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Compaq Targets Small Biz Market

Compaq Computer Corp. unveiled plans Wednesday for direct-sales of a new bundle of lower-priced products to small and medium-sized businesses.

With the introduction of its Prosignia line of desktop PCs, laptops and servers, Compaq (CPQ) has left no doubt of an ambitious push into the direct-selling market led by rivals Dell Computer (DELL), Gateway (GTW), Micron Electronics (MUEI) and others.

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COMPAQ (CPQ)
For Compaq, the key components of that push include a competitive pricing and leasing program, sped-up delivery, Web-based ordering and bundling a suite of online applications and services for businesses.

"These new products (customers) can order directly from Compaq now at prices equal to or below direct PC manufacturers," Compaq CEO Eckhard Pfeiffer said at a press conference.

The idea is to give the small business owner everything-in-one: PCs, servers, Internet connection and online services and to wrap customer service, support and a leasing arrangement around the sale.

Compaq expects to roll out the Direct Plus in Europe, starting in the U.K., next year.

Analysts consider the threat for the leading PC maker to be the degree the direct-sale model will alienate Compaq's substantial network of dealers.

Pfeiffer maintained Compaq can have it both ways, and that the customer wants the ability to purchase PCs both ways. Compaq's model, he said, will be the "winning model in the PC industry."

Some 65 percent of PC sales worldwide stem from the distribution channel, Compaq's Pfeiffer said. That 35 percent of PC were sold directly or through resellers.

"We simply decided we're not going to miss out on that opportunity of roughly one third of the market," Pfeiffer said. "We've been blurring the lines between direct (selling) and channel distribution... There's plenty of evidence that Dell has been talking to agents."

Compaq shares closed at 34 1/2, up 1 5/8, or 4.9 percent.Chip maker Intel's (INTC) news that fourth quarter revenues would top the third quarter's by 8-10 percent lent support to PC stocks overall.

Yet Pfeiffer lso indicated that PC sales are recovering. In response to a question from an analyst on whether the Prosignia line sales launch could contribute to an inventory glut, Pfeiffer said Compaq "has reduced inventory to the lowest level that I can remember."

The PC maker's worldwide inventory now stands at 3 weeks, he said.

"We're beginning to touch the sensitive limit of where resellers are running out of product," he added.

The small and medium-sized market (or SMB in PC speak) is the fastest growing segment of the PC market, and accounts of 30 percent of all PC purchased, Pfeiffer said.

The niche now accounts for between 15 percent and 20 percent of Compaq's total revenue, company officials said.

PC industry watchers have noted the marketing shift by the PC makers to pay attention to the little businesses. Gateway, International Business Machines (IBM) and Dell are stepping efforts to market directly to small businesses.

"The enterprise (or large business) market is really starting to stagnant," said Matthew Nordan at Forrester Research. The upgrade opportunities are now surfacing in the SMB segment.

"They're coming around for a second generation of PCs," he added.

Some 68 percent of Fortune 1000 companies are running Microsoft's (MSFT) Window 95, and 25 percent already using some form of NT, and rates for the small businesses aren't nearly as strong, Nordan said.

Dell's sales to the small business sector exceeded $1 billion last year, and grew over 50 percent in the first half of 1998 over the same period in 1997, a Dell spokeswoman said on Tuesday.

Written By Emily Church

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