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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: rudedog who wrote (31886)	8/30/1998 5:10:00 PM
From: Geoff Nunn	Read Replies (1) \| Respond to of 97611

Rudedog, But the costs of using resellers don't impact GM since it is before any channel markup. The channel IS CPQ's customer. GM is a pretty reliable indicator of component costs in a MFG business. Channel related contra-revenue is important in looking at net income but not GM or component cost. Sorry, but I have to disagree. The price protection CPQ offers its resellers increases the value of CPQ's products. Consequently, CPQ can charge resellers higher prices. If CPQ were to withdraw the protection it would be forced to lower its prices, and this would reduce GMs. The price protection inflates CPQ's gross margins. This is another reason we should not be so impressed with CPQ's GMs. BTW - If CPQ has pared down it price protection program to a mere 2-4 weeks as you indicate, why doesn't it just go the whole nine yards and kill the program. The program leads to all sorts of absurdities in terms of deadweight losses (costs which are unproductive) not to mention the perverse incentives it creates for resellers. These incentives include holding rapidly depreciating PCs in inventory far longer than necessary. I predict CPQ will eventually be forced to end the program. Reason: it raises the overall cost of getting a PC from the manufacturer to the consumer but without creating any value added. From an economic standpoint it's a deadweight loss. It's about as productive as a West Texas cowpoke digging holes in the ground then filling them up. At least the cowpoke has a good excuse. We know what too much sun can do to a cowpoke. I think the reason CPQ clings to this ridiculously inefficient program is it underpins its centralized, Soviet style pricing model as I have previously discussed. Geoff