As it looks to prove its business model amid financial weakness, Loudcloud (Nasdaq: LDCL) is fighting not only the clock, but also a host of small and large competitors that want a piece of the outsourced management and maintenance of corporate networks.

In what some analysts consider nothing short of an information technology revolution, data center operators, telecommunications companies, systems integrators, and private startups are rushing to market with software packages that automate administration of the software and servers that run the networks of both small and large companies.

"It's the biggest shift that we've seen since the consolidation of telecommunications," says David Tapper, who follows the Internet infrastructure management industry for IDC, an industry consultancy. "We're seeing the marriage of information technology with telecommunications."

It's a powerful message that hasn't been endorsed by the public markets. Early providers of automated management tools like Loudcloud, which makes Opsware, and Genuity (Nasdaq: GENU), which sells Black Rocket, have seen their stock prices flounder as investors wonder whether they'll have sufficient funding to be part of the revolution.

Despite gushing approval from Loudcloud's IPO underwriters on Tuesday -- lead manager Goldman Sachs put the stock on its "Recommended List" -- the company's shares have been unable to gain any ground in the public markets.

"Loudcloud has been a pretty good slap in the face," says Bernice Behar, manager of the John Hancock Small Cap Growth Fund, which owns shares of Loudcloud. Ms. Behar bought in at the offering price because the stock priced at a severely discounted level of $6 a share.

Loudcloud's share price has fallen 20.7 percent to $4.31 since Goldman Sachs, Thomas Weisel Partners, and Epoch Partners initiated coverage of the stock. Nevertheless, venture capitalists remain bullish on the sector. Telenisus landed a $45 million Series C round earlier this week; SevenSpace took in $45 million in its second round in February; and Inteq and SiteLite also are busy closing their second rounds of financing.

COMPETITION REIGNS OVER LOUDCLOUD The concern is not whether Loudcloud's solution works. The company reported revenue for its fourth quarter (which ended in January) of $8.9 million, a 94 percent increase from the previous quarter, and it has contractual bookings of $120 million, which will be realized by January 2003. The dilemma is whether management will be able to bridge the financial gap until the company turns cash-flow positive, which is expected to occur by July 2003.

"I don't think Global 2000 customers are going to buy into a completely automated solution," says IDC's Mr. Tapper. "Eventually, we're going to get to a standardized service, but Loudcloud may be ahead of the curve."

Loudcloud's ability to support its leased data centers, servers, and 586 employees will likely be the least of its challenges. With $243 million in cash as of March 8, the company probably wouldn't burn through its money until the end of fiscal 2003. The problem is, the lucrative nature of outsourcing has attracted the attention of much larger technology companies. Monthly service contracts that can exceed $200,000 per month for enterprise customers has attracted collaborative development efforts from Microsoft (Nasdaq: MSFT), Compaq Computer (NYSE: CPQ), and Intel (Nasdaq: INTC), as well as stand-alone projects from IBM (NYSE: IBM) and Sun Microsystems (Nasdaq: SUNW).

Recent alliances between these developers and telecommunications carriers to implement managed solutions for existing and new data centers underscores the potential of IT outsourcing. Within the past month alone, IBM and Qwest Communications (NYSE: Q), Sun and Sprint (NYSE: FON), and Microsoft/Compaq/Intel/EDS (NYSE: EDS) have all announced collaborations in this arena. Qwest and IBM, which agreed to build 28 new data centers over the next three years, will split the $5 billion of revenue the companies expect from the multiyear agreement.

That type of financial stability may prove to be the largest obstacle for Loudcloud and a host of privately held companies targeting the infrastructure management space. "You're outsourcing your business infrastructure, so you have to know that they're going to be around," notes Corey Ferengul, an industry consultant at the Stamford, Connecticut-based Meta Group. "Were telling our clients that you must have a guaranteed service contract of at least 12 months and assurances that they have enough cash to last 18 months."

ECONOMIC REALITIES Given the public market's demand for immediate profitability, smaller private companies have been tweaking their business models so they can become profitable sooner. To keep a lid on costs, Rancho Santa Margarita, California-based SiteLite funnels all of its business through an outsourcing agreement with Exodus Communications (Nasdaq: EXDS). Unlike Loudcloud, SiteLite isn't burdened with leasing the server and hosting space, but instead has teams that monitor customer-specific applications.

Although in-depth knowledge of a customer's software applications may not be scalable, the strategy makes operational sense to Exodus as it transitions from a co-location company toward lucrative value-added services. "One of the problems is that some of the managed service providers are trying to offer an extremely automated, one-size-fits-all solution," says Peter Fortenbaugh, senior vice president of strategic planning at Exodus. "The reality is that many of our customers have very large, complex Internet operations that require custom solutions."

Although Exodus has rolled out its own completely automated solution -- developed by Sun, Compaq, and Cisco Systems (Nasdaq: CSCO) -- outsourced relationships like the one with SiteLite reduce the company's reliance on in-house engineering talent and enable it to be quicker to market with a menu of managed services. Other Exodus partners include Peakstone for applications management and Mirror Image for content distribution.

Concentrating on monitoring a customer's existing applications, rather than forcing them to adopt a cookie-cutter solution, is seen as a more economically viable business model. Oakbrook Terrace, Illinois-based Nuclio, which has 70 clients, has followed that prescription to profitability. As a result of its unique position of being profitable, the company is looking to consolidate a crowded field of managed service providers (MSPs).

"We believe there's tremendous opportunity to roll up some of this industry," says Nuclio CEO John Jazwiec. "There's a lot of players going after a lot of business, but the reality is that you have to get to the $25 to $30 million per year run rate to cover the fixed costs of providing these services. We see a lot of people in our space that are running out of cash."

Having a cash-flow-positive parent in privately held Forsythe Technology to bankroll those acquisitions certainly doesn't hurt. And there are plenty of targets. At least 100 smaller MSP companies may have no alternative but to seek a buyer.

And unless Loudcloud can convince Wall Street that its execution is as good as its idea, it too may wind up as prey for a larger technology firm. Chairman Marc Andreessen has played this game before. Netscape, his last great idea, did wind up selling out to America Online, after all.