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Compaq puts its money on storage

High-tech companies typically follow the advice of industry analysts, but the PC maker is shifting its server and storage strategy for a surprising reason: The CEO thinks analysts are wrong.

High-tech companies typically follow the advice of industry analysts, but Compaq Computer is shifting its server and storage strategy for a surprising reason: The chief executive thinks analysts are wrong.

CEO Michael Capellas made his position clear this week when Compaq launched its highly touted but long-delayed AlphaServer GS series, code-named Wildfire.

Compaq's chief executive said analysts are wrong about the demand for Internet access, and he plans to reshape his company to take advantage of windfall sales coming from that demand.

To support its efforts, Compaq has entered a multifaceted strategy involving servers, storage, reduced-legacy PCs and application service providers. The Houston-based company also is looking at partnerships for delivering wireless Internet access.

Compaq's immediate goal is to beef up storage. "In addition to server farms, you're going to see storage farms," Capellas said.

The computer maker also plans to improve the reliability of storage to match that of servers. "You have to ensure you're as fault-tolerant with storage as you are with processor speed. And, of course, it's got to support absolutely explosive growth," Capellas added.

Compaq stumbled into the storage market when it agreed to buy Digital Equipment in January 1999. Until then, Compaq didn't take the need for attached storage as seriously as it should have, said Technology Business Research analyst Lindy Lesperance.

But with Internet usage rising--and the need to store data with it--Compaq has put more emphasis on storage, particularly attached to servers.

"They discovered the unseen gem of the acquisition," Lesperance said.

In a research note issued today, Merrill Lynch analyst Steve Fortuna estimated Compaq's annual storage revenues to be about $5 billion: $2.5 billion from internal storage, $1.5 billion in external storage and software, and $1 billion in tape backup.

Compaq's internal storage sales, like its competitors, will grow at a modest pace--Fortuna forecast about 5 percent a year. Tape storage is better, with about 10 percent to 12 percent growth. But the big growth is in external storage, with 50 percent annual growth, Fortuna predicted.

Currently, 30 percent of Compaq's storage revenues come from external devices and software, but that could increase dramatically as the company pushes into delivering attached storage for Internet servers.

Central to Compaq's strategy will be distancing its storage operations from its PC business and associating it more with Internet infrastructure. Fortuna said to expect a major marketing campaign to support this shift sometime in the second half of the year.

Capellas, like rival CEO Michael Dell, is recasting his company as an Internet infrastructure provider. Dell recently gave a similar message, shifting Dell Computer to becoming a deliverer of Internet infrastructure products and services.

"Internet infrastructure" is to hardware makers what "business-to-business e-commerce" is to software developers: an all-encompassing expression du jour describing an opportunistic expansion of their historical businesses.

"Dell and Compaq have radically changed their tunes," said Piper Jaffray analyst Amir Ahari. "They want to get out the message they are no longer PC companies but enterprise companies. These companies have woken up, and they see the World Wide Web, the Internet, and they're seeing the growth has never been on the customer side, the consumer side."

Capellas' push into Internet infrastructure is strongly tied to his belief that analysts have underestimated future demand for Internet access.

Analysts have largely based their Internet usage forecasts on typical PC use. International Data Corp., for example, estimates there are about 200 million Internet users today, potentially reaching 500 million in three years.

But when factoring in the nearly 1 billion wireless users--many of whom will be using handhelds computers, cell phones and other non-PC devices to connect to the Web--the number jumps dramatically, Capellas said.

"The decisions that you'll make about how you access the Web will be increasingly off the wireless handheld device you have, increasingly off of different choices about the carrier that you have (and) choices about who will be your content provider," Compaq's CEO said.

Ahari predicted that as WAP (wireless application protocol) and other technologies take off, the demand for servers and storage will increase. Those companies positioned to take advantage of this will succeed.

Behind this demand for Internet access and services, Capellas envisions the need for more storage--lots of it--which is the final piece of a broader Internet strategy Compaq will reveal over the next couple of quarters.