The Red Herring
Microsoft (Nasdaq: MSFT) must have felt like a wallflower next to its competitors' frenzied overtures in the hot hosted applications market. No longer. The software giant is investing $67.5 million in Web services firm USWeb/CKS (Nasdaq: USWB) to develop technologies allowing corporate customers to outsource their computer applications to third parties.
San Francisco-based USWeb/CKS announced this week that the funds will be used to develop new products and build application hosting data centers. The deal also calls for Microsoft to pay $14.9 million for warrants on 1 million USWeb/CKS shares, which Microsoft may acquire at $27.59 each over the next five years.
USWeb/CKS executives would not comment on how much revenue their company's managed services offerings would generate, but they said they expected hearty demand.
Myrna Laine, an associate analyst with the investment bank Adams, Harkness & Hill, says the financial backing and Microsoft's name will further burnish USWeb/CKS's image and help the Web developer attract new customers. The deal "definitely provides them with a competitive edge," she says.
WEAVING A WIDENING WEB
USWeb, founded just a few years ago, grew rapidly through mergers and acquisitions with other computer services and integration firms. A year ago it merged with advertising company CKS Partners, turning the combined companies into a new breed of Web developer and marketeer.
Now the company is making a major push in the hosting services market. It already rents space in two data centers, located in Santa Clara, California, and Reston, Virginia, where computer systems for 200 customers are housed by its Managed Services division. It also plans to build what it calls a Global Network Operating Center in Virginia. Other plans call for another data center in Europe and as many as 300 new hires.
The application service provider (ASP) market is expected to sizzle in the next few years. According to the information technology research firm IDC, companies spent $23 million in 1998 to have a third party host their applications. IDC predicts that that number will jump to $2 billion by 2003.
The ASP field includes Usinternetworking (Nasdaq: USIX) and Corio, which is funded by Kleiner Perkins Caufield & Byers. This week Intel (Nasdaq: INTC) launched a new business, Online Services, to focus on the Web and application hosting.
MICROSOFT CHARGES HARD
USWeb/CKS plans to base its application services and hosting business on Microsoft technology. The firm is setting aside 10 percent of its new funding for training 750 people on Windows 2000 technology over the next year. The company says it already uses Microsoft technology in roughly 80 percent of its projects.
The duo, whose business relationship goes back three years, is also creating a lab at Microsoft headquarters in Redmond, Washington, where about 20 engineers will work on integrating applications and developing new software, says Alex Hawkinson, senior vice president of USWeb/CKS's Managed Services division.
The USWeb/CKS investment is Microsoft's first in a computer services firm. "Microsoft always had a standoffish relationship with clients," says Harry Fenik, vice president of analysis with Zona Research. "In this case, they decided to break their own rules."
According to Bill Anderson, Microsoft's Web application services director, Microsoft is also looking to invest in other service companies. "We haven't done that much in the application services space," he says. "This is a major thrust in that area. [USWeb/CKS] is a firm that has the ability to bring it together very quickly."
**Reprinted from The Red Herring, October 1, 1999