New Compaq ads to target rival Emachines

The ads, which will compare the value of the Compaq Presario 5304--complete with free ISP access from NetZero--against the Emachines Etower 366i2, will appear in five major dailies including USA Today and the Wall Street Journal.

Analysts described the ads as Compaq's way of marking its territory--the sub-$1,000 market it pioneered and which accounted for 72 percent of its retail sales in July, according to PC Data.

Compaq and Emachines are bitter rivals in the sub-$1,000 PC market, where profits on boxes are sometimes measured in pennies.

"But it isn't just pennies, though, and that's the problem," said PC Data analyst Stephen Baker. "In July, three-quarters of the market was [priced] under $1,000."

In that market space, success is measured more in volume of sales than profits on individual PCs. If a PC manufacturer fails to meet his volume goal or gets stuck with excess inventory, the potential losses are enormous. The downfall of former chief executive Eckhard Pfeiffer came partially as a result of financial woes brought on by excess inventory.

For a small company like Emachines, which makes so little on every PC and has no high-cost PC systems to absorb shortfalls, the line between profit and loss is often very thin. Compaq's ad campaign, which touts three years free Internet service with the Presario 5304, could hurt the company, analysts said.

This isn't the first Compaq-Emachines conflict. Compaq in July sued its rival for allegedly violating 13 Compaq patents. Analysts note the PC maker used a similar strategy against Packard Bell when the two companies went head-to-head for the position of retail PC sales leader.

"What's interesting here is, if there is any merit to the suit, something like this could put Emachines out of business," said Lindy Lesperance, analyst with Technology Business Research. "It could ruin the margins they operate on. Compaq also has significant resources to spend on a thing like this."

Emachines also faces trouble from Apple Computer, which sued the company over its iMac look-alike.

Compaq's continuing war against Emachines will move into area of value, or which PC offers more services for less money. Compaq is betting it has a winner with free Internet access, which will be provided by NetZero.

"At the bottom of the price band we will show that Compaq has the greatest value," said Patrick Griffin, Compaq's manager of Presario products. Griffin dismissed the notion Compaq singled out Emachines--the only competitor cited in the ad.

"It is clearly showing the value of Compaq Presario against the rest of the market," he said.

Emachines chief executive Steven Dukker, however, criticized Compaq's ad campaign, saying the firm's math was faulty.

At first glance, the Presario 5304 bundled with free Internet access costs significantly less than the Etower 366i2. But the real issue, said Dukker, "is what people pay going out the door."

Most people buying the Etower 366i2 at BestBuy last week paid $199, which included a monitor and printer, Dukker explained. Emachines offers instant in-store rebates for customers who agree to a three-year contract for Internet access.

"The real function of this offer is the elimination of entry, to allow anyone to get on the Internet," said Dukker. "And the real issue for many people is what the pay up front to get a PC and Internet access."

Some analysts also questioned the validity of comparing the Presario 5304, a 366-MHz Cyrix MII system, against the 366-MHz Intel Celeron-based Etower 366i2. The Presario 5304's main competitor is the Etower 400i, they said.

The Presario 5304, at an average sale price of $524, lead the retail market in July, according to PC Data. Compaq also took the number two spot with the Presario 5340, at $747, followed by the $720 Hewlett-Packard Pavilion 4570. The Apple iMac came in fourth, averaging $1,075, followed by the $568 Etower 400i.

The sub-$600 market, where Compaq and Emachines typically slug it out, represents 36 percent of the retail market, according to PC Data.

In June, sub-$1,000 PCs accounted for 63 percent of Compaq's retail sales. "Every month this year it was over 60 percent, with as high as 78 percent in March," said Baker.

Compaq was the dominant PC manufacturer in retail sales for July, according to retail market researcher Intelect ASW. Compaq held 35 percent market share overall and 32 percent for PCs and 49 percent for portables.