EL...WSJ article today.
Steve
After Undergoing a Big Buildup,
Compaq Retreats From Networks
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
After a costly acquisition spree, Compaq Computer Corp. is quietly
scaling back its effort to crack the fast-growing networking business.
As recently as last year, Compaq saw the high-margin business of
supplying gear for computer networks as a perfect match for its low-cost
manufacturing and distribution skills, and predicted a $1 billion-a-year
operation. But the four-year-old foray into networking equipment has been
tripped up by shifting technology, management turmoil and a misplaced bet
on dealers.
Now, Compaq is phasing out manufacturing
and disbanding key engineering groups. Come
Jan. 1, the Houston company plans to place its
networking products into computer and
services units, dissolving a stand-alone
division. It will continue to make networking
products available as an option, says John T. Rose, senior vice president of
enterprise systems.
The miscue, much like the company's short-lived foray into printers in
1992, underscores how closely bound Compaq is to personal computers
and how much difficulty it has had translating its computer-making skills to
new businesses. Even after its recent purchases of big computer makers
Digital Equipment Corp. and Tandem Computers, PC products will
account for 70% of its $11 billion in sales in the quarter ending Dec. 31.
'Clearly Within Reach'
Analysts say that, with total revenue this year expected to hit $36.5 billion,
Compaq won't necessarily be hurt by its more modest strategy. It should
achieve the $50 billion revenue target it set two years ago. "That target is
clearly within reach," says Bear, Stearns & Co. analyst Andrew J. Neff,
even if its networking unit hasn't met expectations.
To fill the networking gap, Compaq is selling products made by Intel Corp.
and Cabletron Systems Inc. When it bought Digital, Compaq acquired an
agreement with Cabletron to buy $300 million in networking gear through
February 2000. Relying on a such a potpourri of suppliers means Compaq
customers could end up paying more than if they bought from a single
supplier.
What happened? Former executives, dealers and analysts say Compaq's
strategy of using its vaunted low-cost PC manufacturing and distribution
systems failed when the company couldn't achieve the sales volumes it
needed for its low-cost strategy.
For instance, Compaq purchased Microcom Inc. in June 1997 to move
into network-access devices called concentrators. Its revenue from the
business declined 20% last quarter compared with a year earlier -- even as
the overall market grew 19%. What's more, despite releasing products that
were easier to install and operate, Compaq couldn't get its computer
dealers behind the products.
Omnitech Corporate Solutions Inc., an Englewood, N.J., computer and
networking-products dealer, sells Compaq computers but never saw a
need to add its networking gear. "It's not like they have something that
others don't provide," says President Jonathan O. Katz. Compaq also
aimed its original gear at midsize companies, leaving it without the same
product breadth as suppliers such as Cisco Systems Inc., 3Com Corp. and
Bay Networks, he says.
Another problem: Networking technology moved in a different direction
than Compaq anticipated. Compaq's first entry into networking was via
routers, which direct information across a network. Analysts say its routers
hit the market just as Cisco and 3Com were pushing a newer and more
flexible technology, called switches, for midsize companies.
By the time, Compaq was ready to round out its offerings with access
servers -- via Microcom in 1997 -- companies were moving away from
buying their own equipment. Instead they hired Internet-service companies
to handle their networks.
Those companies, in turn, tended to buy large devices that Compaq
doesn't make, analysts say. Compaq's Mr. Rose says that corporate
demand for its equipment continues to be healthy, and that Compaq now
sells to Internet-services companies. In addition, the markets that Compaq
targeted didn't grow as expected, never generating the high demand that
drives prices down. Compaq thought it could match its PC strategy of
expanding the market by keeping prices down.
"They miscalculated the growth," says Tom Caudle, director of data
services at Stratton Voice & Data Inc., a Richardson, Texas, network
supplier. He was an early seller of Compaq's network switches.
Revolving Door
The company also had a revolving door in its networking management
team. The Network Division was created in 1994 by Compaq Vice
President Doug Pushard. He resigned two years later, shortly after the
company's acquisition of NetWorth Inc. for $372 million. His successor,
senior vice president Alan G. Lutz, a former Northern Telecom Ltd.
executive, lasted just 20 months before leaving for Newbridge Networks.
Compaq also didn't retain key managers at the companies it acquired. The
presidents and several top engineers at NetWorth and Microcom resigned
within months of the purchases -- in both cases to create networking
company start-ups. At NetWorth, says Mr. Caudle, "once the original
management of the company started to leave, the engineering talent went
with them."
The new strategy of putting network sales into the computer division may
ultimately prove more successful than trying to build a stand-alone
business. Next year, Microsoft Corp.'s Windows 2000 operating software
for server computers will incorporate basic network routing, eliminating the
need for separate hardware in small office networks, says Francis X.
Duzbeck, president of Communications Network Architects Inc. in
Washington, D.C.
"Computer vendors are coming to the realization their strength isn't as a
networking company, it's as a server company that integrates networking,"
he says.
If he is right, Compaq Computer may yet see its networking vision
resurrected. The company still holds a 32% share of the world-wide PC
server market, more than twice the share of its nearest rival, according to
researchers International Data Corp. What's more, PCs are still a growing
business. Next year, analysts expect sales to rise nearly 13% to $173.7
billion, up 3.5% from this year.
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