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?”

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