Compaq revamps strategy, adds AMD

Compaq Computer chief executive Eckhard Pfeiffer presided over a press conference in which he described a new, and relatively ornate, strategy for reaching small- and medium-sized businesses through a combination of direct sales, co-manufacturing, and better dealer incentives.

The computing giant introduced new notebooks and servers for small business and discussed changes to its sales strategy for the Prosignia line, which is mostly sold directly by Compaq over the Web.

Also, in a landmark development, Compaq announced today that it will start selling Prosignia notebooks based around processors from AMD. To date, AMD chips have largely been used in consumer computers, and inclusion in the Prosignia line will mean that AMD has cracked the business computer market, which is both larger and generally more profitable.

Compaq announced the Prosignia 150 Series of notebooks which features AMD K6-2 chips running as fast as 380 MHz. The company also introduced a new line of servers. The NeoServer is the "first ready-to-go server," the company said.

Some of the highlights of today's announcements include:

• Direct sales of Prosignia computers have hit $2 million day, Pfeiffer said.

• Compaq is delivering its PCs to customers in under five business days.

•  70 percent is new business and "half has been switched over from Dell," Pfeiffer claimed.

•  $1 million a day run rate for "consumer choice" program--which is either direct consumer sales from compaq or kiosk sales at stores.

•  Prosignia now offered at over 600 resellers and retail: new additions include CompUSA, Staples, Office Depot, and OfficeMax.

• Compaq will price at or below competition: three percent below Dell notebook PCs, for example.

• Partner Direct Program introduced: resellers work with large distributers such as Ingram Micro and Tech Data who are "co-located" in Houston with Compaq to sell and configure PCs. This allows value added resellers to make more money, Compaq said.

• The company also rolled out the Prosignia NeoServer, a 500-MHz Pentium III server for small businesses starting at $1,399. Up to 25 PCs can be hooked up to the NeoServer.

The company discussed changes in its sales strategy for the Prosignia, including a program under which distributors and resellers will help customize Compaq PCs. This will likely dredge up the debate that has dogged Compaq for a year: Can a company sell computers directly and through dealers?

"They want to do it [selling both ways], and they don't. I would think of the Prosignia as a trial balloon," said Roger Kay, an analyst at International Data Corporation. Selling computers directly can cut costs, and Compaq has indicated it wants to do more business directly. However, disruptions in the current sales structure could hurt the company drastically. If botched, a shift to direct sales could put a dent in sales for two to three quarters.

"They feel like they can't afford a revenue hit given the expectations of Wall Street," he added. "It could be a long recovery cycle, on the scale of absorbing Digital."

The Prosignia PC line, released last year, was the basis for Compaq's entry into direct sales. Although dealers can participate in Prosignia sales, most get sold directly through Compaq's site, according to Compaq sources. Along with Prosignia, Compaq has also inched toward making it easier for customers to buy its consumer Presario computers and its corporate Deskpro models through its Web site.

These moves angered Compaq resellers. To ease the relationship with its dealers, Compaq created a program, called the "agency program," according to Kenny Kurtzman, vice president of Compaq.com and the person who spearheaded Compaq's direct sales push. Under the program, dealers received up to a six percent commission on sales that they directed to Compaq's Web site.

The agency program is now being scrapped. In its place Compaq is instituting the PartnerDirect program. Under PartnerDirect, Compaq will work more closely with distributors and dealers to deliver customized computers while eliminating inventory costs.

With PartnerDirect, Compaq will build the basic PC unit while Ingram, Tech Data, or the resellers specifically tailors the PC to the exact parameters of the customer order. With this program, ideally, Compaq will not have to stock as many components or third party products, which will cut costs. These components instead will be carried by resellers and distributors, who theoretically will be able to keep inventories lower. Customers, in turn, will have the choice of ordering from Compaq or through a dealer.

In January, Compaq called the Prosignia line a success, stating that the company was selling more than $1 million worth of Prosignias a day across its Web site.

Then, in late February, Compaq said that sales to medium-sized businesses, the target audience for the Prosignia line, were below expectations for the first quarter. Sales to large companies and consumers were on track, said a company spokesman, but the medium-sized segment lagged.

Striking a balance between these new channels of distribution has not been easy. In February, Compaq told Internet resellers that they were no longer authorized to sell Presario computers for 60 days. The halt came, said sources, because conflicts were erupting between Compaq's standard store retailers, and Web resellers which were undercutting stores by selling at cost on the Internet.

Reuters contributed to this report.