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Commentary: Good news for Windows shops

If Compaq's announcement to emphasize software and services indicates management is finally making the decisions it has so far avoided, then it's a good sign.

Compaq Computer has struggled to bring appropriate focus to its diverse businesses ever since it bought Digital Equipment and Tandem.

If its announcement to place more emphasis on

See news story:
Compaq narrows server-chip competition
software and services indicates that senior management is finally making the hard decisions it has so far avoided--particularly about what to spin off and what to keep--then this is a good sign for Compaq. If not, the company will continue to drift.

A stronger focus on services by Compaq could benefit end users with large Windows environments and global support needs. Compaq is one of the world's largest and best Microsoft Exchange design and installation shops, with impressive references worldwide.

Exactly what Compaq intends by refocusing on services and software is still unclear. However, we do not expect the company to start buying business applications--for instance, a CRM (customer relationship management) software vendor--and enter the application package market. Rather, we think it will look at middleware, storage management, systems management, asset management and messaging capabilities to augment its services and systems management offerings.

We also expect Compaq to continue to aggressively partner with business application vendors, such as Siebel Systems. To support these application projects and differentiate its offerings, Compaq is likely to prepackage bundles of services, integration software, systems management capabilities and hardware around these business applications.

The hazards of the game
However, Compaq faces several dangers with this shift in emphasis. First, when all is said and done, Compaq will be an Intel-based hardware vendor, supporting primarily Windows along with Tru64, which we expect it to port to and make available on both Alpha and Intel's 64-bit chips--Itanium in the near term, McKinley in the longer term.

With this reality in mind, Compaq must succeed in the Intel-based hardware market. This means that it must be able to position itself against both the high-end players such as IBM and more cost-conscious competitors such as Dell Computer. Both IBM and Dell have made significant cost-cutting inroads on their Intel-based systems, which Compaq must beat--or at least match.

Second, Compaq must avoid competing with its larger resellers, many of which provide their own services to customers as part of their packages. When defining services, Compaq must consider partnerships in providing services and hardware with the application vendor, as it will struggle to appear platform-neutral and merely to be pushing hardware. Desktop services have been a struggle for the company in non-Compaq shops.

Third, Compaq must avoid fragmentation. If the company ends up dividing into several stovepipe organizations, each focused on a vertical market, this will increase the fragmentation that already prevents it from focusing effectively on any one strategy.

Overall, Compaq should not count on services to specific verticals to replace the income from server and desktop sales. Instead, it must focus on ways to compete more strongly in those markets.

Vertical horizon
In the past two decades, several hardware companies that have run into trouble in the market have retreated and stated that they would refocus on specific vertical industries and on providing services. IBM succeeded at this strategy, while other companies--including Digital and Unisys--have found it a recipe for creating a smaller company. Compaq must be careful that it does not fall into this trap.

For Intel, the purchase of Compaq's Alpha processor operation makes sense. Although the Alpha market itself is fading, Intel will gain additional patents as well as some strong engineering talent.

We recommend that Alpha users evaluate Itanium in its first release to set up a migration strategy before the transition from EV6 to EV7. They should then consider a route to Itanium McKinley-based servers from Alpha by the end of 2002 and complete the transition by the end of 2003.

Organizations with large Windows installations should watch Compaq's services offerings carefully. To the extent that Compaq is serious about competing more effectively with IBM and other major services providers, its natural market is in integrating large NT-based systems, where it is one of the market leaders. Compaq has built several of the largest Exchange systems worldwide. To expand its presence in the services arena, Compaq may be willing to offer those services at a cut-rate price to gain entries into companies and markets where it does not now have a strong presence.

Meta Group analysts Dale Kutnick, David Cearley, Jack Gold, Michele Hudnall, William Zachmann, Philip Dawson and Val Sribar contributed to this article.

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