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Commentary: An opportunity for Dell

The acquisition of Compaq by HP likely won't revive the fortunes of either company in PCs because it doesn't address the two main competitive threats: Dell Computer and IBM.

By Mark Margevicius, Gartner Analyst

The acquisition of Compaq Computer by Hewlett-Packard will likely not revive the fortunes of either company in PCs because it does not address the two main competitive threats: Dell Computer and IBM.

HP and Compaq will undoubtedly

See news story:
Dell covets HP-Compaq customers
continue to lose market share to Dell, which has set the benchmark for manufacturing efficiency. Neither HP nor Compaq by itself has retooled to meet that competitive situation, and Gartner believes that the merged HP-Compaq would have at least as much difficulty.

Moreover, Dell already has momentum going for it in gaining PC market share. After taking the top position in the worldwide PC market from Compaq in the first quarter of 2001, Dell extended its lead in the second quarter. Dell's shipments grew by 20 percent year over year to 4 million units, accounting for 13.1 percent of the worldwide market.

Dell's growth is especially impressive considering the decline of the total worldwide market by 1.9 percent in the second quarter. The company was the only one among the top five worldwide vendors--Dell, Compaq, IBM, HP and NEC--that showed a double-digit growth rate in the quarter.

Anticipating increasing profit-margin pressure from price reductions, Dell has executed a second round of layoffs to reduce operating expenses and maintain an 18 percent corporate gross margin.

Working against HP and Compaq and in Dell's favor will be the length of the regulatory process, the problems associated with the combining of the two vendors' PC groups, and the working out of conflicts in the sales channels, all of which will consume HP-Compaq management's time and attention.

IBM competes by selling low-profit-margin PCs to bring along sales of software and services. To succeed with that type of selling, HP-Compaq would have to do more with hardware, software and service packages than either vendor has done separately so far. That approach also means maintaining a hybrid sales channel and relying on resellers and other partners to deliver value-added services along with PCs. Managing such a hybrid channel has bedeviled HP and Compaq, and will likely continue to do so after the deal closes.

Time is a factor because HP and Compaq will likely not be able to offer a unified solution until the first half of 2003, which is a long time in the PC business. Additionally, customers now view PCs primarily as commodity products, so they have far less allegiance to a given vendor and, more importantly, are willing to switch vendors during times of product and organizational uncertainty.

The uncertainty of a pending acquisition tips the scale in favor of the enterprise customer, which can safely continue buying products from either vendor, because service and support will continue long after any product consolidation.

Gartner recommends that customers use the uncertainties posed by the deal as leverage in negotiating for better terms and conditions, concessions on price, and better support. In addition, customers engaging in multiyear contracts with HP or Compaq should negotiate to have conditions and clauses added that allow for the contract to be dissolved in the event of discontinuities in product road maps, deficient services or inability to deliver in a timely fashion.

(For a related commentary on the worldwide PC market and its dynamics, see Gartner.com.)

Entire contents, Copyright © 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.