customers may be wondering how best to handle the situation, what clues to look for and what to expect from the new owner. caught up with Ted Chamberlin, an analyst with Stamford, Conn.-based research firm Gartner Inc., to get some advice.

How large is its customer base here?
It is in the thousands. Exodus had one of the largest footprints, with 3,000 to 4,000 customers. But that number has been shrinking. Cable & Wireless USA had as many as 4,000 employees. Now that number is 1,700. After the sale, it will likely be more like 700. Who is most likely to be effected -- Web hosting customers, or those that use the company's WAN services?
This will have the biggest impact on the hosting customers. I feel for some of these customers. If they signed on with Exodus in 2000, on average they have had to change data centers two to four times [since then]. Many of the data centers that were built by Exodus were shut down. Then, when those customers were with Cable & Wireless USA, they had a tumultuous time. A lot of those clients are going to stay. They have put up with so much from the evil they know, they might be afraid to go to the evil they don't know. What is the current situation with Cable & Wireless USA?
In 2001, U.K.-based Cable & Wireless plc purchased the hosting and network assets of Digital Island [Inc.] and Exodus [Communications Inc.]. It combined those assets to form a separate company, Cable & Wireless USA. It has 25 to 30 data centers and network segments, and sells primarily to large multinationals and enterprises in the U.S. It bought the assets for $850 million, and is now selling them for about $125 million. What should customers keep an eye out for?
A lot of red flags have gone up already. These guys have lived through a lack of communication from C&W USA. C&W plc hamstrung C&W USA. In order to get information out to users, C&W USA had to get approval from C&W in London, and they did a poor job of alerting customers to what was going on. C&W USA now has John Dubel as chief executive, who was the CFO at WorldCom, Inc. during its restructuring. As far as I know, C&W USA is in rational hands. Things are being done to create a stronger company.

But the selling price is very low. $125 million is peanuts. The hard assets are worth more than that, let alone a client base that includes, eBay and Merrill Lynch. I'd say that there is a 50% chance that Gores Technology Group will get the company. What has been so trying about all the data center migration?
A lot of people chose Exodus or Cable & Wireless USA because of the location of the data center. Many companies looked for a date center that was nearby, that they could drive to in 15 or 20 minutes. Then, later, Exodus or C&W USA may have shut down that data center and moved its customers from a data center in, say, suburban Chicago to, say, Dallas. For those customers, a big reason they signed on in the first place was the proximity of the data center, and now it is thousands of miles away. Changing vendors again is just going to be another headache. It is hard enough to maintain the status quo in IT, let alone a planned migration. What is its difference between Cable & Wireless plc and Cable & Wireless USA?
Cable & Wireless plc, the British parent company, is still selling in the North American market. It has hosting and IP divisions, and still maintains five network nodes here. It is not pulling out of the U.S. market. Should C&W USA customers start looking for new providers?
I think it would be wise to have an exit plan. A lot of customers have had one on tap for a while. They should have contingency plans and should be talking to competitors to find out what the going rates are. Companies should be ready to move, but should not jump yet.


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Should companies be concerned about their contracts?
A lot of companies signed on with Exodus in 2001 and were paying a premium. For example, in a data center in the year 2000, floor space sold for $140 per square foot. Today, that [space] is going for $35 per square foot. A lot of those contracts will be coming up, and companies will be renegotiating. I'm sure the large anchor tenants are getting great deals. C&W USA may be looking to get rid of a lot of the mid to large size companies that are not using a lot of managed services.

Also, if a company is paying less than $30 a square foot or under $100 a megabyte, that is too sweet of a deal and they should watch out. One thing that can happen is that the bankruptcy court can step in and start looking at contracts in an effort to make the company more profitable, and that can create hell for clients.

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