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Can PC rivals avoid Compaq's fate?

HP and Gateway target small business, but Compaq's shortfall shows that there is no guarantee for success in these strategies.

Hewlett-Packard and Gateway today announced programs targeting small business, but Compaq Computer's earnings shortfall shows that there is no guarantee for success in these strategies.

HP is strengthening its ties to online and catalog reseller Computer Discount Warehouse to focus on small businesses and will create a special Web site devoted to HP PCs, printers, networking gear, and other products. Other deals with the computing giant are expected in the near future, said sources briefed by HP.

Gateway, meanwhile, is targeting the same group of customers, expanding its Your:)Ware financing program to small businesses and officially opening "Business Solution" centers at its company-owned retail outlets. The PC maker also launched an ad campaign that will run in newspapers, television, and the Web that's part of a broader push to gain acceptance in the corporate market.

Small-business PC sales are expected to outstrip growth in the consumer and corporate markets, according to industry analysts. While non-branded "white box" PC assemblers claim a large chunk of today's sales, the small-business market is become a top priority for major manufacturers like Dell, Compaq Computer, and IBM.

Not all companies have reached this market with success, however. The issue of how to sell to small businesses is a vexing one for companies such as HP and Compaq that are used to selling through third-party retailers, such as computer and office-supply warehouse chains.

Compaq, in particular, is struggling to keep up with Dell, Gateway, and others that build PCs to order and sell directly to customers. The direct-sales model keeps costs down by reducing inventory and quickly taking advantage of dropping prices for computer parts. Compaq, by comparison, can't reduce prices on already-built machines without sacrificing profit, a crucial disadvantage when demand slows at resellers.

"The direct guys are starting to really stick it to the indirect guys," said Louis Mazzucchelli, a financial analyst with Gerard Klauer Mattison.

Compaq has tried to address this problem by selling its ProSignia PC directly to consumers through its Web site. The results of that shift seem particularly pronounced in Compaq's precipitous earnings shortfall for the current quarter, which was attributable in part to slow sales in this line. (See related story).

"Compaq's hybrid model of part direct and part indirect is not working well," said Merrill Lynch analyst Steve Milunovich, who noted that the issues could linger beyond the March quarter.

PC prices also continue to drop in this cost-sensitive segment, further making it more difficult to succeed.

HP's program with CDW, which could be expanded to other catalog/online sales operations, isn't a sign of a move to direct sales--yet, the company claimed. HP still ships PCs to CDW, which then stores them until a customer orders them.

"This is another way of reinforcing our relationship with [the sales] channel," an HP spokesperson said. "It's just one piece of a plan to engage the channel and vie for market share. The channel is still important to us," she noted.

"HP seems to be in the camp where they are staying with the indirect mode. They have the feeling that because of the channel problems Compaq is having, that it is to their advantage to stay in the channel to say, 'We're loyal,'" said Matt Sargent, senior industry analyst with research firm Infobeads.

HP can't stay solely with the reseller channel, though. In fact, industry sources briefed by HP say that the company has plans to sell equipment directly to corporate customers as well as expand its sales by teaming up with other online resellers.

Gateway's strategy, for its part, has been to continue to expand its retail presence and to refine its direct-sales model to better target small-business buyers who tend to shop locally for equipment. While the company operates 155 stores, none stocks equipment for sale. Instead, PCs are built and shipped to customers only after being ordered.

The company said today that the updated Your:)Ware program would offer customers the ability to replace PCs every two years while keeping a fixed lease payment. Service and support options now include a 24-hour dedicated support line and training programs at more than 100 of Gateway's stores.