The Dark Side of Verio's Bright Growth Prospects

Rolling up a national patchwork of ISPs carries a hidden cost: customer satisfaction.
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The Roman Empire was a pretty hot little start-up in its day, a sort of political roll-up operation with a growth-by-acquisition strategy that served it admirably until about A.D. 225, when it had finally swallowed more territory than it could digest. As a result, it overran its logistical technology, choked on the Huns and lost the captive market underpinning its success.

The same centrifugal force threatens voracious

Verio

(VRIO)

, which came out of nowhere in 1996 to lay claim to the title of the world's largest hoster of Web domains -- some 260,000 at last count.

The problem at Verio, according to both internal whistleblowers and a veritable mob of customers, is a steadily worsening pattern of poor technical and customer support. These, combined with frequent email and network problems, are evidence that the roll-up ISP is struggling to keep its disparate units from spinning out of control. It's a situation that threatens its long-term strategy and future growth.

The tendency to come asunder is not surprising considering the company's operating history, which began when CEO Justin L. Jaschke -- then COO of

Nextel

(NXTL)

-- was asked by some of Nextel's original investors to put together a roll-up operation that would cobble together a national Internet company by snapping up local ISPs. Following that strategy, the new company, Verio, went on a three-year, $829 million Roman-style acquisition orgy, acquiring 56 ISPs, including the recent $100 million cash purchase of Alexandria, Va.-based

DigitalNation

.

But interviews with more than 40 Verio customers and several employees confirm the downside of that strategy and chronicle a litany of woes, including a consistent pattern of system glitches and outages, unsolved technical problems, billing errors and frequent dropped connections. These service woes are compounded by an apparently chaotic internal organization in which many employees of newly acquired ISPs don't even know who their supervisor is.

Verio President and COO Herbert Hribar denied that the company was experiencing a management meltdown or even that its customers had any unusual customer service problems. But that is disputed by the former equity holder in an ISP acquired by Verio who said, "I am ashamed for my former customers who we nurtured so carefully. I would get out of bed in the middle of the night to take care of my customers -- and now they're lucky to even get a reply."

The former owner, whose relationship with Verio prohibits public comments, was "appalled" at the recurring system problems, including mail servers that are frequently down and a lack of response to customer complaints. "I don't look at the Verio news groups anymore," the former equity owner said recently. "It's just too depressing."

According to one employee at a Verio operations center in the Southwest who spoke on the condition of anonymity: "Verio's executives are very worried about our declining customer satisfaction ratings," now less than 50%. "They added three folks to the Network Operations Center, then pulled the same number of people off the tech support phones to fill the quality assurance positions when we are desperately in need of people as it is."

Playing this answer back to Hribar, he initially said that the employee was "off base," but then replied, "I personally reversed that. It was a wrong decision."

He contended that Verio's customer churn rate is actually about 2% to 3% per month, which, if verified, would be half the industry average of 4% to 6%. But the low churn could be due to Verio's captive user base rather than real customer satisfaction. Analyst Steve Murray with technology research firm

International Data Corp.

noted that for the small business Web sites and domains that are Verio's specialty, it's a lot more trouble to move to another ISP than for the typical consumer dial-up account.

Hribar said he didn't have any idea what percentage of acquired customers is retained over the long haul. When asked for specifics on this and other issues raised by customers and employees, he repeatedly chimed: "Our goal is to deliver exceptional customer service to every customer, although we sometimes fall a bit short on that."

Just how short is a matter of some dispute: Ask John Kopf, a Silicon Valley Internet professional who spent 22 years as a senior staff scientist at online access pioneer

Tymnet

and a key member of

NASA's

next-generation Internet project. "I was with Aimnet since about '95. The service provided after Verio took over declined drastically," he said.

Among the numerous problems cited by Kopf -- ones that mirror hundreds of others expressed by customers on Verio's news groups: "The modem would connect, but I couldn't get anything. The mail server was always down and so were the newsgroups and Net." He said that his service contract allowed him 50 hours of connect time per month, "and I spent a lot of that time connected but unable to so anything useful."

Providing a fix to the problems may be complicated by a shell game reportedly played by tech support supervisors to make things look better than they really are to management. Verio employees said that supervisors frequently pushed to have open service tickets closed as quickly as possible -- because that makes it look as if the problems have been solved successfully. When there are too many unsolved tickets open, tech support employees complain (sometimes openly in emails to customers) that their supervisors frequently close those tickets arbitrarily, often before the problem is solved or sometimes even before the customer is contacted.

Hribar responded that Verio had instituted new procedures and that "we are not focusing on closing tickets like we were six months ago."

One Verio employee said that tech support's situation-monitoring system has spent a substantial amount of the past six months in a "deep red" condition, which indicates an unacceptable level of customer waiting time before they received service.

Hribar promised things would improve and said that Verio had increased customer and technical support personnel by 20% in the past 45 days. He also said the company was spending $30 million this year on things affecting customer satisfaction and that users would see an improvement by the end of 1999. "Come back and talk to us in six months," he said.

"I think that Verio is serious about being in this space," said IDC's Murray. "I don't think that they're just a roll-up operation out to flip the company. But if these problems are as widespread as these people say they are, then they must be addressed if they want to be successful in the higher-end services -- such as dedicated server hosting -- that they obviously want to offer."

Hribar also said that the company would be making fewer acquisitions in the coming months. "They will be fewer, larger and more strategic," he said. Judging from the white-hot comments coming from customers, news groups and Verio employees, the big question is whether customers will wait that long. As the Roman Empire's strength ebbed away, the Huns certainly did not.

Perdue helped launch three technology companies in roles ranging from marketing executive to chairman/CEO. He has written widely on technology for InfoWorld, PCWorld, Interactive Week, Forbes ASAP and many others. Perdue is also editor and publisher of

Wine Investment News. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time.