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Compaq CEO sketches plans for content-saturated future

Michael Capellas outlines a bold strategy for remaking his company by focusing on the delivery of Internet-based content to a multitude of devices, such as cell phones, handheld PCs or Web appliances.

Can you hold the world in the palm of your hand?

Compaq Computer chief executive Michael Capellas thinks so, and he is betting his company's future on just this concept.

Speaking with industry analysts this morning in San Francisco, Capellas outlined a bold strategy for remaking the Houston-based PC maker by focusing on the delivery of Internet-based content to a multitude of devices, such as cell phones, handheld PCs or Web appliances.

The key elements are providing the back-end infrastructure for delivering content, selling the devices that will receive the content and cementing the two with services agreements. Those agreements, such as a recent DSL deal with SBC Communications, will help drive revenue beyond hardware sales.

Speaking at the Banc of America Securities conference last week, Capellas said his goal was to get 25 percent of revenue, or 50 percent of gross margins, from device-related services.

Today, he laid out more clearly how Compaq would achieve this. Compaq plans to increasingly focus on "multiple services wrapped around the PC in its new form," Capellas said.

The focus on devices, of course, also comes amid uncertainty in the PC market. Last week, Intel announced that it would miss third quarter earnings because of weak demand in Europe. Some analysts, however, have said that weakening demand could spread to other parts of the world.

Capellas himself last week said that sales of commercial PCs and storage systems have been weak and that European sales have been slow. Growth in the computer industry over the next two to three years will largely be driven by a need to build Internet infrastructure.

"Some segments of the market are extremely strong but others are getting soft," he said.

To drive home the importance of its non-PC device strategy, Compaq gave each analyst an iPaq digital music player.

Devices are taking an increasingly important role at Compaq. Capellas last week said the company would quadruple production of iPaq handheld computers.

The company had originally projected 7,000 unit sales a month, grossly underestimating demand. Capellas told financial analysts today he wanted to quickly ramp up production to 50,000 units a month. By early next year, if high-quality displays are available, he hopes to expand to 100,000 devices a month.

The popular handhelds are in such short supply they have been selling for hundreds of dollars above retail price on eBay.

Compaq's strategy revolves around what Capellas calls "edge of the network" or "edge of the Web."

The first generation of the Internet revolved around central servers delivering static Web content to PCs.

"What made the Internet happen was not about devices, it was the millions of pages of digitized content that were brought to the Web," Capellas said.

But with the increasing demand for multimedia content, the nature of the Web has changed and so has the technology used to meet that demand. Many companies moved from centralized servers or what Capellas called "server farms" to deliver that multimedia content.

Server farms, "that's where we are today," Capellas said. "Does that have any chance of being successful in the next phase of the Internet rollout? My premise is (that) we're betting the company on, 'No, it doesn't.'"

Content will be king in the next stage of the Internet's evolution, and that means successful computer companies will have to do more than just sell PCs or servers.

On the back end, companies will need to beef up storage as their permanent repository of static and dynamic information, add caching servers to quickly deliver frequently accessed content and sell smarter devices that can harness the full range of information.

During a Sunday night gathering with analysts, Capellas, who considers himself a seasoned hand at downloading MP3 music files, gave a demonstration of how the Internet, dynamic content, services, and work and home life converge.

"This (is the) kind of experience that is starting to say, 'The Internet is different,'" he said. "Handhelds are starting to deliver. They are the culmination of the business things. You get wireless e-mail, read your attachments. If you get tired of that, you stick your headphones in and listen to music at the same time. It's about redefining the touch of the Internet experience."

Going forward, as Compaq shores Internet infrastructure sales--servers, storage and caching servers--the company will augment PC sales with an increasingly broad range of Internet devices backed by service agreements with broadband and wireless carriers, among others.

Capellas said Compaq has seen no indication that Internet devices, such as the iPaq handheld PC or MSN Web appliance, will replace PCs. He sees the devices as extending PCs capabilities, "so that when they're not stationary they can continue to have the same level of access and ease of use."

As Compaq looks to the future, the company will more aggressively focus on two areas: wireless and broadband Internet access. Content delivered to wireless users will be increasingly personalized, and "the one thing we know about wireless Internet users is they hit the Web more often than the stationary user," Capellas said.

Compaq's CEO also predicted an unexpected boom in broadband, such as cable and DSL. "One of the underestimations is in developing countries how fast broadband will be brought to the market place," he said. "With that (comes) much different assumptions about what kind of content we can deliver."