Compaq aims for direct hit
By Michael Kanellos
Staff Writer, CNET News.com
October 30, 1998, 12:40 p.m. PT
Compaq's holy war against Dell will ratchet up
November 11 when the No. 1 PC vendor rolls out a
new program to target small and medium-sized
businesses through direct sales and new product
bundles.
The new effort, which will be unveiled by CEO
Eckhard Pfeiffer with
fanfare in New York, 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, said sources.
Compaq currently features desktop PCs, notebook
PCs, servers, and workstations through its 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 Prosignia 200 server.
Compaq also sells third party products, including
Microsoft software, on the DirectPlus site, and some
have speculated that greater emphasis on these
products may also be in the works.
"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 over 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 into the
small and medium- sized
business market. Dell has also been 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 its 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.
While the exact content of Compaq's program is not
yet known, observers say the company 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
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.
Compaq officially will not comment on Pfeiffer's
upcoming program. The company, however, stated
that the November 11 presentation is centered around
a new direction for small and medium-sized
organizations.
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. |
