I.B.M.-QWEST DEAL ON INTERNET DATA CENTERS
By Seth Schiesel

In a move to expand its ability to manage Websites and software applications for corporate customers, IBM intends to announce Monday that it has struck a multibillion-dollar deal with Qwest Communications International Inc.

The pact calls for IBM to build and help operate Internet data centers for Qwest across North America, executives from the two companies said Friday.

One of the fastest-growing segments of the electronic economy is the so-called hosting business, in which information technology companies manage computer systems that run Websites or internal software programs for corporate customers. The idea is that by allowing an outside concern to act as host for those computers, rather than managing them internally, companies can focus on their core business while receiving expert technical support.

"Customers are starting to get serious about using the Internet, about the use of e-commerce, and about building the core processes that businesses run around what can be done on the Internet," Douglas T. Elix, senior vice president of the IBM unit involved in the effort, said in an interview Friday. "This alliance expands our ability to meet those needs."

As basic communications lines become largely a commodity market, communications carriers of all sizes and descriptions are attempting to expand into more sophisticated markets that can carry richer profit margins, like Web hosting. In recent years, Qwest, the upstart long-distance carrier, has announced alliances with companies including KPMG, the consulting firm, and Oracle, the database company, as it tried to expand its hosting business.

Now, Qwest has enlisted IBM as perhaps its most significant partner. IBM is already a leader in Web hosting and computer-applications hosting, generating about $1 billion in annual revenue from those businesses. But managing complex computer systems -- IBM's forte -- often also requires managing complex communications networks.

"Keeping up with demand in this market is always a challenge, especially in finding qualified people," Lewis O. Wilks, Qwest's president for Internet services, said Friday. "Teaming with IBM is a huge leap for us."

Under the deal, IBM has agreed to build 28 North American data centers, each having at least 100,000 square feet of space, for Qwest over the next three years. The first four are to be located in Dallas, Philadelphia, Sterling, Va., and near San Jose, Calif. Over the next seven years, Qwest intends to pay IBM $2.5 billion in construction costs and management fees.

IBM intends to lease about 25 percent of the space in the sites that it builds for Qwest. And over the seven-year life of their contract, IBM intends to pay Qwest $2.5 billion for that space and for the use of Qwest's fiber- optic communications network.

The two companies will generally continue to market their hosting services separately, but Elix and Wilks said that IBM and Qwest could potentially collaborate and act as subcontractors for each other on certain projects.

The two executives declined to estimate how much revenue the deal would help their companies generate from outside customers.

In recent years, IBM has appeared to ignore many other big communications carriers while announcing a series of strategic agreements with AT&T, whose chairman, C. Michael Armstrong, is a former IBM executive. By reaching a major deal with Qwest, one of AT&T's big competitors, IBM may be trying to demonstrate that it is serious about forming partnerships across the telecommunications industry.