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Hewlett-Packard spends big to woo start-ups

Less than two weeks after Sun announced a $300 million program to woo Internet start-ups, rival Hewlett-Packard has its own plan--and five times the funding.

Less than two weeks after Sun Microsystems announced a $300 million program to woo Internet start-ups, rival Hewlett-Packard has come back with its own plan--and five times the funding.

The HP "Garage" program, an update of the "e-services" plan launched a year ago, bears many similarities to Sun's iForce program. Both lavish start-ups with discounted products, financing terms, co-marketing efforts and advice. HP will sink $1.5 billion into its Garage effort this year, a 50 percent increase over the $1 billion earmarked last year, said Nick Earle, president of HP's unit.

A billion and a half bucks may sound like a lot of money, but HP doesn't have a lot of choice. Analysts agree Sun is the company to beat when it comes to servers to house Internet operations, and it's taking aggressive measures to stay in that position.

HP will announce the Garage program tomorrow, beginning with a new series of advertisements featuring the animated Wallace and Gromit characters, Earle said. The ads are the second phase of a $200 million campaign chief executive Carly Fiorina announced in November.

HP, Sun, IBM and others are scrambling to attract start-ups as fast as possible, and not only as customers that could be giants in the future Internet. Traditional companies such as Sun, HP and IBM are eager to trot out start-up partners to demonstrate that they understand the Internet economy and deserve a place in it.

With HP and Sun, the effort has turned into a spitting match.

HP and Sun in particular have been trading barbs over each other's business methods. Sun CEO Scott McNealy has accused HP of engaging in "unnatural acts" by taking equity investments in its Internet partners and sometimes skimming a fraction in their revenue stream. McNealy insists Sun takes a more neutral, hands-off stance.

HP's Earle counters that with 350 to 450 e-services deals signed so far, HP is having no trouble finding business partners who see the Internet its way. "It's not an unnatural act unless you don't know how to do it," adds Craig White, general manager of HP's financing group.

Of the $1.5 billion HP will spend on Garage, about $225 million will be used for investments in start-ups, Earle said, with another $450 million to $600 million for financing options. HP will give approved start-ups $2 million in financing, with the company not having to pay anything back for six months. Even then it's on a sliding scale that adjusts to the company's revenue.

"I think there's a tremendous amount of risk," but it's not unwarranted, White said. The close ties "force HP to help these companies become successful."

Both Sun and HP offer partnerships with several companies who will house Internet sites on their servers, a feature that lets a start-up concentrate on its product rather than buying and running hardware. HP is offering connections to AboveNet Communications, Consonus, Intira, USinternetworking and longtime HP partner Qwest.

HP is also spending big to become a major player in the emerging Web hosting market. As previously reported, HP will this week unveil a new hosting service called Infrastructure-on-Tap. Under the plan, HP will provide all the technology necessary to start and manage a Web site, including hardware, data storage, network security, maintenance, network connections and other IT support.

However, not everyone wants to let someone else handle the hardware. Two new HP partners using their own hardware include Zantaz, which offers software that can be used to archive a company's email or electronic transactions, and ePit, which offers a service to let organizations set up online markets for trading commodity goods. ePit, for example, is used to power Agex's market for expensive agricultural goods such as almonds, said ePit president Richard Friesen.

Sun and HP also are teaming up with venture capitalists. The venture capital firms Draper Fisher Jurvetson, Angel Investors, Redleaf Group, Divine InterVentures and NewMedia Investors will bring start-ups to HP's attention when there's a good match between the companies, Earle said. "It's more informal than formal," he said.

HP's e-services will be marketed through Yahoo, which is setting up portal sites customized for specific companies, Earle said.