Compaq goes on a diet

With some 70 DeskPro models available, the company is looking to simplify its commercial PC line

Compaq Computer is betting that slimming down its commercial desktop PC line will increase profitability. As part of chief executive Michael Capellas' strategy for getting Compaq back on track, the company will streamline its commercial desktop PC line, ZDNet US has learned.

Capellas is known by some for his bold predictions about the future of the computer industry, and his "think out of the box" approach. Thinking out of the box has turned to weeding out a few boxes. Compaq's commercial DeskPro line has grown to include a large number of models with a wide range of processors and chipsets from Intel. At the same time, its commercial PC sales have fallen. In its fourth quarter, commercial PC sales totaled $3.1bn (£1.9bn), down 19 percent from the previous year. The unit also operated at a loss.

Sources say Compaq will attempt to turn this part of its business back to profitability by slimming down the product line. The aim is to relaunch DeskPro with a smaller number of models, supporting a smaller number of chipsets and processors, sources said.

Compaq, analysts say, has the widest commercial PC product line available today. The DeskPro line includes nearly 70 models spread across its Deskpro EN and EP lines, according to the Compaq Web site. By slimming down, some analysts believe Compaq could cut costs and better compete with business rivals, which include Dell Computer, Hewlett-Packard and IBM.

Under the prodding of chief executive Steve Jobs, Apple Computer returned to profitability in part by slashing its product line from dozens of models and configurations to just a few. "It may be good to consolidate the line for cost reasons and customer confusion reasons," said analyst Roger Kay of IDC. "It would probably cost them some money in the short term. It would probably cost them some (market) share. But in the long term, it would improve things."

The strategy is expected to be announced this summer.

The keystone in the move to simplify could be the forthcoming 815 chipset from Intel. The chipset is based on the same architecture as the Intel 810, 810E and 820, but is more flexible than either, as it supports a wider range of configurations. PC makers can base a wide range of low- to-high-priced systems on it.

The 815, for example, has an integrated graphics engine, but also allows for the attachment of an AGP graphics card. This allows a PC maker to offer a cheaper model with a lower-cost processor and no graphics card, or a more expensive model with a graphics card and faster processor -- all with the same chipset and motherboard.

Standardising on a single chipset would please corporations with IT staff, who generally like to have their PCs based on the same hardware for easier support. For Compaq, carrying a smaller number of models should reduce manufacturing costs -- a necessary move as the average selling price of PCs continue to fall.

Another cost-cutting strategy would be for Compaq to discontinue manufacturing its own motherboards, a move already practiced by rival Dell. Sources speculate that Compaq will get out of manufacturing its own boards this year, as a cost saving measure. "Everyone will have to re-examine their cost models going forward," Kay said. "I believe that all of the (PC makers) are dealing with cost structures from the days when PCs still cost a couple of thousand dollars."

The road Compaq and other PC makers are heading down will call for further cost cutting in order to remain competitive. "The coming world is a virtual hardware company," Kay said. Instead of manufacturing, PC companies of the future will market their intellectual property -- their overall brand, design and engineering capabilities, as well as service and support. Manufacturing will be outsourced to third parties, he said.

Another major part of Compaq's DeskPro vision includes selling a greater percentage of PCs directly to customers, like Dell, sources said. A source said Compaq wishes to change its product sales mix, which is now largely indirect sales through retailers and resellers, to one that is largely direct sales.

In early January, Compaq purchased reseller Inacom's distribution business. The $370m (£229m) purchase gave Compaq four manufacturing and customisation centres, along with a call centre and other order-related services. The buy was made in order to help Compaq strengthen its abilities to deliver its hardware direct to large corporate customers. It will continue to work with resellers to address medium- and small-size businesses.

Another part of Compaq's commercial PC business is the recent introduction of the "legacy-free" iPaq PC line, which stresses ease of use and simplified support. The iPaq brand includes PCs, notebook PCs and handheld devices.

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