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Loudcloud sees rainbow after dot-com storm

But competition says chairman’s ideas are off-base

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SUNNYVALE, Calif. — The way Loudcloud Inc. chairman Marc Andreessen sees it, the economic pall hanging over the Silicon Valley is about to become even gloomier. And he couldn't be happier about it.

"A large number of companies are going to go under," Andreessen predicted. "And the companies that survive this are going to end up being very large in markets that are going to be very large. It's a golden opportunity from that perspective."

Not surprisingly, Andreessen believes his 20-month-old Web services firm will be among the survivors.

Andreessen was instrumental in introducing much of the world to the World Wide Web. As a student, he was part of a team that developed Mosaic, the first Web browser to combine graphics and text on a single page.

He helped start Netscape Communications Corp. in 1994 and gave the world its first commercial browser. Shortly after America Online Inc. bought Netscape in 1999, Andreessen left and formed Loudcloud.

The reasoning behind Andreessen's optimism goes something like this:

With about $200 million in the bank, Loudcloud has enough cash to remain in business for at least two more years. By that time, he believes, slumping rivals such as Exodus Communications Inc. and Metromedia Fiber Network Inc. will be long gone.

That would leave Sunnyvale-based Loudcloud to dominate the potentially lucrative market of developing and maintaining Web sites for other companies.

Loudcloud's rivals say Andreessen's theory is off-base.

Exodus estimates it will still have $200 million in cash at year's end — enough to carry the company through September 2002 when it expects to start making money.

Likewise, Metromedia says it will have enough money to survive through 2002 after it completes negotiations to borrow an additional $350 million.

"We are more in tune with the market than Loudcloud," said Richard Dym, Metromedia's vice president of marketing. "We wish Marc a lot of luck, but it looks like he has a tough row to hoe."

Wall Street isn't sold on Loudcloud, either.

Despite his track record as Netscape's co-founder, Andreessen had trouble persuading investors to buy Loudcloud's stock in an initial public offering earlier this year. To get the IPO done in March, the company had to slash its offering price in half to $6 per share. And the stock has bombed, plunging by nearly 70 percent in four months to around $2 per share.

In a show of faith, Andreessen spent $2.2 million to buy 1 million shares of Loudcloud from May 22 through June 21, in the process boosting his ownership stake to 10.1 million shares, or 13 percent. Andreessen said he may buy even more stock if the shares remain depressed.

Like many of its rivals, Loudcloud expected to be swamped by businesses looking for an independent contractor to manage their Web sites. Instead, an economic slowdown left Web hosting companies with too little business to support their overhead.

Loudcloud adjusted for the downturn in May by laying off 122 employees, about a fifth of its work force, in a move expected to save $60 million annually. But industry analyst Alexander Arnold of Adams, Harkness & Hill warns that Loudcloud remains "top-heavy in costs."

Arnold said Loudcloud's overhead is meant to accommodate $300 million in annual revenue.

The company's revenue will reach $54 million in the fiscal year ending in January 2002 and $125 million in fiscal 2003, predicts industry analyst David Readerman of Thomas Weisel Partners. Those revenue estimates are down dramatically from his previous projections of $76 million in 2002 and $211 million in 2003.

Meanwhile, Loudcloud expects it will continue to add to the $299 million in losses accumulated since the company's inception in November 1999.

Despite the current downturn, Loudcloud is betting the Internet's continued growth will prompt more and more companies to increase their online presence.

"In general, companies are slower to pull the trigger on their buying decisions than a year ago, but there are a lot of deals out there that someone is going to get over the next six to 12 months," Andreessen said.

Loudcloud and its competitors are trying to persuade companies to hire outsiders to manage Web sites, rather than build an around-the-clock information technology staff internally to handle the task.

"The concept is a good one because managing Web sites is an increasing point of pain for companies," Arnold said. "There is a real skill gap opening up. Eventually, it's going to be a huge market. The only question is how you get from here to there."

Loudcloud's message already has resonated with a number of major companies, including Ford Motor Co., Nike Inc., Fox Broadcasting Co. and Blockbuster Inc.

Although Andreessen is Loudcloud's chief dealmaker, he isn't the company's chief executive. He happily turned over those duties to fellow Netscape alumnus Ben Horowitz.

"It works very well," Andreessen said. "My ego is in check. The last thing I want to do is be CEO of this company."

What Andreessen really wants is for Loudcloud to last longer than Netscape, which was sold to AOL four years after it started.

"It turns out the hardest thing to do in the Valley is to build a company that is still going to be in business 10 years later," he said. "Three, four, five years is not that hard. If you are still standing in 10 years, then you win almost by default because nobody else is around. It's just so hard to get there."