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Compaq plays both sides

The leading PC maker puts a hold on agreements with 10 companies that sell its Presario systems, including Buy.com and Cyberian Outpost.

The Internet is changing the rules of business, so Compaq Computer had decided to rewrite its own rules for dealing with Internet-based resellers of its Presario line of computers.

Compaq suspended sales agreements with as many as ten companies that only sell Compaq's Presario computers over the Internet, as it works to manage emerging conflicts with traditional retailers. The affected companies include Buy.com, Cyberian Outpost, Value America, CompuCom Systems' PCSave, and even Compaq's own Shopping.com. The result: most are effectively unable to get and sell new shipments of the line of consumer computers.

The move is aimed only at companies that only sell over the Internet, according to company executives. Although these resellers typically buy their systems from a distributor such as Ingram Micro and Technology Data, just as "brick and mortar" stores do, some such as OnSale are selling the systems for less than their counterparts because they don't need to stock systems themselves or maintain the necessary warehouses.

In the long term, Roger Kay, a PC industry analyst with International Data Corporation believes Compaq sees the Internet as the buying channel of preference for consumers, but in the meanwhile, "Compaq can't afford to disturb existing retailers in favor of new outlets," he said.

The companies that stand to be most affected by the decision appear to be those such as OnSale and Buy.com which rely on the distributors to stock and ship the systems to customers. Buy.com did not return calls seeking comment.

"The impact on us would be non-material," said Jerry Kaplan, CEO of Onsale. "These systems represent a very small percent of our overall sales."

Apparently the company does have the ability to sell some older Presarios while more recently introduced systems will not be available for sale, according to Kaplan.

Not all Internet-only stores will be affected equally by the measure. Darryl Peck, CEO of Cyberian Outpost, said his company maintains inventory in its own warehouse, and will continue to "sell through" its current inventory of Presarios.

"Some people are saying there was pressure from other resellers [and] some saying [Compaq] wants to take it all for themselves. That's ridiculous," Peck said. "They just want to get their act together."

Peck expressed optimism that Cyberian will be reauthorized to sell Compaq systems, and said the move isn't impacting his business.

"Undoubtedly [Compaq's] concern is that the Internet is stirring up the pot in such a way as it reduces their control over their distribution channels. Until they understand the effects of this new, lower-cost channel, they're going to be reluctant to play," Kaplan theorized.

Other online vendors were either unwilling to comment or were still in the process of figuring out the impact of Compaq's moves.

Compaq's decision comes on the heels of the formation of a new business unit that is focused on selling PCs and services over the Web, highlighting the challenges that face that face Compaq, Hewlett-Packard, IBM and Apple Computer as they try to mimic the success of direct-only PC vendors Dell Computer and Gateway.

Leslie Adams, Compaq's U.S. director of consumer marketing, said Compaq took the action in response to the growing number of online retailers seeking authorization to sell only its PCs. Traditional retailers who are opening online outlets have also been seeking to sell over the Internet in greater numbers, further adding to the urgency of the situation for Compaq.

Interestingly enough, Compaq itself is dependent on at least one online reseller for its own direct sales efforts. The company outsources much of its own direct sales effort to a subsidiary of Insight, a large online reseller specializing in corporate sales, according to sources. The Insight subsidiary handles the customer sales call for Compaq as well as delivering third-party products on behalf of Compaq.

Just recently, Compaq said that it is selling approximately $1 million a day in Presario systems from its Web site. Internet-only retailers are potentially draining away sales that would otherwise go directly to Compaq's online store because it is relatively easy to find lower prices on the Internet through the use of specialized search engines.

While the move may seem a straightforward attempt to grab a larger portion of online consumer sales for itself, Compaq has in fact been in the process of streamlining its sales channels for over a year. In 1998, the company changed the requirements for dealers seeking to carry its corporate computers. The new standards, which required that dealers hire more technicians trained on Compaq products, reduced the number of authorized Compaq resellers.

Adams said sales to the group of Internet retailers to date represent a insignificant part of its overall business. "They weren't even on our radar until recently," she claimed.

The conflict Compaq has faced is increasing its own direct sales efforts without angering its dealers. Many of its corporate dealers now participate in an agent program. Under this program, dealers who refer customers to the Compaq site receive a commission on sales.

In any event, direct sales in any event have been climbing. Daily sales of $1 million in Presario products comes to around 10 percent of overall Presario sales, said a source close to Compaq. In addition, Compaq sells over $1 million a day in Prosignia computers, designed for small and medium-sized business.

"I don't think [the action is] related to issues about margins or wholesale prices [of PCs]," a Compaq spokesperson said, noting that the company thought it was an appropriate time to "reevaluate" its sales programs.

"The sales programs we have in place were designed for brick-and-mortar stores. There are issues like customer support, product demonstrations, and [sales materials] that obviously don't apply to a strictly Web-based reseller. We thought the best thing was to start over and develop a new set of programs with new requirements" for this emerging channel of distribution, the spokesperson said.

Compaq said it expects to reach new agreements with the Internet companies within 30 days.

Reuters contributed to this report.

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