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Compaq's new plan hurts dealers

The PC maker's direct sales effort launched today is more bad news for companies that resell systems.

The handwriting is on the wall for computer dealers.

The direct sales effort launched today by Compaq is the latest, and not likely the last, bit of bad news for companies that make their living by serving as the middleman in computer transactions.

Increasingly, customers are buying computer equipment directly from the manufacturer, thereby bypassing dealers. Further, companies like Compaq which historically have had strong ties to resellers and dealers, are now being forced to turn their back, to some extent, on resellers to meet customers' demands for a direct relationship with the PC manufacturer.

To make matters worse, Compaq is not just selling its hardware directly to the customer. Under the new program, the company will also boost efforts to sell a variety of services to customers, cutting into one of the higher margin business areas for dealers. The company will even bundle all of these services and products together in a package that comes with a single monthly fee.

Compaq executives strongly deny that the company is abandoning its sales partners, but observers point out that Compaq's necessary shift toward direct sales curtails opportunities for dealers. And Compaq won't likely be the only company to take the plunge. Survivors will be those dealers who can market highly specialized technical skills.

"A huge shift is under way, and we are in the middle of it. Resellers are just going to have to deal with it," said an executive at one large reselling operation. "The distributors have a hard row to hoe, too. You will see a lot of software start to go direct. Compaq is probably going to be followed by Hewlett-Packard and IBM."

Consolidation in this industry segment, in fact, already seems to be under way. Compucom, one of the largest computer resellers in the country, recently announced employee cutbacks while another, Vanstar, was acquired by a competitor.

Stocks for several computer resellers and distributors slid today following Compaq's announcement. Ingram Micro, for example, dropped by $2.44 to $44.5.

"The dealers were probably feeling the pain even before Compaq took this route, primarily because a lot of their sales were being funneled through the direct channels," said Deepinder Sahni, an analyst at Access Media International.

The shift in the industry largely comes from a simple phenomenon: Customers have learned to buy their systems directly.

While in the past, most customers needed a substantial degree of handholding to install equipment, general technical sophistication has grown. The Compaq program rolled out today, in fact, is mostly directed at selling directly to small and medium-sized businesses, traditionally the group that needed the most help.

Direct vendors, such as Dell Computer and Gateway, have also often been able to deliver high-performance products for less. One of the goals of the new program is to offer PCs and servers that will be equal or lower in price to comparative products from the two direct-sales giants.

Eckhard Pfeiffer, Compaq's CEO, was fairly blunt about the growth of direct sales in his presentation today: approximately 35 percent of PCs.

"We are simply not going to miss out on that opportunity, which is roughly one-third of the market," he said. Approximately 15 percent of PCs sold directly come from Dell; a substantial portion of the remainder are house-brands from dealers.

Even more importantly, Pfeiffer pointed out that virtually all large account sales go directly. Large dealers may be involved, but the customer is essentially negotiating the contract with the manufacturer.

Despite all of the discussions on direct sales, Compaq is accommodating its mass of dealers as well as its customers who want to transact through dealers, said Ken Kurtzman, vice president of Compaq's small and medium-business division. Compaq's prices will roughly be the same as those offered by dealers.

Dealers, moreover, receive commissions on sales directed to Compaq's site. Dealers get a six percent commission on desktops and a 10 percent commission on servers.

Nonetheless, most of them are wary of the program. Dealers contacted said that the program could prompt them to shift loyalties to other vendors. The program also makes "white box," or no-name, house brand computers more attractive, because dealers can get larger margins on these machines, the same ones that Pfeiffer said the new program targets.

"Nobody feels secure with Compaq these days," said one dealer. "The clones are becoming a larger part of our business."