Compaq saw writing on the wall
Customers demand direct sales mode

By DWIGHT SILVERMAN
© 1998 The Houston Chronicle

Compaq Computer Corp.'s expanded operation of selling PCs directly to small and medium-sized businesses completes a process that began more than a year ago.

Wednesday's announcement that Compaq has created a line of computers under the brand name Pro-signia is the Houston-based PC maker's latest attempt to stifle the growth of archrival Dell Computer Corp. and other direct vendors.

Compaq has been struggling to find a way to appeal to customers who want to buy directly from the manufacturer, while at the same time not alienating its network of 11,000 dealers.

But even those dealers have seen the writing on the wall.

"It is simple," said Eckhard Pfeiffer, Compaq's president and chief executive, in an interview. "You cannot ignore what is happening around you. You had better embrace change, and judge whether to act upon it."

Compaq unveiled its new strategy during a New York City news conference, but the products being introduced already were for sale on the company's World Wide Web site at www.directplus.Compaq.com when dawn broke.

The company will sell desktop, notebook and file-server computers under the brand Prosignia, which previously was used only for Compaq 's low-end servers. The machines will be available via phone, over the Web or through dealers that choose to carry them.

Compaq is calling the overall program Customer Choice, emphasizing that customers can choose to buy the machines directly or through traditional resellers.

In a twist, dealers also can act as agents for customers, placing orders via phone or over the Web on their behalf. In that case, Compaq will pay the dealers a commission.

Previously, customers who wanted to buy one of Compaq 's business computers had to go through a reseller, which ordered the machine and delivered it to the customer. The dealer system adds a layer of cost to the product.

By contrast, direct vendors such as Dell, Gateway or Micron Electronics do not use a middleman. Customers call them directly by phone, or place orders over the Internet, and the computers are shipped right to customers' doors.

Compaq has had a direct operation aimed at businesses - Compaq DirectPlus - for some time, but it was deliberately limited to avoid competition with resellers. The previous incarnation of DirectPlus never charged less than dealers.

Van Baker, an analyst with Data-quest, a San Jose, Calif.-based market research firm, said Compaq 's move into the direct arena was necessary.

"It is not Compaq making this decision; it is the market making the decision for Compaq ," Baker said.

Pfeiffer, addressing journalists and analysts at the New York event, said that direct sales account for about 35 percent of the PC market.

"We have simply decided that we are not going to miss out on that one-third of the total market," Pfeiffer said.

Investors liked the move. Compaq 's stock closed Wednesday at 34 7/16, up 1 9/16.

Compaq has been trying to get into the direct business for some time, either by acquiring another computer maker or by modifying its own systems.

In early 1997, Compaq tried to buy both Micron and Gateway. The Micron talks didn't get far, but Compaq came closer to acquiring Gateway in April 1997. In fact, sources say the companies even had news releases announcing the buyout ready to go, but Gateway executives backed down at the last minute.

In July 1997, Compaq announced at another New York news conference that it would create a hybrid system it called the Optimized Distribution Model. Under this setup, dealers would pass orders on to Compaq , which would build customized PCs and ship them directly to customers. In some cases, dealers themselves would do the final build-out of customized systems.

But analysts say Compaq has had problems making this work. Although the Optimized Distribution Model was designed to keep inventories down, Compaq found itself with a glut of computers in the first quarter of 1998. The company had to slash prices and shut down its factories in Houston for two weeks. Its first-quarter earnings report was a disappointment to Wall Street.

Pfeiffer said Wednesday that Compaq 's inventories are now at the lowest levels he's seen since assuming the top post in 1991. Compaq now turns over its inventory once every three weeks, he said, or about 17 times a year.

Michael Winkler, Compaq 's senior vice president for PC products, said the Prosignia products are priced below those of the top competing direct vendors. A check of the offerings at both Dell's and Compaq 's Web sites bore that out.

A Prosignia Desktop 330 computer with a 450-megahertz Pentium II processor, 128 megabytes of memory, a 10-gigabyte hard drive, a DVD-ROM drive, a 17-inch monitor, a 56K fax modem, 16-bit stereo sound card with speakers and a network interface card cost $2,150. A comparably equipped Dell Dimension XPS system cost $2,289.

However, the Dell warranty, at three years for both parts and labor, was slightly better than the Compaq warranty, at three years for parts and one year for labor.

Compaq also is selling its higher-end Deskpro line of PCs, Armada notebooks, professional workstations and Proliant servers via phone and its Web site. It also sells some of its consumer Presario products online. Its Compaq Works factory outlet also has an online site at www.compaqworks.com.

The new Prosignia line of products is coupled with new service initiatives. Compaq will use the army of technicians it acquired in its $9 billion purchase of Digital Equipment Corp. to service the new systems. Customers also will be able to take advantage of some Internet-based services - such as online backup, buying postage via the Web and storing documents on an Internet server so they can be retrieved from any connected computer.

With Customer Choice, Compaq is targeting small and medium-sized businesses, the fastest-growing segment of the computer market. Access Media International, a New York-based research firm, estimated that the segment is growing at about 20 percent a year, compared with the large corporate segment, which is growing at 13 percent annually.

Andy Bose, president of Access Media, said Compaq 's biggest challenge is going to be in not alienating its dealers, which account for the vast majority of its sales.

"However, the distribution channel is going through shifts, and these trends are difficult if not impossible to stop," Bose said.

Pfeiffer agreed, and used an analogy from another century to make his point.

"You know, you can hang on long enough to the old railroads until there are no more trains," Pfeiffer said. "You have to decide - are you in the railroad business or are you in the transportation business?"