Compaq PC chief describes post-PC plans

Like many PC makers, Houston-based Compaq is hoping to hit on the next big thing: the anticipated convergence of PCs, the Internet and consumer electronics.

At the same time, Compaq is looking to move beyond its recent past, which includes the ouster of then-CEO Eckhard Pfeiffer in April and the loss of market share to Dell Computer and others.

In an interview with CNET News.com, Mike Larson, senior vice president and general manager of Compaq's consumer division, explained how Compaq will increasingly shift from seeking profits from hardware per se to finding it in "e-tronics," Compaq's buzz word for slimmed-down devices that will be marketed in conjunction with Web sites or communications carriers.

The "Clipper," a Web terminal that potentially will be sold as part of an Internet access package, will be one of the first steps in this transition process. In a promising start, software giant Microsoft recently showed off the Clipper as a potential client for its Web Companion service.

CNET News.com: I understand Compaq with Microsoft developed the MSN Web Companion, announced at Comdex.
Mike Larson: It was the Web Companion platform that was really announced by Microsoft at Comdex, and they showed a number of potential products that would use that platform sometime in the future. We're positioning it publicly and for the press as a technology demonstration more than a product announcement. It's safe to say we have been working with them around the type of functionality that we view this kind of product having or needing.

Compaq has been taking a broad approach to information appliances. Are you looking at other operating systems than Windows Powered (the new name for Windows CE)?
Yes. We're going to look at any and all operating systems that we believe customers will demand or require around the world. Please don't spin this as my trying to pick a fight with Microsoft. The Windows [Powered] operating system is not necessarily the right [choice] for consumers worldwide. In certain parts of the world, it's really not an option. It's safe to say we're supporting Microsoft in the development of this platform, but it's possible we'll use other operating systems as necessary.

Let's talk about the broader e-tronics category as introduced by Michael Capellas.
He's using my term. It's a consumer [division] term.

What can consumers expect from Compaq in this new product category?
We're categorizing e-tronics as the individual devices that...do singular functions, or skinnyed down functions, vs. a full-fledged PC. There's a device with a link to a Web site with links back to the PC.

Why is this so important?
I think all of us are going to be hard-pressed to make big dollars and large profits in selling these lower-cost devices, which in my mind will be extremely competitive. Where the money is to be made will be the Web sites, the relationships and partnerships with the Web sites via traffic, e-commerce and revenue sharing.

So why would anyone want to partner with Compaq? We have a huge installed base. We provide instant scale and distribution. We send millions of customers to these sites. The message I have given my group is no e-tronic will see the light of day without the appropriate Web-site partnership, because I see the profitability to be primarily from the Web site as opposed to the device.

I assume you are talking about something more than just site traffic?
The real play is in its incremental revenue growth, but more important than that you're going to drive profitability through traffic and revenue sharing by sending people to the sites. And should they buy any products, you share in that sale as well.

Everybody is talking about making money off of Internet services. Most people now understand they are not going to have big profitability and revenue growth selling hardware alone, unless we drop a few more [competitors ]. Packard Bell just bit the dust here in the U.S., IBM's kind of pulled in their horns and Acer fell by the wayside. Maybe if we can drop a few more, maybe there will be a couple left standing to make a little money in this business.

Do you have a major portal partner yet?
We have the relationship with CMGI, and we're currently using AltaVista as our default launch page. But from there we can go to many different sites. I really don't want to talk too much about what we're doing, but you can rest assured we have some announcements brewing. We've positioned ourselves as the Internet leader, and in the consumer space, I think we definitely are. We had the first Internet PCs, we invented the Internet keyboard, and we already are generating substantial above-the-box, or beyond-the-box, access and revenues.

Do you envision moving to a total services model, where you aren't really making any money on the PCs at all?
I suppose that's a possibility, but I don't see it happening for the next year, or two or three. I think these free PC models, or subsidized PC models, if you think about it there really is no free PC. They're just paying for it in a different form. I actually have benefited from that craze, because we sold to a lot of these companies [that are] giving...away the PCs. They're free to their customers, but we got paid for those.

MicronPC recently moved to a subscription-based model where customers pay a monthly fee for PCs and services. Do you see Compaq doing this?
It's clearly a model that is evolving. We do sell direct, and we're looking at any number of offers we think will resonate with consumers. We're working hard on developing our own Compaq.net service, and the key for us is we want to own the customer. That kind of approach clearly does that.

Compaq's consumer business in the third quarter grew by 51 percent in terms of unit shipments, but only about 15 percent in terms of revenue. Your operational margins were around 4.3 percent. Isn't that disparity a problem?
You have to remember, when you make that kind of money on a very large base, you're talking about a large sum of money. What we've been talking about here today is not a hardware-only model. We recognized a year-and-a-half ago that to make it on hardware-only margins was probably not the best business strategy. We're very well positioned to continue to grow in this business, to continue to be profitable in this business, and there will be a time in the future where we won't be dependent on hardware for profitability. We see that very clearly.

I don't see the same kinds of trouble on the horizon that you do. Obviously, this is a fast-moving, fast-changing business. If you blindly follow the same business strategy or model year after year, at some point you're probably going to crash and burn--I am confident we are zigzagging around enough to forge ahead.