Compaq Starts $1B Fund

FRAMINGHAM (03/27/2000) - The growing corporate interest in renting applications and infrastructure services over the Internet is driving the development of closer relationships between hardware vendors and service providers.

Last week, Compaq Computer Corp. became the latest vendor to announce a wide-range financial program targeted at companies that sell rented applications, systems management services, hardware storage and network bandwidth over the Internet.

Under the program, Compaq will commit more than $1 billion to the service provider market this year. Of that amount, $600 million will be loaned to start-ups and established companies for equipment, storage, software and related purchases. About $400 million is being earmarked for equity investments and partnerships with service providers.

Compaq's move comes as interest in outsourcing key information technology functions and technologies to service providers is on an upswing.

For instance, more than one-third of IT and development managers at large corporations expect to rent applications from application service providers this year, according to a survey conducted last December by Evans Marketing Services in Santa Cruz, California.

The strongest support for renting came from the professional services sector, which includes the insurance, legal services and real estate markets, according to the survey.

"The fact of the matter is that service providers are hot," said Joyce Tompsett-Becknell, an analyst at Aberdeen Group Inc., a consultancy in Boston.

"As their infrastructure demands grow, they are going to need more servers" than are found at even some of the biggest corporate customers, she added.

Broader Market

Compaq is hardly alone in its efforts to team up with Internet companies.

Rivals such as Sun Microsystems Inc., IBM Corp. and Hewlett-Packard Co. all offer similar programs for dot-com start-ups and Internet hosting companies.

But Compaq's offering is broader in the sense that it targets not only application service providers and Internet providers but also network and infrastructure providers, said Thomas Kucharvy, president of Summit Strategies Inc., a Boston-based consultancy.

"Equity investments have become absolutely de rigueur" for vendors selling in the service provider space, Kucharvy said.

Conversely, having an equity partnership with an established vendor gives Internet companies that haven't had initial public offerings added credibility, Kucharvy noted.

"Secondly, they want the vendor they are buying from to have some skin in the game - to really have something tied to their ultimate gain," Kucharvy added.

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