Compaq puts in $1.6b to join suitors courting start-ups

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.

Compaq has become the latest vendor to announce a wide-ranging 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 $1.6 billion ($US1 billion) to the service provider market this year. Of that amount, roughly $1 billion ($US600 million) will be loaned to start-ups and established companies for equipment, storage, software and related purchases. About $600 million ($US400 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 companies expect to rent applications from application service providers this year, according to a survey conducted last December by Evans Marketing Services in the US.

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," Joyce Tompsett-Becknell, an analyst at Aberdeen Group, commented. "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.

Compaq is hardly alone in its efforts to team up with Internet companies. Rivals such as Sun Microsystems, IBM and Hewlett-Packard all offer similar programs for dot-com start-ups and Internet hosting companies (see story at right).

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, according to Thomas Kucharvy, president of Summit Strategies, a US-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, he added.

"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 said.

Wooing the start-ups

Competition is hot amongst the major vendors as they scramble to grab a share of the burgeoning start-up market - and they're prepared to spend up big to attract a future eBay or Amazon.com:

* IBM established a $US500 million program to provide financing for IBM hardware, software and services to emerging Internet companies that have already completed their first round of venture capital financing.

* Sun Microsystems plunged $US300 million into its ‘iForce' program which offers start-ups discounted products, financing terms, co-marketing efforts and advice.

* Hewlett-Packard upped its investment in the ‘Garage' program for start-ups - an update of the ‘e-services' plan announced a year ago - from $US1 billion to $US1.5 billion.

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