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Layoffs at Compaq NT unit just the start

The ax is falling first on Compaq's NT Alpha operation in Bellevue, Washington, where as many as 100 engineers are being shown the door, according to sources.

Compaq Computer has started to hand out pink slips in the first round of potentially 8,000 layoffs.

The ax is falling first on Compaq's NT Alpha operation in Bellevue, Washington, where as many as 100 engineers are being shown the door, according to sources.

The former Digital unit is responsible for the development of Microsoft's Windows NT operating system on Alpha processors. The company acknowledged it would not support 32-bit Windows 2000 on Alpha but focus on the 64-bit version instead.

But sources close to Compaq said the Bellevue operation is not being singled out; the ax will fall in many divisions. Areas likely to see layoffs are those groups that focus on small and medium businesses, the distribution/sales organization, and the enterprise and services group, which accounts for over half of Compaq's revenue. Manufacturing operations and administration will be heavily hit in all areas.

Compaq confirmed employees in its Bellevue operation had been notified about layoffs, but that none had yet been let go.

The layoffs are expected to be sporadic and will proceed as managers get a handle on their organizations. The first serious rounds of layoffs will take place over the next two weeks as Compaq seeks to wrap up the majority by the end of the quarter, sources said.

"They've done the major layoffs, now they have to pick and choose by division," said Lindy Lesperance, analyst with Technology Business Research. "There will be a lot of nitpicking."

The Bellevue layoffs demonstrate how serious Compaq is about ditching unprofitable units, no matter how painful that may be. And the Alpha NT layoffs hit the heart of Compaq's relationship with Microsoft.

The partnership has never been tighter. Microsoft has been developing its next-generation 64-bit version of Windows NT on the Alpha processor. Microsoft's own online operation runs on more than 1,600 Compaq ProLiant servers.

Deborah Willingham, vice president of Microsoft's Business and Enterprise division, appeared this week at Compaq's eight-way server launch in New York and emphasized the importance of Alpha to 64-bit Windows.

Sources close to Compaq said the company would refocus Alpha rather than abandon the processor, including shoring up its presence as the core component of its nonStop eBusiness strategy.

Compaq committed to continued Alpha development, including the 833-MHz processor due in a few months and the 1-GHz processor next year. But Compaq will seek to drive Alpha volume with Linux, not 32-bit Windows, sources said.

Linux has been a successful business for Compaq, said Terry Shannon, publisher of the Shannon Knows Compaq newsletter. Shannon said he would not be surprised if Compaq greatly increased the number of Alpha servers supporting the operating system.

The severe cuts are necessary, said analysts. "We already knew Alpha was vulnerable, so this move doesn't surprise me," said Roger Kay, analyst with International Data Corporation. Harder cuts are still ahead, said Kay.

Shannon said it came down to simple economics. "NT on Alpha wasn't making any money for them."

Profitability is the new metric at Compaq, Enrico Pesatori, senior vice president and group general manager of the Enterprise Solutions and Services Group, has said. Compaq units will have to justify their existence through profits and growth.

But Pesatori also made it clear Compaq is committed to Alpha, despite the questions that swirl around the future of the chip architecture.

"It's been a curse [the questions about Alpha's future]. I got to answer this question for three years at Digital and now at Compaq," he said.

Analysts said the coming cuts may be even more controversial. While line managers decide on people, new CEO Michael Capellas is overseeing broader cuts with his chief lieutenants, Pesatori, Mike Winkler, and Peter Blackmore.

"Michael has a big job," said Compaq chairman Ben Rosen earlier this week. "He's reorganizing the company, and there are some tough decisions ahead of him."

If Capellas has a destiny to make, it will be rebuilding Compaq in a back-to-basics approach, suggested Rosen.

Capellas ascended to the chief executive?s chair on July 28, an 18-month insider who had been chief operating officer. The move surprised many analysts, who expected an outsider to be named.

"There is a tendency for outsiders to want to choose someone outsiders know," said Rosen. "We think Michael was the lowest risk choice, not the highest."