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Compaq fights off pack
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November 11, 1998: 8:13 p.m. ET
Direct sales program nudges into Dell territory as retail price war continues
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NEW YORK (CNNfn) - Compaq Computer Corp. is declaring war on rivals Dell and Gateway.
The No. 1 computer maker Wednesday launched an aggressive direct-selling initiative to gain ground in one of its few weak spots: the small business market.
Faced with a declining market share, Compaq said it will offer its new Prosignia line of servers, desktops and portable computers -- when purchased directly -- at prices below those of resellers. And in a bid to bolster support among distributors, Compaq promised to pay a fee for each customer they refer to the company.
"These exciting new efforts are milestones for Compaq as we drive deeper into the heart of the direct marketplace," said Eckhard Pfeiffer, president and CEO.
Tom Cal of SoundView Technology group commented, "Technology products in general decline in value 1 or 2 percent every week, so every week of inventory adds an incremental 1 to 2 percent of cost to your product, so that's why it's very important to have very lean inventory levels. Selling direct is sometimes one way to achieve very low inventory levels."
In particular, Compaq hopes to lure small business owners with the Prosignia models' emphasis on personal configurability and Internet function. The company has set up a separate help service hotline to support the models.
Compaq's leading share in the U.S. personal computer market has eroded over the last year, dipping to 15.8 percent of the overall market from 19.6 percent a year ago, according to market-research firm International Data Corp.
Number two computer maker Dell Computer Corp. has boosted its share to 14.1 percent from 9.7 percent in the same period, growth largely attributed to its direct-sales model. By eliminating the cost of maintaining a large inventory backlog, Dell is able to pass that savings onto its customers.
Like fellow direct retailer Gateway Inc., Dell has managed to differentiate itself from other PC companies by building computers tailored to the customer's wishes.
"Everyone recognizes direct and build-to-order is a more profitable business method as opposed to stocking your shelves and hoping the product moves off of them, but I don't believe that retail is going away either," said Scot Ciccarelli, a computer analyst at Gerard Klauer Mattison.
Compaq (CPQ) shares closed up 1-5/8 at 34-1/2 while Dell (DELL) gained 1-5/8 at 71-15/16 and Gateway (GTW) dropped 1-7/16 to 57-3/16.
The retail wars
Though the direct sales market is growing, it still represents only about 35 percent of worldwide computer revenue.
To fend off its chief retail competitor Hewlett-Packard Co. (HWP), Compaq recently slashed prices on its Presario Internet models between 10 and 17 percent to bring them in line with HP's leading Pavilion line.
According to the most recent Computer Retail Week figures, Presario is Compaq's best-selling home line, with the Presario 5020 ranking fifth in overall retail unit sales behind two Pavilion models, Apple Computer Inc.'s (AAPL) iMac and IBM Corp.'s (IBM) Aptiva.
HP and Compaq have fiercely contested the top retail spot, resorting to frequent price wars in order to take market share from one another. In 1997, HP led the industry in sales while Compaq's slightly cheaper models kept the company on top as volume leader.
At stake is the vast and comparatively untapped first-time user market. Only half of all U.S. households currently have computers but the allure of the Internet has spurred breathtaking increases in industry revenue.
And Compaq, like the rest of the PC industry, will look to lure new users and cash in on the upcoming holiday buying season, especially considering the disappointing third-quarter earnings results the company recently posted.
Though the fourth quarter should show significant improvement - in part due to Compaq's acquisition of Digital Equipment Corp. - Pfeiffer told The Moneyline News Hour with Lou Dobbs that the company is still facing growth issues in the U.S. market.
"Growth is not as high [in the U.S.] as it was a year ago, but that's true for the industry," Pfeiffer said. "(But) we're seeing higher growth this year from Europe." 
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Compaq
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