Under the three-way agreement, Qwest will set up seven "CyberCenters" running SAP's R/3 corporate software on HP computers. In return for handing out $500 million worth of products and services, HP will receive a share of the revenue from the centers, said Bill Russell, chief operating officer for HP's enterprise computing group.
The deal is Qwest's first push into the application service provider (ASP) market, in which companies pay outside providers to run complex and expensive-to-maintain software such as SAP's R/3, said Lew Wilks, Qwest's president of Internet and multimedia markets. Qwest will target the mid-market businesses, those will less than $500 million in annual revenues, he said.
Salespeople from Qwest, SAP, and HP will promote the service, Russell said.
The move bolsters HP's e-services strategy, a plan to become a more aggressive player in what it terms "chapter two" of the Internet, when more sophisticated online services are expected to emerge as companies build the online medium into their businesses. HP plans to benefit by selling hardware to support such services or by making money from the services themselves.
Because Qwest owns its own network and hosting facilities, the company can keep costs lower than some competitors, Wilks said. "We think we have the ability to perform at a cost level that is dramatically more efficient," he said.
Market research firm International Data Corporation projects the application service provider market will grow to $2 billion by 2003. However, the market still is relatively new and untested, and earning trust will be a long-term endeavor, IDC said.
"Having extremely reliable infrastructure will differentiate who people will trust to outsource services to," Wilks said.
Qwest plans to offer the service within the next 60 days, the company said. Three hosting facilities are in place in Weehawken, New Jersey, San Francisco, and Denver. The company plans to build another four in the United States by the end of the year.
The agreement will help SAP's effort to get smaller companies in new industries to adopt its software, SAP said in a statement.
"It's a big deal," said Goldman Sachs analyst Laura Conigliaro. "It's part of the bigger-picture move that HP has committed itself to...in order to raise its profile and presence" in the Internet world, she said.
Today's announcement parallels an April deal in which HP said it will host electronic commerce services for small and medium-sized businesses. Among other HP e-services deals are its partnership with Ariba, its $35 million investment in BroadVision, its $100 million investment in BEA Systems, and its $10 million investment in Security First Technologies.
The move also highlights the popular high-tech industry strategy of allying with other companies. Peoplesoft as well as competitor SAP have partnership programs with application service providers. Peoplesoft has invested in application services provider Corio, and Corio has an agreement with HP rival Sun Microsystems for its hardware.
Russell said that HP, with its e-services strategy, "is partnering with companies in a much less Switzerland kind of way"--in other words, it's striking alliances instead of taking a neutral stance.
Qwest is one of several new telecommunications carriers building state-of-the-art fiber optic networks. Qwest has completed 16,200 miles of its planned 18,500-mile network and expects to finish construction by the end of June. The company carries corporate data, long distance voice calls, and has a consumer Net access offering called Q.home.
However, Qwest does not offer corporate email service and, until now, had not entered the application service provider market. Wilks said the HP-SAP deal is just one in "a series of announcements" and hinted that email and customer relationship management (CRM) could be in Qwest's future.
Earlier today, Qwest competitor Frontier Communications, a telecommunications carrier and Web hosting company, announced it will begin offering outsourced email applications during the fourth quarter as part of a larger Internet Protocol-based application service provider strategy.
Frontier will target the largest Internet companies and Fortune 1000 corporations with unified messaging during the first quarter of 2000. The company expects to later roll out calendar and scheduling applications, shared workgroup applications, IP voice and fax, and streaming video services.
Frontier is going after the so-called utility application market because enterprise resource planning (ERP) products, such as SAP's, can be too costly and are not practical for many small- to midsized businesses, according to executives and analysts.