Capellas told an audience at a Churchill Club dinner in San Jose, Calif., yesterday that MP3 players will be one of a number of new products to emerge from the consumer unit created by Capellas when he took over the company last July.
"We're coming out with MP3 players," he said. "The Internet will become different types of devices that serve different purposes?Three years from now, the end consumer will want to buy a utility that says, 'I have access to that.'"
Nonetheless, while Compaq sees an opportunity to cash in on the MP3 trend, Capellas said he is firmly against Napster, the online music-swapping software that helped make the MP3 format popular.
"It will ultimately be destructive if we don't take a stand," Capellas said of the service.
Napster allows people to connect their computers directly to thousands of others on the Net to quickly swap songs or other files without paying for downloaded music. The software is at the center of a controversy over copyright protection and has shaken the recording industry, which is already scrambling to adapt to the world of online music.
While acknowledging that "we can never completely legislate or control the flow of intellectual property," Capellas said the industry still has to take a strong stand to defend intellectual property.
"We patented it, we will protect it, we will fight like hell because it is the foundation of our industry," he said.
Last night's speech in many ways reflected the cultural change Capellas is trying to bring to Compaq. In 1997, when Compaq was the dominant PC power, appearances by then CEO Eckhard Pfeiffer were rare and about as exciting as footnotes from a doctoral thesis. By contrast, Capellas joked with the audience and reiterated his plans to reinvigorate the Compaq brand through edgy advertising and "cool" products.
The shift to devices will be a major issue for Compaq, as well as the rest of the computing industry. The popularity of handheld computers, cell phones and MP3 players has expanded the market for consumer electronics and Internet access. While these appliances have opened up new markets for hardware makers, these companies also face the problem of how to make money off of what are typically inexpensive products.
Like others, Compaq will create alliances with content providers and access carriers to create plug-and-play devices, and then split the revenue through ornate agreements.
"There is no question that you have to get revenue above the box line," he said. These alliances, he added, aren't easy to craft but ultimately necessary and profitable.
"I have put more priority on defining our alliances than almost anything I have done," he said. "Nobody can do it all?The marriage is hard. The honeymoon is painful, but the divorce is really painful."
Compaq is also giving relatively free reign to its consumer unit. The division operates fairly autonomously from Compaq's corporate divisions, so that it can concentrate more specifically on retail issues.
"The people who are developing high-performance alpha clusters probably don't have a lot in common with the guy trying to decide what color to put on an MP3 player," Capellas said.
The downturn in the company's fortunes in 1999, combined with the hiring crunch, forced Compaq to reexamine its policies.
"It did force us to change longstanding institutional things about the work environment," he said.