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Compaq's direct hit is here

The firm's holy war against Dell takes a turn as it rolls out a program to target small and midsized businesses through direct sales.

Compaq's holy war against Dell took a new turn today as the No. 1 PC vendor rolled out a new program to target small- and medium-sized businesses through direct sales and new product bundles.

The Houston-based company unveiled a new category of Prosignia branded personal computers, aimed at small- and medium-sized businesses, and said it will sell the PCs directly, bypassing, in many cases, its existing distributors.

As previously reported by CNET News.com, the new effort, which was unveiled by CEO Eckhard Pfeiffer with fanfare in New York this morning, will essentially be the latest, and most comprehensive, effort Compaq has thus far launched to stem the popularity of direct vendors such as Dell. Small and medium-sized businesses will be encouraged to buy directly from Compaq's Web site. To entice them, Compaq will be offering special all-in-one product bundles.

The new family of computers consists of "aggressively priced desktops, notebooks, servers, options and online services, available direct from Compaq or through its network of resellers," Compaq said. The No. 1 PC supplier is emphasizing its suite of online services designed for technical support and advice.

Compaq said it was undertaking a "massive" direct sales and marketing effort in the United States for its new PC family, selling directly to customers. Compaq will also utilize an army of 11,000 local PC resellers for customers who require added technical support.

Customers can buy PCs directly from Compaq via phone or on the Internet through its DirectPlus site, Compaq at Home, or Compaq GEM Online, which is aimed at government, education, and medical markets. Prosignia PCs will be available overseas in the first half of 1999, largely through existing distributors.

In addition, the computer maker said it would offer a range of flexible financing programs covering not just products, but installation and services. Leased Prosignia equipment starts at $45 a month.

Interestingly, Computer Discount Warehouse, a major Compaq reseller which could potentially suffer from a revved up direct sales strategy from the PC maker, launched a campaign today, promoting the new line of Prosignia computers.

Compaq currently features desktop PCs, notebook PCs, servers, and workstations through DirectPlus direct sales site, but in the future, the company will put additional emphasis on its secondary products, such as networking equipment and printers. To date, Compaq has been selling a line of small business PCs including the Deskpro EP desktop model, an Armada SB notebook PC, and the Prosignia 200 server.

The new product line will include a Prosignia desktop starting at $1,219 with a 300-MHz Intel Celeron processor, an 8GB hard drive, a modem, and a 17-inch monitor. This same system can be leased for $42 per month through Compaq Capital, the company said.

A Prosignia notebook will start at $1,999 and includes a 233-MHz Pentium II processor, a 12.1-inch active-matrix LCD screen, and a 3.2GB hard drive.

Servers will start at $2,033 and at this price point include a 350-MHz Pentium II processor, a 4.3GB hard drive, 64MB of memory, and a monitor.

"They are looking at a whole bunch of ways of getting directly to customers," said a computer dealer who attended a recent Compaq briefing. "They are going for the Dell model. You can't really blame them. They have been getting beat up by Dell."

The Houston, Texas-based vendor has talked about selling directly to customers for more than a year, but has generally avoided aggressively pursuing direct sales in an effort to avoid alienating its dealer base. Now, however, the trend toward direct sales is inevitable, said dealers and analysts.

Compaq has said in the past that it estimates there are about 165,000 medium-sized businesses, 770,000 small businesses, and 6,300,000 very small businesses. Medium-sized businesses have fewer than 1,000 employees, small businesses have fewer than 100, and very small businesses fewer than 20, according to the company.

This is a market also targeted by Hewlett-Packard, represented by its Brio line of computers, and by Gateway, which has boosted advertising aimed at this market.

While more Compaq sales will be direct, dealers will receive commissions for customers it sends to the site. Compaq has also already rolled out new service contracts with its dealers which provide incentive bonuses for dealers who get better-than-average marks from customers on warranty work.

Dell, meanwhile, is not sitting still. The company, which mostly sells to large institutions, has been actively recruiting regional computer dealers, including Compaq partners, to sell Dell products in the small- and medium- sized business market. Dell has also recently ramped up an informational effort to reach this audience.

Dell's growth spurs plan
Compaq's new program comes as a result of Dell's growth in the past year, said dealers and analysts. Compaq has rolled out a number of initiatives and programs to stem the advantages Dell achieves through its direct sales model without disrupting relationships with its dealers and distributors, who earn income from reselling Compaq products. While these measures have worked, they haven't worked well enough.

Compaq, for instance, launched a "build-to-order" initiative last year which was designed to mimic the manufacturing cost advantages Dell historically has enjoyed. Building computers to customer order has reduced costs, pointed out Roger Kay, an analyst with International Data Corporation, but not completely eliminated the delta. Overall, Compaq's manufacturing costs are still around 3 percent or more higher, a figure which grows when distribution gets factored in.

Build to order manufacturing, moreover, only replicates some of Dell's advantages. Because Dell actually sells the computer directly to the customer, they effectively become a constant presence with the customer.

"It's not just Web selling, or configuring computers to order. It's customer intimacy and being closer to the orders," he said. "They [Compaq] have made the decision to go direct. When Compaq jumps in, they own a piece of it."

"Channel" programs under fire
Another effort to trim costs, the "channel assembly" programs under which dealers or distributors manufacture PCs for the major vendors, seems destined for similarly mixed results, said Charles Smulders, an analyst at Dataquest.

"It's potentially more efficient than traditional [manufacturing], but it's not as efficient as the direct model," he said. "I'm skeptical that channel assembly makes sense."

"The effort has taken more work than they thought and the benefits are less than they imagined," added Kay of these delayed manufacturing efforts. IBM and Hewlett-Packard have been the lead advocates of channel assembly.

Compaq's program will emphasize a broad product line and special bundles. One area Compaq is expected to more aggressively enter is networking equipment. Through the Digital acquisition, Compaq has inherited an agreement to purchase approximately $1 billion worth of networking equipment from Cabletron for eventual resale.

"They want to offer customers a complete solution," said another dealer. "They want to take on Cisco.

The ultimate success of the program is uncertain. Computer vendors have tried and failed to blend direct and indirect sales models before, and have failed. In the past, dealers have reacted to a vendor's direct efforts by switching their allegiance to a competing computer brand. Circumstances to some degree favor a direct effort at the moment. Customers, after all, seem to want to order directly. And, since dealers earn very little margin on hardware, the losses that result from direct sales aren't as large as in the past. Still, questions persist.

"The real question is how much they get paid in lead generation," said Ian Morton, a computer distribution analyst at Hambrecht & Quist.

So far, Compaq's direct efforts have also caused friction. "We have run into them as competition already," said one large Compaq dealer. "There's a lot of people concerned."

Service reps key
A factor that could help the program succeed is the fact that small customers need service representatives. Most small businesses do not have an IS department and therefore often hire dealers to build, repair, or maintain their networks.

Compaq has encouraged cooperation of its dealer base by offering incentive compensation. Compaq calls customers after a warranty repair. If the dealer gets a better than average review, Compaq pays the dealer $75 an hour for the work, rather than the standard $50.

The need for handholding also lay behind Dell's efforts to recruit dealers. Approximately 70 percent of Dell's business comes from large institutions, said one Dell spokesperson.

Dell is relatively mum about its specific plans for this market. The company, however, has invested more resources into this segment over the past year, according to David Clifton, a Dell spokesman.

Reuters contributed to this report.