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Compaq investing in start-ups

Like Intel and Microsoft, Compaq is making equity investments in an increasing number of start-ups.

NEW YORK--As part of its goal to become a world-class computing power, Compaq Computer has joined the ranks of Intel and Microsoft in making equity investments in an increasing number of start-ups to strengthen the PC market.

The practice, which has become a sign of industry statesmanship, is essentially aimed at an indirect but important goal. The computing leaders intend to benefit from their investments eventually by making the market hungrier for their products.

In Compaq's case, the Houston-based PC maker is trying to seed the development of compelling applications and communication services--especially since its megamerger with Digital Equipment, the deal that propelled it to stratospheric industry status. In turn, Compaq wants these applications to compel consumers to buy more powerful, higher-profit-margin PCs.

Compaq and Microsoft, for example, are negotiating to buy respective equity stakes in E-Stamp, which is creating an Internet-based system for refilling postage meters over the Web, according to sources close to the company. Compaq also recently made investments in Inex, a vendor of electronic storefront software.

These deals complement an announcement earlier in the week that Compaq and Microsoft had invested $425 million in high-speed cable Internet provider Road Runner.

The PC maker is also cutting content deals with a wide range of Internet companies that could eventually account for up to $4 billion in annual revenue, according to optimistic company projections.

"We've taken an interest in a number of companies," said Mike Winkler, senior vice president of the PC products group at Compaq.

Like others at Compaq, Winkler declined to discuss any particular deals, but he did confirm that the motivation in start-up investing comes from a desire to enhance PC offerings, especially for consumers and small businesses. One particular area of investment has been at companies such as Time Warner's Road Runner, which are trying to improve Internet access.

"On the consumer side, the killer app is the Internet. The Internet has become a fact of life," he said. "But on the consumer side there is a bottleneck. Why do you need more power when you don't have the bandwidth?"

The content deals will have a more direct impact on their bottom line. Under these agreements, Compaq creates easy-to-use access paths on its computers to allied Internet services. Partners include America Online, which is providing Compaq buyers with AOL access; GTE, which is creating a service with Compaq for web site hosting; and NovaStor, which is offering a data backup service. In another deal, Compaq will team with UPS to deliver, a secure electronic document exchange service.

If a customer selects one of the services, Compaq receives a percentage of the revenue generated by a customer subscription, according to the company. Compaq's cut can also be calculated in different manner, depending on the deal, Winkler said.

Although admittedly optimistic, Compaq officials speculated that content deals on the consumer side could amount to $1 billion in revenue for Compaq by 2000. Revenue from the small and medium sized business offerings could potentially reach $3 billion.

Roger Kay, computer analyst for International Data Corporation, said these deals will help Compaq become more attractive to users. But he cautioned that too much emphasis on venture capital investing or "tying" deals could distract Compaq from its core business at a time when the company is already facing gargantuan management tasks since its merger with Digital Equipment.

"These sorts of deals cover all aspects of the PC market," Kay said. "Compaq does have an issue on managing a large number of assets, particularly the Digital acquisition. They need to add revenue but add revenue profitably."