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Compaq, Microsoft cut hosting deal

The PC maker and software giant agree to each invest $50 million in Web site developer and application service provider Digex.

Corporate users have yet to fully embrace application service providers--service companies that will host and manage software applications remotely. But today's multimillion dollar investments in ASPs from Compaq Computer and Microsoft prove the concept is strong in the tech industry.

Compaq and Microsoft today announced they are investing $100 million in Beltsville, Md.-based Digex, an ASP, while Kohlberg Kravits and Roberts will invest $200 million in Intermedia, the majority owner of Digex. In addition, a consortium of banks committed $400 million in funding to Intermedia.

A substantial portion of the money will go toward building up a strategic early position in the ASP market, which many experts believe will explode in the next few years. With an ASP, corporate users no longer buy, upgrade or manage their own software applications. Instead, outside firms like Digex or even Compaq will handle those functions.

Although customers haven't completely converted to the concept yet, major technology powers are busily lining up as many relationships as possible and using their wallets to win friends. Microsoft has already made equity investments in USWeb/CKS and Corio.

Compaq, meanwhile, has made several ASP deals over the last several months, including a $500 million deal with Cable & Wireless and $2.2 million investment in FutureLink, which also agreed to use Compaq equipment.

Ironically, Sun earlier this week touted its ASP certification program, which is meant to show customers that the certified ASPs have a solid infrastructure for hosting Web sites, renting software over the Internet and other Web-based services. Two of the nine ASPs to be certified through Sun's program: Corio and Digex.

Digex, which develops sites and serves as an ASP, committed to using Compaq and Microsoft products and services as part of the agreement. Digex will be using Microsoft's Windows 2000 operating system and SQL Server database management software running on Compaq servers.

Nike, W.W. Grainger and Forbes are some of Digex's current customers.

Besides selling servers and services to ASPs, Compaq hopes to spur sales of iPaq, its easier-to-use PC introduced last November. Chief information officers are increasingly choosing smaller, simplified computers, such as iPaq, over network computers, said computer executives.

"We've had a lot of CIO interest" in ASPs, said Michael Takemura, a marketing manager at Compaq, on the day of the Cable & Wireless announcement in November.

ASPs business models differ significantly from the network computer concept, in that application processing is done locally. Users run the applications on their desktops, while management is a remote function. Network computers, on the other hand, run applications from a server, increasing the bandwidth and computing power required to maintain a corporate network.

The deal is not the first for Microsoft either, which, like Compaq, is looking to fill niches both at the back-end and in front-end product and services. Microsoft on Monday invested $10 million in ASP Corio and last month cut a deal with Commtouch for Web-based messaging.

While Microsoft would like Digex and other ASPs to use its BackOffice products, the company also is looking to bolster its efforts to rent Office and other software products online. Digex is one of Microsoft's partners in software rentals.

"Digex has been a great partner in the past, hosting 2,200 NT servers using Compaq hardware," said Tod Nielsen, vice president at Microsoft's developer division. "We'll continue to do more of these partnerships. ASPs are another outlet for our software."

The emergence of ASPs are making customers rethink the concept of the types of productivity applications they use.

"Bill (Gates) is seeing the capabilities of this," said Mike Weir, marketing manager for business PCs at Hewlett-Packard during an interview at Comdex last November. "That (ASPs) will be an issue for them...It levels the playing field for a lot of other product vendors."

HP, which has been working with Qwest on application rentals, is another big-iron servers and services company moving aggressively into the ASP market.

ASPs can change the computing playing field, potentially, because they shift application management over to an outside party. ASPs may play a large part in HP's future. Qwest and HP, in fact, are "looking at the whole possibility of getting information appliances to the end users," Weir said. "We want to be able to offer the whole thing"--a situation where the "client" computers would be preconfigured for the task at hand.