Microsoft Embarks on Qwest for Application Outsourcing

Microsoft Corp.'s recent $200 million step into the telecommunications industry represents more than a simple equity stake in one of the nation's leading fiber-optic carriers. The software giant's recent arrangement with telecom carrier Qwest Communications International Inc. (www.qwest.com) is a ringing endorsement of a new model for selling and distributing software. Soon, it may be possible to outsource -- or rent on an as-needed basis -- Windows 2000 applications hosted and managed by a network service provider, such as Qwest.

Qwest is partnering with Microsoft to provide web hosting, virtual private networks (VPNs) and managed software services on the Windows 2000 operating system platform. As part of the arrangement, Microsoft is licensing its software to Qwest, which then can be provided to customers. Qwest is forming a separate network organization to support this agreement. Microsoft has become a 1.3 percent shareholder in Qwest through a $200 million equity purchase of Qwest stock.

Essentially, the agreement consists of Qwest remotely hosting clients' applications on the Windows 2000 operating system. In the process, Qwest expects such an architecture to "match a large percentage" of its customers' architectures, says John Charter, vice president of business development at Qwest. "In other words, end-to- end NT," he explains.

This structure also provides a way for Microsoft to distribute software updates, though this is still a way off in terms of delivery, Charter says. "Microsoft has clearly accepted that this method of distribution is a better model for its customers," he notes. "This gets software modules into the hands of its customers faster." Eventually, customers may be able to purchase outright Microsoft software through Qwest, Charter hopes.

Through its Microsoft-based network, Qwest expects to deliver new services, including instant technology upgrades and usage-sensitive billing. Beginning in the second quarter of this year, Qwest will offer customers ISP services through a high-speed network that will also facilitate hosting services for electronic commerce, streaming media, managed software services and VPNs built on Microsoft platforms. Qwest expects to generate $150 million in revenue during the first two years, most of it in 2000.

Through this process Qwest is joining a new arena, application outsourcing over the Web. Forrester Research (www.forrester.com) projects that the application outsourcing market will reach $20 billion by 2001. "Outsourced application hosting is gaining acceptance beyond simple Web sites," says David Cooperstein, an analyst with Forrester. He predicts ISPs will move into this market by leveraging their Internet roots, while traditional outsourcers will "struggle with the business model of hosting a few PCs, rather than a room full of mainframe iron." Challenges to entrants in this market include providing robust Internet backbones, offering speed and flexibility, and developing strong systems-integration skills.

Along with ISPs and outsourcers, this market has other stakeholders, including software vendors, telecommunication providers and financial services firms, says Clare Gillan, vice president at International Data Corp. (IDC, www.idc.com). The rise in application service providers is being driven by Year 2000 compliance requirements, enterprise application initiatives, and IT skills shortages. Providers such as Qwest "will help drive a shift in the market, and move the focus of competition beyond software features to total business solutions," Gillan explains.

Qwest, which had been an international long-distance carrier, forged its presence in the ISP market with its acquisition of Icon CMT Corp. in January, says Charter. As a result of this acquisition and the Microsoft agreement, Qwest now considers itself a competitor to major national ISPs.

Qwest plans to offer "virtual corporation" capabilities to customers as well as software rentals, Charter relates. "We could offer seven or eight modules from an ERP vendor's applications," says Charter.

To accomplish these goals, Qwest recently announced it completed construction of 12,500 miles of a U.S.-based fiber optic network and connected 16 additional key markets, with a goal of linking 130 cities over 18,500 miles by mid-1999.

Qwest may partner with applications software vendors to establish similar outsourcing arrangements, Charter says. "This opens up the door for us to bring in all kinds of applications partners that are committed to work in the Microsoft environment," says Charter.