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Hardware giants must compete for start-up partners

Hardware manufacturers IBM, Compaq, Sun Microsystems and Hewlett-Packard are setting aside colossal sums to attract start-ups and Internet companies.

A few hundred million dollars in loans to start-ups, a few hundred million dollars for marketing and capital investments--pretty soon, you're talking about real money.

Traditional hardware manufacturers IBM, Compaq Computer, Sun Microsystems and Hewlett-Packard are setting aside colossal sums to attract start-ups and Internet companies to their respective technologies as quickly as possible. Aggressive marketing is nothing new for these companies, but the size and scope of these programs seems to represent a change in the fundamental relationship between customers and makers of big iron computers.

With these funds, the companies hope to nurture the future eBays with expensive technology from the vast reaches of a multinational empire and hook them into long-term alliances and financial deals.

"They really have turned into technology venture capitalists," said Giga Information Group analyst Brad Day. "They review the business model, they review the management team, they review what segment of the market these customers have a value proposition in. Only at that point will these vendors engage."

IBM set aside $500 million in January, Sun $300 million two weeks ago, Hewlett-Packard $1.5 billion today and Compaq $1.15 billion today.

The programs variously involve discounted products and services, equity investments in start-ups, marketing help and consulting advice. But a key component is financing--money lent to companies that will be paid back with interest. The financing options are making the hardware companies look like auto manufacturers, which long ago discovered that loans are not only helpful to customers, but profitable as well.

"I think you'll start to see a whole new type of revenue stream specific to this type of the market," Day said. Not only will hardware companies see more money from financing deals, but their business partners will become new sales channels for their products.

The hardware companies are being forced to tie together once-disparate divisions of their vast organizations to respond to a demanding new type of customer. "These high-growth companies are expecting that your hardware supplier is more than your box vendor--it's your partner," said Technology Business Research analyst Lindy Lesperance.

The financial contortions required of these hardware companies may be taxing and painful at times, but the companies don't have a choice, analysts say. Those that don't adapt will expire, according to Aberdeen Group analyst George Peabody.

HP, Compaq and IBM seem pleased with the new world of increasingly interconnected business plans, happy to invest in start-ups that hold promise. Sun, in contrast, disparages ties it feels are too close.

Sun, though, can probably best afford to be choosy. It's accepted as the leader in the Internet area in revenue as well as in name recognition. The company has strength both with the slim servers sold in large numbers to handle the front-end tasks of complex Internet sites, such as customer identification, as well as the more expensive and powerful back-end servers for data analysis. However, Sun, with its single collection of hardware, software and operating system, isn't as good a choice when a customer needs to mix several types of computers, analysts say.

The major targets for these initiatives are start-ups, the small companies today that could be the giants of tomorrow. The other targets are "application service providers" (ASPs), the companies that stack hardware in data centers to house computing applications for other firms. The ASPs themselves are luring both start-ups and established companies, dangling carrots such as reduced hassle and a faster time to launch.

"There's going to be north of 10 million square feet of data center built this year," Peabody said. "That's a lot of servers. You can understand why there's so much interest."

Dell has started its own hosting service and will begin backing ASPs with more vigor in early April, Day said. Dell's high-volume sales model meshes well with the ASP philosophy, he added. "They have the perfect historical background to do well in the ASP space," he said. In addition, Dell will release a new line of inexpensive "server appliances" at the end of the month during a meeting with financial analysts, sources have said. see related story: Compaq, HP, IBM vie for e-commerce niche

Financing will be key, and in this area, Sun is at a disadvantage because it won't be able to respond as quickly, Day said. HP, Compaq and IBM have their own financing operations, whereas Sun goes through GE Capital.

"That speed of the handshake is going to be a critical differentiator. Start-ups don't have time to wait," Day said. "HP can come in, do the assessment, and right there approve the financing terms, whereas Sun has to go through their third party."

Though the hardware giants won't throw money at Internet companies indiscriminately, the new financing methods are riskier, Peabody said.

The new era of tighter partnerships has forced the hardware companies to spend a lot more time evaluating their partners, Day added.