DENVER -- Qwest Communications International Inc. and International Business Machines Corp. said Monday that they signed a $5 billion, seven-year agreement to sell services for maintaining company Web sites at 28 new computer centers.
Qwest, the No. 4 U.S. long-distance telephone company, will pay IBM $2.5 billion to set up and manage the Web sites. IBM, the largest computer maker, will pay Qwest $2.5 billion to lease 25 percent of the space at the centers, which Qwest will own, and maintain the fiber-optic network that taps into the Internet.More companies are setting up Web sites to sell products or are joining business exchanges where they buy and sell goods and services on the Internet. Revenue from managing Web sites is expected to total $35 billion in the United States by 2005, according to researcher Frost & Sullivan, based in Mountain View, Calif.
"We can't keep up with customer demand for Web service capabilities," said Lewis Wilks, president of the Internet and multimedia unit of Denver-based Qwest.
The demand is such that 80 percent of the companies that want Web-site services cannot get them, Wilks said.
IBM and Qwest will provide services for their own customers at the centers and jointly develop packages of services, software and computers for clients. The centers will generate more than $1 billion when operational, IBM said.
For Qwest, the agreement expands a Web-services business that helped boost fourth-quarter revenue 34 percent to $1.16 billion.
The agreement "seems to be significant in terms of providing them the ability to speed up the rollout of their activities in what's becoming an increasingly crucial area for the major telecom players," said Merrill Lynch & Co. analysts Adam Quinton, who rates Qwest near-term "accumulate."
The company's current customers include Amazon.com Inc., Akamai Technologies Inc., America Online Inc., CBS Corp. and Citigroup Inc.
IBM, for its part, manages more than 40,000 computer servers that run Internet sites in 133 centers around the world. IBM Web-site services is a $1 billion business, the company said.
IBM's agreement with Qwest is part of the company's broader plan to take advantage of companies using the Internet to run their businesses, analysts said. IBM also sells servers and software to run and manage Web sites.
"IBM realizes there's no magic pill for what ultimately is the successful formula" for profiting from the Web, said George Elling, an analyst at Lehman Brothers, who rates the company an "outperform." "They're playing in different opportunities."
Teaming Up
Customers' requests for more Web services prompted IBM to strike an accord with Qwest. "We could have built our own data centers, but it was better to team up with Qwest," which already had a network in place, said Doug Elix, an IBM senior vice president who heads the company's services unit.
Target clients will be companies that run business-to-business online marketplaces and companies who want to rent software that run their inventory, record-keeping, e-mail and other functions.
The first four centers will open this year in Dallas, Philadelphia, Sterling, Virginia, and the San Jose, California, area. More centers are planned for Atlanta, Boston and New York and other U.S. cities.
They will contain computers, software and networking equipment from IBM and other companies, depending on the customers' preferences, IBM said.
Most of the new centers will occupy at least 100,000 square feet and will be directly connected to Qwest's long distance network.