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New reality forcing direct pressure

Selling via the Internet may appear to be a panacea for all that ails PC makers, but it's not as easy as it looks.

Moving from traditional retail sales to a direct model may appear to be a panacea for all that ails PC makers, but the shift is not as easy as it looks.

But more companies are headed Computer Darwinism that way as the Internet transforms the market and the price war forces companies to think outside the box.

Selling over the Internet directly to customers is appealing to PC makers looking to cut costs and boost profit margins. Just look at Dell's phenomenal success, they'll tell you.

But there's a lot more to online sales then simply putting up a Web site, PC makers are learning. Companies have to change their manufacturing lines, and not alienate their current dealer base. NEC, in fact, retreated from its direct plunge after sales dropped.

"There is a new reality emerging," said Tony Amico, an analyst from International Data Corporation. "The villain [for resellers] is not Michael Dell," Amico said. "The villain is the Internet."

It is hardly surprising that PC makers would want to emulate Dell and its business model. Until recently, the direct pioneer has booked growth at dizzying rates, maintaining stable average selling prices while traditional PC makers have watched their profit margins slip, dragged down by PC price wars.

"Unit growth as a priority forces vendors to be more efficient," said Bruce Stephen, another IDC analyst.

But unlike traditional PC makers, Dell was built for direct sales from the bottom up, he said. It is much more difficult for established companies like Compaq Computer, Hewlett-Packard, and IBM to shift strategies mid-game.

These companies must walk a tightrope between aggressively expanding their online sales and appeasing their retail partners. Compaq is a prime example. Simultaneously beefing up its online division while freezing some online retail sales, the company is struggling to appease resellers without letting the Internet pass it by.

Compaq is working out programs that give its resellers a percentage of Internet transactions they bring to Compaq, but the eventual success of these plans is uncertain. IBM and HP are putting together similar programs.

"Compaq is taking a deep breath," Amico said. "It doesn't make sense to cut off Internet resellers--that's the direction [the industry] is going."

In addition to placating resellers, PC makers must also maintain their relationships with distributors. "The distribution role is migrating," Amico said, noting that when PC makers shift to a direct model, distributors not only lose a customer, but gain a competitor.

Resellers and distributors need make up revenues lost to direct sales by offering more "out of the box" services, he said.

Additionally, PC companies need to update their manufacturing processes before they can even think about selling direct, he said.

For his part, Michael Dell claims that doing both is not easy. The company tried it once by selling consumer PCs through retail outlets. The experience was, he said, "a disaster."

Others will find it just as tough, he added. "These companies that are very good at indirect, can they be great at direct? Can the world's best baseball team beat the best basketball team at basketball?" he said.

To offer build-to-order systems, companies must have "cell manufacturing," Amico says-- teams of workers who build each PC from start to finish, rather than a typical assembly line production.

"If you don't have cell manufacturing, don't do it," Amico advised, citing NEC's ill-fated NECNow direct sales effort as an example.

NEC shifted its distribution from its reseller network to direct in an attempt to warm up lackluster sales while cutting costs. The program never caught on with customers. A spokesperson admitted earlier this year, "The 'be like Dell' model is not working for us. It did not do as well as we expected."

Michael Kanellos contributed to this story.