Compaq to unveil new AlphaServers

Two years ago, Compaq Computer Corp. paid $9 billion for Digital Equipment Corp. in an effort to crack the market for big computers. But rather than making the company leaner and faster, Compaq stumbled with too-high expenses and lackluster sales.

Tuesday, the world's largest personal-computer maker hopes to demonstrate that its acquisition can really propel it into the computer industry's big leagues. At a New York news conference, Compaq (cpq) will unveil new Alpha server computers that it hopes will move it into the top tier of suppliers of powerful Internet computers.

"It's the final building block in place to allow us to complete our vision," says William W. Heil Jr., a Compaq vice president who runs the big-computer business that includes the old Digital Equipment. "This is going to drive a lot of business for us."

It had better. Five years and an estimated $100 million in the making, the new machines come as Compaq's share of powerful Unix computer sales have shrunk to just 4 percent, a new low. What's more, the explosion of electronic-commerce sites has fueled demand for big machines. Rival Sun Microsystems Inc. (sunw) saw its server sales jump 50 percent in the last quarter.

Compaq, which last year earned $569 million, less than a third of its peak prior to the Digital acquisition, is also struggling to fix an ailing PC operation. Success with the three new AlphaServers, which boast upward of 50 percent gross margins, could help rekindle profits at the company, which had revenue last year of $38.5 billion.

The new machines, dubbed Wildfire for their speed, use an advanced design that allows customers to add processing power, memory and communications in Lego-like chunks. Early tests running financial applications show the machines handle twice the number of active users than a similar Sun model, says Compaq systems architect Dave Fenwick.

Employing two levels of communications switches, the design mimics that of parallel supercomputers. The design is so advanced, Compaq had to build its own test software, resulting in lengthy delays, says Fenwick. Unlike rivals, it will allow customers to mix existing and future chips and multiple operating systems on the same machine.

"This technology is not too late to get them on the growth path," says Richard Fichera, a vice president at market watcher Giga Information Group Inc. He says advanced management features that allow the machines to be controlled remotely will appeal to large Unix computer buyers such as Internet and telephone companies. "They have thought very closely about what these companies need," he says.

But for some companies, the delay was just too long. Alpha customer Amazon (amzn) recently chose a Unix server made by Hewlett-Packard Co. (hwp), and TransAlta Utilities Calgary, Alberta, bought IBM's (ibm) RS/6000 for energy trading. Compaq's Heil says the company has orders for 200 of the new machines, which sell for $100,000 to more than $1 million. Buyers include such online companies as Internet portals Lycos Inc. and Northern Light Technology Inc., and telephone giant WorldCom Inc. Online brokerage house E*Trade Group Inc. will spend $15 million on four of the new and existing Alpha computers to process customer trades. Rivals say while designers have built a leading-edge product, Alpha can't offer the software that was developed while it sat out a generation of machines. "It's not just technology anymore," says Shahin Khan, a Sun vice president, explaining that customers make their choices based on a number of factors, including software availability. Compaq's tiny share of the Unix computer market has turned off most Web software developers, he says.

To bring applications developers back to its fold, Compaq is spending $100 million to cultivate Unix software developers such as Oracle Corp.

Still, some analysts say Compaq should stick to its PC roots. Don Young, a computer analyst at PaineWebber Inc., says despite the new servers, total Alpha revenue will increase just 10 percent this year, to $2.15 billion. "The game is already up. I wish they had cut their losses and quit wasting their time," says Young.