Shares of Compaq Computer Corp. jumped 1 9/16 to 34 7/16 yesterday as the company unveiled its latest battle plan against Dell Computer Corp. by targeting small- to mid-sized businesses through direct sales.
While the direct sales got the attention Wednesday, Compaq CEO Eckhard Pfeiffer was sure to emphasise that Compaq is not cutting out resellers. Pfeiffer said the direct sales will complement indirect channels to give customers choices. "Many want to do business both ways," said Pfeiffer, who noted that 65 percent of PC sales go through resellers. "We want to make Compaq the IT vendor of choice in all categories."
Compaq, with its Prosignia product line, will undercut its resellers, but will offer a fee for referrals to buy direct. PC resellers will also offer technical support.
Compaq said it won't simply give up direct sales to Dell and other players anymore. Pfeiffer said Compaq plans to become a leader in direct sales. Officials also said they can top Dell's shipping time with deliveries within five days compared to Dell's seven-day benchmark.
Analysts said that Compaq's move is important because it challenges Dell on its home turf -- the small- to mid-sized business markets. Compaq fares well in the high-end corporate market and dominates in the consumer space. By going with its hybrid direct-indirect model, it could grab more market share in the fast growing small-business market.
According to Access Media International, small and medium-sized businesses spent about $62bn (£38bn) on information technology in 1997, and that figure is expected to reach $120bn (£73bn) by 2002. "It's an impressive move," said Andy Neff, an analyst with Bear Stearns, referring to Compaq's announcement. "It allows them to address a growing market and extend their position."
Compaq officials said its strategy to target small businesses will utilise multi-channels and offer various services. Users can choose to buy direct from Compaq's site and get service warranties that would be carried out by resellers. Customers can also buy direct through resellers, which would act as "agents" and get a small commission. "It's not about channels, resellers or going direct," said Mike Winkler, general manager of PC Products for Compaq. "It's about choice and value added services."
Compaq said it will offer turnkey applications for e-commerce, package delivery, scheduling and connectivity. Through those services and warranty and leasing options, Compaq can build a steady revenue stream.
To stimulate demand, Compaq said it will launch a marketing blitz and be aggressive with pricing. Winkler compared Compaq direct prices as of Wednesday morning with comparable products on the Dell, Micron Electronics Inc. and Gateway sites and Compaq products were cheaper. The Prosignia brand includes desktop PCs starting at $1,219 (£743); servers priced at $1,447 (£882); and laptops priced at $1,999 (£1218).
Although the Prosignia line will be offered domestically, it will be rolled out next year in Europe, starting off in the UK.
Some analysts said Compaq's strategy is meaningful, but it isn't like the company just turned on a switch and decided to sell direct. Robert Cihra, an analyst for ING Barings, said Compaq is just following through on what it's been talking about for years. "It's not like weren't offering anything direct," said Cihra. "They have a hybrid model." Analysts noted that Compaq has been selling direct to its largest customers for awhile just as Dell uses the channel to sell to the government and education markets. "There's plenty of evidence that the lines are blurring," said Pfeiffer. "We can mesh the two."
One executive at a direct vendor disagreed. "A pig dressed in a fur coat is still a pig," said Joel Kocher, chairman and CEO of Micron. "Yes, I think Compaq got more competitive on price with the move, but they still have no affinity for nor understanding of the direct customer."
Don Young, an analyst with PaineWebber, applauded Compaq's strategy, but said he'd take a wait-and-see approach. "The devil is in the details," said Young. "It's execution and whether they can sustain prices." Compaq officials said they can execute and cut prices because inventory is under control and the company is operating efficiently. Pfeiffer said inventory has been reduced to three weeks and that the company is approaching "the sensitive limit where resellers are out of product."
Cihra said prices aren't the real issue, costs are. As long as Dell and Gateway sell direct they will be able to take advantage of falling component prices. "You can price at anything you want, but as a shareholder I want to see the cost advantage," he said. "But if anyone can make the hybrid model work, Compaq can."