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Pricing, not demand, seen key in Compaq problems
By Duncan Martell
SAN FRANCISCO, April 18 (Reuters) -The shock resignation of Eckhard Pfeiffer, president and chief executive of Compaq Computer Corp (CPQ - news)., raises the question: were the problems at Compaq specific to the company, or is overall demand for personal computers waning?
According to industry executives, money managers and analysts, the bulk of the blame falls on Compaq. They said demand was still strong but the prices manufacturers could charge were falling fast.
''The board isn't going to go fire the guy if the market is weak, so it just affirms that the bulk of the problems rest with Compaq,'' said money manager Duane Eatherly with BancOne Investment Advisors.
But while unit shipments of PCs remain strong, falling prices are causing consternation -- and lost profits -- to PC makers.
''Making a living in the PC business takes a lot more intelligence than it used to,'' said a top executive at a PC- technology company.
Houston-based Compaq has, for the last year and a half, been working to emulate the direct-selling approach of rival Dell Computers. Dell, of Round Rock, Texas, benefits because it builds PCs to order and keeps inventories down to less than a week.
But, analysts said, Compaq has had difficulty emulating the Dell strategy as it works to digest the acquisition of Digital Equipment Corp., which Compaq bought to gain its far-flung computer-services business.
Drew Peck, analyst at SG Cowen & Co., who covers Intel, said: ''The overriding trend is moving from being a technology- driven market to a price-driven market. Every company is going through a tough time.''
Departing Chief Executive Pfeiffer has been credited with the rapid growth of the company's sales, but company Chairman Ben Rosen told Reuters the company had been too slow to react to changes in the industry.
Earl Mason, Compaq's chief financial officer, also resigned on Sunday. He said he plans to take a position as chief executive at a company in an ''unrelated business.''
Mason said the wheels were in motion for his new job well before Compaq's first-quarter troubles became apparent. Last week, the company said first-quarter results would be less than half what analysts were forecasting.
''The resignations probably weren't necessarily done on a voluntary manner,'' said Dan Niles, an analyst at BancBoston Robertson Stephens. ''There probably was some definite pressure put on the CEO and the CFO by the board and to some extent from the chairman's office.''
Mason's resignation, according to industry executives, money managers and analysts, did not come as a surprise.
They said there had been rumors that Rosen -- himself a Compaq co-founder, accomplished venture capitalist and the one who will lead the three-person office of the chief executive until Compaq finds a successor to Pfeiffer -- had expressed dissatisfaction with Mason.
''The reason why the board decided to act so succinctly was there was a huge deficit in terms of credibility with (Wall Street),'' said Ashok Kumar, an analyst with US Bancorp Piper Jaffray in Minneapolis. ''They went back to the drawing board and then decided it was best to start with a clean slate.''
In the past week, a law firm has filed a suit against Compaq seeking class action status regarding its recent financial performance.
Rosen appealed to shareholders, saying the company's strategic direction remained sound.
''We have re-energized this company before, and working together, we will do it again. We will prove to every customer that this is the best company to serve their information technology needs,'' he said in a statement.
''And we will confirm to our investors that Compaq remains a core holding in any portfolio.''
The analysts said that in light of the fall in the prices consumers are prepared to pay for PCs, makers had to find new ways to boost profitability.
One way was through enhanced subscriber services that consumers pay to PC makers for Internet access and the like. Another, which Intel would like to see come to fruition, analysts said, is wide-spread super-fast Internet access to the home.
Once that comes, there might indeed be a need for the superfast microprocessors that Intel churns out and for the equally fast PCs that computer-manufacturers make.
Until then, ''from a unit perspective, things are fine,'' BancOne's Eatherly said. ''But, yes, revenue for those same PCs being sold today is falling.''
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