(Massachusetts) State a haven for Compaq in downturn
By Hiawatha Bray, Globe Staff, 3/19/2001
Lately, the bad economic news has been rolling in so fast you almost need a supercomputer to
keep up. Consider the changing fortunes of Compaq Computer Corp., which makes
supercomputers, minicomputers, PCs, and enough other odds and ends to make it the world's
second-largest computer company.
In late February, Compaq chief executive Michael Capellas came to Boston, a major Compaq
operations hub. He was in fine form - relaxed, upbeat and jocular. ''My fundamental role in life is to
be a cheerleader,'' he said. ''That is what I do for a living.'' And despite the early signs of a slumping
computer market, Capellas had something to cheer about. His company had turned in a solid fourth
quarter, with revenues of $11.5 billion - a 10 percent year-over-year uptick - and a Wall
Street-beating profit of 30 cents a share.
But by last week, Compaq's Houston headquarters had become a much gloomier place. Capellas
warned that first-quarter revenues would drop 4 percent compared to the same period last year,
while profits would be unchanged from the previous year. And this profit level would be maintained
only by launching a massive cost-cutting effort that will eliminate 5,000 jobs. ''Clearly, we are
operating in a challenging environment,'' said Capellas. That's CEO-speak for ''uh-oh.''
Yet there's a good chance that most of the 5,400 Compaq workers in Massachusetts will survive
this downsizing - or even thrive. Because Compaq's operations here are at the heart of its
transformation from maker of basic beige desktop PCs to world-class computing titan.
That's why Compaq came to Massachusetts, acquiring the state's leading technology company,
Digital Equipment Corp., in 1998. The deal was a nasty blow to Bay State pride. DEC, as some
still call it, once was second only to IBM in computers. It was the birthplace of the minicomputer, a
company renowned for its superb engineering and global customer service.
But Digital CEO Robert Palmer never could translate those strengths into solid sales growth.
Compaq was the great go-go computer story of the 1980s, a PC company that came out of
nowhere to achieve revenues of $2 billion in a mere six years.
By the late 1990s, it was clear PCs no longer could generate Texas-size revenue gains. Compaq
needed the fat profit margins that come from selling high-end hardware and services to the
corporate elite. That kind of know-how didn't exist inside the company. In 1997, Compaq
purchased Tandem Computers, a California maker of super-reliable ''fault-tolerant'' machines for
use in banks, stock exchanges, and telephone systems. A year later, it was Digital's turn.
Compaq lusted after Digital's global services operation. It was a vast operation that worked with
corporations to design complex data systems from the ground up, and integrate them into the
business. Digital also provided customer service on a grand scale - sophisticated hardware and
software support for giant clients.
But what about the rest of the old Digital? Compaq decided to phase out DEC's core product - the
reliable VAX line of minicomputers, choosing instead to focus on a line of servers based on DEC's
Alpha processor. Developed in the early 1990s, Alpha was recognized as one of the world's fastest
number crunchers. Still, it was given up for dead by many industry-watchers, who figured it would
be overwhelmed when Intel Corp. got around to rolling out its rival Itanium chip.
That would have been bad news for Marshall Peterson, vice president of infrastructure technology
at Celera Genomics in Rockville, Md. Peterson's team had decided to use an Alpha-based
supercomputer to decode the human genome. When Compaq came along, Peterson worried the
Alpha was doomed, but Compaq assured him it was committed to the Alpha, and to the genome
project. ''Generally speaking, it was business as usual,'' Peterson said. ''Compaq was very focused
on making us successful.''
Celera had planned to complete its gene map some time in 2002. Partly due to the power of the
AlphaServers, the job was finished last summer.
Indeed, while the market still waits for the first Itaniums, AlphaServers have become a dominant
force in supercomputing. Compaq recently won a bid to build Australia's largest supercomputer
using Alpha processors. The National Science Foundation is building the world's largest publicly
accessible supercomputer in Pittsburgh, again with Alpha chips. And the processor has developed
quite a following in other niche markets. A recent study found that utilities use Compaq computers
to manage 65 percent of the world's electric supply. Many of the computers used for this purpose
are AlphaServers.
Massachusetts and New Hampshire form the center of the Alpha universe. A chip design team in
Shrewsbury continues to design ever more muscular versions of the processor, while a few
thousand engineers and technicians in Marlborough and Nashua design and test new AlphaServers.
The machines themselves are assembled in Texas or Scotland, but the brainpower behind them
resides in New England.
If it weren't for this Digital-derived business, Compaq would be in a world of hurt. Last week,
Mike Winkler, executive vice president of Compaq's global business units, said demand is
''especially weak on the consumer side. We saw a very aggressive price environment there.''
Winkler added that the slump also is eroding sales of commercial desktop computers, and even
low-end servers. But he said that sales of high-end AlphaServers, while down a little, are still
strong.
Meanwhile, critics have long argued that Digital's old services business has yet to pay off for
Compaq. Services brought in $1.8 billion in the fourth quarter of 2000, down from $1.9 billion a
year earlier, while profit slipped from $275 million to $241 million. But Capellas said this
Massachusetts-based unit and its 38,000 global employees finally are coming into their own.
''The customer service side is already at benchmark level,'' he said of the services branch that
provides customer support. ''That model's in pretty good shape.'' But then there's Compaq
Professional Services, the department that helps companies design and manage extremely complex
information systems.
Jeffrey Lynn, the MIT grad brought in last March from IBM to take over Professional Services,
admitted: ''There were some problems with the business model.'' But he added: ''The tearing-down
part has been completed. The rebuilding is well underway.''
Last week, Global Services landed a five-year deal to provide computer management services for
Blue Cross and Blue Shield of Michigan, that state's largest health insurance firm with nearly 5
million members. ''They were head and shoulders above the competition in the things Blue Cross
was looking for,'' said David Doney, director of information services for the Blue Cross customer
service department.
As part of the deal, Compaq is leasing space in a Detroit office building, where it will store and
configure the hundreds of new computers Blue Cross must buy every year. Even if the company
picks IBM hardware, Compaq will set them up, hook them up, and keep them running. The dollar
value of the deal hasn't been disclosed.
But Compaq has made no secret of a recent $150 million contract to integrate 90,000 PCs, 1,500
servers, and 135 terabytes of data storage into an upgraded computer system for the energy
company Royal Dutch Shell.
Terry Shannon, an industry analyst who's spent years tracking Digital and Compaq, thinks the
services business finally may be coming together. And when it does, the potential profits could
handily compensate for softness in desktop computing. ''It's still a relatively high-margin business,''
said Shannon. ''I think they have very good opportunities there.''
And, of course, the healthier the services business becomes, the stronger Compaq's ties to
Massachusetts.
Capellas's predecessor pulled the trigger on the Digital deal, but Capellas would have done the
same. ''I think there's no question it was the right strategic decision,'' he said. Because of its Digital
assets, ''Compaq has extended itself as one of the really true global enterprise players.'' |
