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Compaq Eyes ISP Market

As part of a game plan to gain ground in the lucrative server supply market Compaq Computer Corp. Tuesday committed more than $1 billion to finance and invest in Internet service providers and Web developers.

Compaq (CPQ) announced that the project includes $600 million designated for service provider financing programs, $400 million for equity investments in service providers and independent software vendors (ISVs), and $150 million for joint marketing programs to bring new services to market.

Michael Capellas, Compaq chairman and chief executive officer, earlier this year said that by the end of 2001 as much as 20 percent of its revenues would come from the ISP and application service provider market.

Cahners In-Stat Group estimates that by 2004 small companies will spend more than $7 billion on application services as broadband services develop.

Compaq is looking to tap into the lucrative software rental market as it develops business relationships with ISPs, ASPs and ISVs today, in order to provide Compaq with differentiated revenue streams tomorrow.

But Compaq also faces stiff competition from rival industry leaders Sun Microsystems, Inc. (SUNW), Hewlett-Packard Co. (HWP), and Dell Computer Corp. (DELL).

The computer manufacturer is also facing an uphill battle to sell its servers to ISPs providing software application services because of a bundling agreement it signed with free ISP NetZero Inc. (NZRO) last June.

Compaq was one of several companies that invested heavily in NetZero's May 1999 stock offering which added $33 million to the free ISPs cash coffers. In lieu of Compaq's investment, NetZero gained a desktop slot on Compaq's new Presario personal computer lineup. That angered ISPs who lost an opportunity to gain new subscribers to their fee-based Internet services.

One key ally for Compaq is Microsoft Corp., which has endorsed Compaq as a worldwide prime integrator for its Exchange 2000 services.

Microsoft (MSFT) accreditation provides Compaq with an extensive portfolio of solutions for Exchange, as well as other software programs. Compaq's ability to deliver worldwide services to help ISPs and ASPs design, deploy and maintain messaging and collaboration solutions based on Microsoft technologies is definitely a big plus for Compaq.

Compaq is also prepared to support early adoption of Exchange 2000 for its enterprise clients. Compaq streamlined and packaged its Exchange solutions to simplify direct ordering over the Internet earlier this year. Its ProLiant server components have Windows 2000 or Windows NT 4.0 server software pre-installed. Backed up with on-site hardware installation services, service providers may readily optimize solutions for their Exchange and maintain it over an entire lifecycle.