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Computer makers transforming themselves

Compaq's purchase of electronic retailer is the latest deal to show that computer makers are putting a stake in the ground for the era of e-commerce.

Compaq's purchase of electronic retailer is more proof that computer makers are transforming themselves for the Internet Age.

Compaq Computer, the world's largest personal computer maker, today announced plans to acquire in a cash deal worth about $220 million. (See related story.)

Many of the largest PC makers are attempting to transform themselves into online-based resellers of PCs and PC related equipment and, in the case of Compaq, anything else that can be sold over the Internet, in an effort to create a stream of ongoing revenue that partially offsets ever-decreasing PC prices.

Another bonus for Compaq in the deal--the company gets a trophy piece, much like IBM used the Olympics to show off its technological prowess. The acquisition will help Compaq develop expertise in the creation of complex network systems designed for e-commerce, Schrock told Bloomberg News. The hope is that companies wanting to set up similar efforts online will purchase and set up expensive server and networking equipment from Compaq.

Compaq's acquisition comes on the heels of a spate of announcements from other PC makers who are herding new customers to portal sites in an attempt to both make the Internet easier to use--and eventually make more money.

"We're still in Oklahoma land-rush period" said Dave Tremblay, senior industry analyst with ZD Market Intelligence.

"We're starting to get the very beginnings of real volume and real revenue over the Net, [but it's] still early in the climb, so people want to make sure they've got a position staked out more than they are trying to make a lot of money on it. Eventually revenue and profits will follow," Tremblay said.

Compaq has already taken major strides to set itself up as a large online provider of PCs so that it can compete more effectively with the likes of Dell Computer and Gateway and tap into Internet sales. Compaq already works closely with online resellers such as Computer Discount Warehouse and has beefed up its presence on the Net through direct sales of small business PCs and other PCs and components.

But this deal goes beyond this as the PC giant attempts to cast a wider net to corral PC users into its Internet universe and exploit its existing AltaVista search engine technology.

The number of deals announced just in the last week show how eager PC companies are to claim a leadership position in e-commerce as they attempt to corral more viewers for the portal companies. For instance, Yahoo, Excite, and Lycos announced distribution deals with IBM today. (See related story.) Additionally, new Hewlett-Packard home PCs announced last week connect users to Yahoo with a single touch of the keyboard's search button. Many other PC companies have similar arrangements.

The partnerships are the tangible result of market research showing that the Internet is the primary driving force behind new PC sales. One goal is to make the Internet easier to use by aggregating content such as news, weather reports, and bulletins from the manufacturer in one location. But down the road, Compaq and others are angling for ways to make money off of commerce over the Internet.

With today's deal, Compaq appears to be trying to pursue a strategy of herding customers into its own Internet territory.

"By the end of the year, we could be driving 10 to 25 times more traffic to" by closely coupling the retail site with existing Compaq products and services, said Rod Shrock, senior vice president for Compaq told Reuters.

Unlike other PC manufacturers, Compaq already owns its own well-respected search engine, to which it now adds a shopping site. The company said it plans to push buyers of its consumer PCs and visitors to its AltaVista Internet search site and directly to the site, multiplying the site's potential customers. If a user does a search with AltaVista, the results will also provide a link that can allow for the purchase of relevant products, said Shrock.

When will pay off?
It will be a while before Compaq's moves to put together a comprehensive e-commerce strategy pay off, analysts say.

"It's a new revenue stream but not a big one, but every little bit helps in a world of small margins," said Lise Buyer, an Internet analyst with Credit Suisse First Boston.

She estimated that computer makers are receiving between $25 to $50 per person who signs onto the Internet.

Meanwhile, PC analysts agree that the new revenue is not yet significant.

"I think these moves are just directional at this point but not material," said Andrew Neff, an analyst with Bear Stearns. "It's too early to say what kind of contribution they'll make in the future, but it's a move in the right direction."

Other PC makers may have a tougher time trying to figure out what role they will play in the Internet field, said Philip Rueppel, an analyst with BT Alex Brown.

He noted that while PC makers want a part of the Internet service provider fees from deals they strike with ISPs, they'll be less inclined to push the issue with portals or e-commerce sites.

"Portals have more bargaining power because of the eyeballs they attract," Rueppel said. And as for the e-commerce sites, he added that PC makers are likely more interested in the business-to-business aspect of e-commerce than retail e-commerce.