Eckhard's Gone but the PC Rocks
On
Part 3
David Kirkpatrick
Gateway doesn't sell just PCs. It sells a broad range
of software, including packages for doctors,
lawyers, and other small-business people. It sells
Internet access; it gets additional revenues from
customers who pay in installments; it gets ad
revenues from its Website. Says Waitt:
"Everybody's looking for some form of ongoing
revenue stream from their installed base. As prices
come down, the box itself is a smaller percentage of
the overall solution you offer customers."
Gateway uses its close connection to sell customers
on hot, new, expensive features. Stories of buyers
phoning in and finding themselves persuaded to
buy a $3,000 PC for their mother are not uncommon.
To further the connection to customers, Waitt has
launched 155 Gateway Country Stores, mostly in the
U.S. The stores carry no inventory, but customers
get to test machines before they buy, all with the
helpful assistance of salespeople only too happy to
make in-person pitches.
Hewlett-Packard has many of the same problems as
Compaq: It's a behemoth that needs to be nimbler; it
would like to sell directly to customers but is afraid
of alienating resellers; and its CEO, Lew Platt, is an
ambitious man who for years was enamored of
growth, aiming to make HP one of the "Fortune 10."
(It is now No. 14 on the Fortune 500.) Perhaps not
coincidentally, HP's CEO is headed out the door,
albeit in far more decorous fashion--Platt is
overseeing the breakup of HP into a computer and
imaging company and a measurement company, and
will leave after the board has found a new CEO for
the computer half.
Platt modulated his talk of growth after last year's
disastrous second quarter, when HP lost money on
PCs for the first time since 1994. Platt heeded the
warning. With Duane Zitzner, who now heads the
PC division, he immediately refocused the group on
profitable growth. Now HP is working assiduously
to reduce both product and parts inventories and
improve its manufacturing operations. It is also
selling PCs directly, even as it vows to retain its
long-standing connection with resellers. Says Webb
McKinney, head of the group that sells PCs to
businesses: "We think we can pass Dell eventually,
and we're going to do it by growing share and profit
simultaneously." HP already has the largest PC
market share in U.S. retail stores, having seized that
spot from Compaq in January.
Unlike Compaq, HP has an incredibly strong profit
center: Its printer business is by far the market
leader. A large percentage of Hewlett-Packard home
PCs are sold with a printer. And printers have a
wonderful ancillary profit stream of their own: ink.
Merrill Lynch analyst Steven Milunovich estimates
that printers account for 55% of HP's profits--with
40% coming from ink and cartridges, and just 15%
coming from the machines.
On the surface, IBM's PC business is considerably
worse off than Compaq's. The division lost $990
million last year and $89 million in the first quarter of
this year--although that was down from $458 million
a year earlier. But there's a silver lining here. After
selling PCs to a company, IBM can often also sell
services to the customer, thus locking in profits for
years. A well-managed Compaq could eventually do
the same thing. Jim Pertzborn, the newly appointed
general manager of IBM's PC group, recently told
CNET's News.Com, "It is fundamental for us to be in
the PC business to provide solutions to customers."
(IBM declined to comment for this story.) Pricing
well-reviewed products aggressively, IBM gained
PC market share in the first quarter, with sales up
30%, according to IDC.
IBM's price cutting was a factor Pfeiffer pointed to
when he tried to rationalize Compaq's disappointing
quarter. But he can't get off the hook just by blaming
industry conditions. The fact is, each of his big
competitors, even money-losing IBM, has a better
strategy for dealing with today's malady of declining
prices and erratic demand.
The big lesson is simple: PC makers need to find
other ways to make money, even if by some miracle
PC prices eventually rise from the dead. (For more
on the PC's future, see our interview with Andy
Grove in the box that follows.) Says Jim Liang, who
co-heads technology investment banking at Morgan
Stanley: "I don't think we'll see pure-play PC
companies that are growth companies anymore."
Pfeiffer understood that: It's why he wanted Digital's
services arm. But in his rush for growth, he bloated
Compaq by buying the rest of Digital--and in this
fast-moving market, bloat is really, really bad news.
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