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Andreessen's Change of Heart

In late 1999, when Loudcloud was about to launch, co-founder Marc Andreessen wouldn't tell anyone what the company would do. After assuring the press it wouldn't be a consulting company, or a Web hosting company, or an ISP, he unveiled Loudcloud as a managed services business in October 1999.

But with yesterday's announcement of a deal to sell its Web hosting business to EDS, while changing the company's name to its Opsware, Loudcloud decided it wasn't a managed-services company after all, but a regular software company.

The EDS of the Internet

Announcing the deal with EDS, Andreessen acknowledged Loudcloud had failed in its bold effort to break into the market for managing Internet services and compete with the likes of IBM and EDS.

"When we first started Loudcloud, we said we wanted to be the EDS of the Internet," he said on a conference call announcing the EDS deal. "Now, EDS will be the EDS of the Internet."

With IBM and EDS dominating the market, and Genuity entrenched in third place, Loudcloud simply did not have the size to compete in a depressed market for technology spending, analysts said.

"You kind of need scale to be profitable in the managed-services business," said IDC analyst Melanie Posey. "The problem a small company faces is not having enough feet on the street to market to enough customers. The advantage of an EDS and IBM is that they have this infrastructure in place."

According to Posey and other industry watchers, Loudcloud was caught in a bind: it needed to get big fast, just when the market began to deflate with the dot-com meltdown. The need for rapid infrastructure expansion gave Loudcloud a steep burn rate that made it appear a risky bet to potential large enterprise customers, said Joel Yaffe, an senior analyst with Giga Information Group.

"First of all, enterprises say, reduce my risk," he said. "You can't compete with IBM and EDS on a risk basis."

Although Loudcloud cut its quarterly burn rate down to $18 million to $20 million, the company's $94 million in cash reserves caused some trepidation in a very uncertain market.

"It's an acceptance of the fact that you can't compete against a $20 billion behemoth in a down economy," Yaffe said.

A Doomed Qwest

In order to give it more credibility in the market, Loudcloud went shopping for a solid partner to offer its managed services. The choice, in retrospect, was unfortunate.

In August 2001, Loudcloud signed a five-year deal with Qwest Communications. With Qwest's subsequent litany of woes, including suspect accounting practices, ended up looking like a liability, Yaffe said.

Andreessen admitted as much, saying yesterday that Loudcloud's deal with EDS would trump the Qwest relationship. "The market's changed a lot in the last nine months," he said. "Qwest's changed a lot in the last nine months."

The deal with EDS includes a $52 million, three-year licensing agreement for Opsware. EDS plans to begin using Opsware in its managed hosting business and eventually across EDS' 50,000 servers, 14 major data centers and 140 client-owned and regional data centers. According to EDS, Opsware could help it save up to $100 million.

With EDS, Opsware will have solid backing in the market. "EDS isn't going to go out of business," Posey pointed out. "The type of enterprises Loudcloud was targeting, they already know EDS."

Returning to its Roots

Nothing symbolized Loudcloud's software shift more than the decision to change its name to Opsware.

"That's the secret sauce," said Dana Tardelli, a senior analyst at Aberdeen Group. "All their intellectual property was around Opsware."

Andreessen painted the move as a return to his own experience building Netscape into a major software company, enabling Opsware to focus purely on the technology.

"They were always differentiating on the strength of their technology anyway," said Corey Ferengul, an analyst with Meta Group. "Basically, they're trying to turn it into a strength."

In addition to EDS, Andreessen said four other large companies had signed up to license Opsware. Posey said the company has a good chance to capture large enterprises with the flexibility and cost savings Opsware offers by automating hosting.

"At the end of the day, do you want to be realized for being the best at what you do," said Yaffe, "or do you want be an also-ran?"