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Compaq vs. Internet retailers

Compaq's suspension of sales with some online retailers shows how traditional companies are struggling to adapt to the Internet revolution.

Compaq may have a new enemy in the PC wars, and it isn't Dell. It's online retailers.

This time around, Compaq finds itself at odds with the online sellers, which are selling Compaq products at wholesale. The computer maker earlier this week suspended sales agreements with as many as 10 companies that only sell Compaq's Presario computers over the Internet.

The dramatic move is another example of how the Internet is reshaping traditional businesses and how these new competitors can throw even the most savvy companies off guard.

Compaq has denied that price disparity was a factor in the decision to suspend sales. But many industry analysts and observers believe the move came about because some online stores are selling Compaq's systems for less than traditional "brick and mortar" retailers. The online contingent can do this because they don't need to stock systems themselves or maintain warehouses.

Online retailers are aware that they have become a thorn in Compaq's side.

"Undoubtedly [Compaq's] concern is that the Internet is stirring up the pot in such a way as it reduces their control over their distribution channels. Until they understand the effects of this new, lower cost channel, they're going to be reluctant to play," said Jerry Kaplan, CEO of Onsale, one of the affected companies.

"The dynamics of what going on is that Compaq was overtaken by a rapidly growing channel of distribution, and some online resellers ended up disturbing some of their existing [retail] channel partners," observed Roger Kay, a PC industry analyst with International Data Corporation

Here's the rub: Onsale lists available PCs at wholesale prices, plus standard fees for credit card and transaction processing. The company's "atCost" program lets Onsale act as an order processing center, while a distributor such as Tech Data actually ships the computer to the buyer. Onsale says a Presario 5240 with 400-MHz chip invoices at $1,097; standard list price at CompUSA and other stores is $1,199.

Not surprisingly, such tempting offers are wooing customers away from the reseller around the street corner.

The immediate effect is that some companies may not have Presario systems to sell. But in the long run, a dangerous precedent could be set. Compaq and other computer makers such as Hewlett-Packard and IBM that sell in retail outlets have to adjust to the reality of the Internet as a force that is changing the rules of business.

Analysts say that Compaq has little choice in the matter but to allow online resellers. Any company that doesn't offer customers a variety of ways to purchase products may only lose sales in the long run.

Compaq may be looking at ways to even out the price disparity between online and traditional stores, but faces a number of vexing issues there, too.

"Compaq is clearly under pressure from channel partners to do something, because [retailers are] getting undercut, but they are trying to swim against the tide," said Charles Smulders, an analyst with Dataquest covering PC distribution issues.

Any attempts to even out pricing structures are likely to fail; what retailers have to do, Smulders said, is justify their existence by doing things for a customer--such as provide the instant gratification--an online store can't do.