Compaq and global telecom carrier Cable & Wireless today unveiled a $500 million deal whereby the two companies will work to jointly offer hosted E-commerce systems to businesses in the United States, Europe, and the United Kingdom.

Under the terms of the five-year, nonexclusive agreement, Compaq will supply Cable & Wireless customers in the small and medium-sized business markets with services and hardware ranging from servers, desktop computers--including the new iPaq--and Aero palmtops. Compaq will also provide third-party software, such as procurement and E-commerce applications from Oracle and Microsoft, as well as unspecified customer-relationship management. Cable & Wireless, in turn, will provide Internet and application hosting over its IP backbone networks in this country and overseas. All of the services--which will be available in January--will be bundled and offered to customers on a rental basis.

To fund the effort, Compaq will commit $200 million to cover development and marketing costs over the life of the agreement, with Cable & Wireless contributing $300 million. Revenue sharing will be proportionate to those numbers, according to the companies.

In announcing the deal today, Compaq president and CEO Michael Capellas said the pact should be seen as evidence that his company--struggling of late in its traditional corporate sector--is serious about becoming a key player in the Internet economy. "We are determined to be the leader in providing the infrastructure for ASPs," Capellas said. "It's not often that you are able to build a business relationship that supports all the elements of your corporate strategy, but this one clearly does."

Earlier this month, Compaq announced it will soon launch a portal site--dubbed B2E--aimed at the IT industry, with plans to follow that with a series of vertical portals for other industries.

For its part, Cable & Wireless executives say they are confident the services offered under the deal will prove irresistible to emerging enterprises looking for a quick way to establish an E-business site. "We'll offer a single customer rental agreement and a single point of contact with the supplier," said Graham Wallace, Cable & Wireless group chief executive.

Wallace added that Cable & Wireless is upgrading parts of its U.S. IP backbone, which it acquired from MCI WorldCom on a leased basis, to accommodate traffic at 9.6 Gbps. "This will give us the most advanced IP backbone network in the U.S.," he said.

Industry reaction to the news was swift, with analysts noting the deal could change the application service provider landscape in this country while providing a major boost for Compaq's enterprise business. "This could be phenomenal for Compaq," says Rob Enderle, a Giga Information Group analyst. "It creates a controlled channel for them, and whenever you get a controlled channel that means that the customers related to that channel can be owned."

Enderle also believes similar deals will follow, as large telecom providers begin a concerted push for the ASP market. "This is starting to hit with mainstream cable and digital subscriber line service providers, and as a result we're going to see rapid consolidation in the ASP market. The difficulty for the pure ASPs is that they are going to have some very big competitors," he said. Both Sprint and AT&T have recently announced plans to enter the ASP market. Enderle believes that ASP services will surpass the more traditional Internet service provider market within two years, and Forrester Research predicts it will become a $10 billion industry by the year 2001.

Compaq and Cable & Wireless say they plan to extend the deal to Asian markets by the end of next year and eventually target large enterprises.