Compaq aims for direct hit

Compaq's holy war against Dell will ratchet up November 11 when the No. 1 PC vendor rolls out a new program to target small and medium-sized businesses through direct sales and new product bundles.

The new effort, which will be unveiled by CEO Eckhard Pfeiffer with fanfare in New York, will essentially be the latest, and most comprehensive, effort Compaq has thus far launched to stem the popularity of direct vendors such as Dell. Small and medium-sized businesses will be encouraged to buy directly from Compaq's Web site. To entice them, Compaq will be offering special all-in-one product bundles, said sources.

Compaq currently features desktop PCs, notebook PCs, servers, and workstations through its DirectPlus direct sales site, but in the future, the company will put additional emphasis on its secondary products, such as networking equipment and printers. To date, Compaq has been selling a line of small business PCs including the Deskpro EP desktop model, an Armada SB notebook PC, and Prosignia 200 server.

Compaq also sells third party products, including Microsoft software, on the DirectPlus site, and some have speculated that greater emphasis on these products may also be in the works.

"They are looking at a whole bunch of ways of getting directly to customers," said a computer dealer who attended a recent Compaq briefing. "They are going for the Dell model. You can't really blame them. They have been getting beat up by Dell."

Full details are not yet known, and sources caution that elements of the effort could change.

The Houston, Texas-based vendor has talked about selling directly to customers for over a year, but has generally avoided aggressively pursuing direct sales in an effort to avoid alienating its dealer base. Now, however, the trend toward direct sales is inevitable, said dealers and analysts.

Compaq has said in the past that it estimates there are about 165,000 medium-sized businesses, 770,000 small businesses, and 6,300,000 very small businesses. Medium-sized businesses have fewer than 1,000 employees, small businesses have fewer than 100, and very small businesses fewer than 20, according to the company.

This is a market also targeted by Hewlett-Packard, represented by its Brio line of computers, and by Gateway, which has boosted advertising aimed at this market.

While more Compaq sales will be direct, dealers will receive commissions for customers it sends to the site. Compaq has also already rolled out new service contracts with its dealers which provide incentive bonuses for dealers who get better-than-average marks from customers on warranty work.

Dell, meanwhile, is not sitting still. The company, which mostly sells to large institutions, has been actively recruiting regional computer dealers, including Compaq partners, to sell Dell products into the small and medium- sized business market. Dell has also been recently ramped up an informational effort to reach this audience.

Dell's growth spurs plan
Compaq's new program comes as a result of Dell's growth in the past year, said dealers and analysts. Compaq has rolled out a number of initiatives and programs to stem the advantages Dell achieves through its direct sales model without disrupting relationships with its dealers and distributors, who earn income from reselling Compaq products. While these measures have worked, they haven't worked well enough.

Compaq, for instance, launched a "build-to-order" initiative last year which was designed to mimic the manufacturing cost advantages Dell historically has enjoyed. Building computers to customer order has reduced costs, pointed out Roger Kay, an analyst with International Data Corporation, but not completely eliminated the delta. Overall, Compaq's manufacturing costs are still around 3 percent or more higher, a figure which grows when distribution gets factored in.

Build to order manufacturing, moreover, only replicates some of Dell's advantages. Because Dell actually sells the computer directly to the customer, they effectively become a constant presence with the customer.

"It's not just Web selling, or configuring computers to order. It's customer intimacy and being closer to the orders," he said. "They (Compaq) have made the decision to go direct. When Compaq jumps in, they own a piece of it."

"Channel" programs under fire
Another effort to trim costs, the "channel assembly" programs under which dealers or distributors manufacture PCs for the major vendors, seems destined for similarly mixed results, said Charles Smulders, an analyst at Dataquest.

"It's potentially more efficient than traditional (manufacturing), but its not as efficient as the direct model," he said. "I'm skeptical that channel assembly makes sense."

"The effort has taken more work than they thought and the benefits are less than they imagined," added Kay of these delayed manufacturing efforts. IBM and Hewlett-Packard have been the lead advocates of channel assembly.

While the exact content of Compaq's program is not yet known, observers say the company will emphasize a broad product line and special bundles. One area Compaq is expected to more aggressively enter is networking equipment. Through the Digital acquisition, Compaq has inherited an agreement to purchase approximately $1 billion worth of networking equipment from Cabletron for eventual resale.

"They want to offer customers a complete solution," said another dealer. "They want to take on Cisco.

The ultimate success of the program is uncertain. Computer vendors have tried and failed to blend direct and indirect sales models before, and have failed. In the past, dealers have reacted to a vendor's direct efforts by switching their allegiance to a competing computer brand. Circumstances to some degree favor a direct effort at the moment. Customers, after all, seem to want to order directly. And, since dealers earn very little margin on hardware, the losses that result from direct sales aren't as large as in the past. Still, questions persist.

"The real question is how much they get paid in lead generation," said Ian Morton, a computer distribution analyst at Hambrecht & Quist.

So far, Compaq's direct efforts have also caused friction. "We have run into them as competition already," said one large Compaq dealer. "There's a lot of people concerned."

Service reps key
A factor that could help the program succeed is the fact that small customers need service representatives. Most small businesses do not have IS department and therefore often hire dealers to build, repair, or maintain their networks.

Compaq has encouraged cooperation of its dealer base by offering incentive compensation. Compaq calls customers after a warranty repair. If the dealer gets a better than average review, Compaq pays the dealer $75 an hour for the work, rather than the standard $50.

The need for handholding also lay behind Dell's efforts to recruit dealers. Approximately 70 percent of Dell's business comes from large institutions, said one Dell spokesperson.

Compaq officially will not comment on Pfeiffer's upcoming program. The company, however, stated that the November 11 presentation is centered around a new direction for small and medium-sized organizations.

Dell is relatively mum about its specific plans for this market. The company, however, has invested more resources into this segment over the past year, according to David Clifton, a Dell spokesman.