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Compaq aims to quadruple handheld production

The computer manufacturer plans to put up a major fight for the handheld market, aiming to produce 100,000 per month sometime during the first quarter.

SAN FRANCISCO--Compaq Computer plans to put up a major fight for the handheld computer market.

The Houston-based computer manufacturer aims to produce 50,000 iPaq handhelds per month by December and 100,000 per month sometime during the first quarter, Compaq CEO Michael Capellas said at the Banc of America Securities Conference here today.

Currently, Compaq manufactures around 25,000 iPaq handhelds per month. In the second quarter, handheld leader Palm shipped 1.1 million units, according to the company.

The push into handhelds is largely being driven by two major trends, Capellas said. First, customers have shown that they want small, portable computing devices.

Second, Web sites, software developers, hardware manufacturers and carriers are working furiously to develop content and services tailored for wireless handhelds and other devices. Internet messaging, for example, will begin to incorporate audio and video. Enhanced features will drive further demand. Wireless communications is currently an optional feature on iPaqs and other handhelds but will become increasingly more common.

The new content industry, in fact, will likely overshadow e-commerce.

"While e-commerce will be big, the delivery of content in a meaningful way will drive the industry," he said. "There is going to be a ton of new Internet content, and that is what is going to drive the Web."

Like Palm and other handheld makers, Compaq's manufacturing plans have been crimped nearly all year because of shortages of components such as flash memory. The goal of producing 100,000 a month, for instance, is contingent on negotiations currently under way to obtain more screens, he added.

Compaq, Capellas indicated, also under-forecast demand. Some consumers sold iPaqs on eBay for more than $1,000, well over Compaq's retail price, he said. "What did I miss? I think the market."

For Compaq, content growth opens a number of revenue opportunities. Not only will the company sell more PCs and devices, it will see an increase in service revenue because it receives a cut of revenue from wireless or DSL services that come with hardware.

The overall goal is to boost services revenue to 25 percent of total revenue from PC or device sales. In turn, this will mean that half of Compaq's margin on these products will come from services.

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Increased wireless traffic would also lead to sales of more servers. Rather than depend on a huge, centralized data center, Web sites will have to invest heavily in regional centers that can spit out content in a variety of formats.

"Real strong spending on Internet infrastructure will occur for the next two to three years," Capellas said. "When you're getting millions and millions of hits, you are not going to be able to take that to some big back office in the sky."

Communications companies and PC makers will also begin to work more closely together. Cisco Systems and Compaq, for example, are working on a joint venture to develop a router with server characteristics for the delivery of audio and video. Mergers aren't out of the question either.

"It is unclear whether PC companies will buy the telcos or whether the telcos will buy the PC companies," Capellas said, adding in jest, "Six months ago, I said that a start-up would buy us all, but that is not going to happen."

Compaq has also turned the corner on its recovery in a number of internal respects, he added. "There has been a dramatic reduction in our (employee) attrition rate," he noted. High-level executive attrition is down to 2 percent, he said.