to financial analysts in Houston, Compaq Computer stated it plans to start selling
more of its computers directly to customers, and this time the company says
it means it.
executives predicted that approximately 60 percent of its PCs for the commercial
market in North America will be sold directly to customers - rather than through
distributors or dealers - by the end of the year. Currently, 85 percent of its
PCs go through distribution. Overall, Compaq wants to see 40 percent of its
systems sold directly.
move to sell computers in the same way as rival Dell Computer should cut costs
and will be helped by the purchase late last year of Inacom's distribution assets.
Still, analysts who have heard Compaq talk about direct sales before say that
the goal could be tough to meet.
"Anyone who sells indirect loses money today," Compaq senior vice president
Michael Winkler said at the meeting, according to Bloomberg. "Anyone who sells
direct makes money."
executives briefed financial analysts for about four hours today, setting the
PC maker's direct strategy and a goal of about 15 percent growth for 2000. Compaq
also promised it would bring its commercial PC division to profitability by
the second half of the year. Winkler said the indirect sales method takes about
15 percent revenue from each machine vs. 2 percent for direct.
company is also betting big on iPaq, its simplified business PC that started
shipping this week.
is a dogfight, and iPaq will certainly help us in that regard both as an innovative
product and increased margins," Winkler told financial analysts Tuesday. "Portables
are becoming an increasing portion of our mix, which bring in increased margins.
And as we increase the direct content of our business, that also increases our
Lynch analyst Steven Fortuna in a short written statement expressed some concern
that Compaq could achieve its direct goals. "We do not think this is achievable,"
Fortuna wrote. "In our view, (Compaq) is being overly aggressive in how fast
it can take its business from indirect to direct."
If Compaq can finally implement this successfully, it will help it greatly in
its battle with Dell. Compaq has other obstacles to overcome, and well-executed
direct sales will not help in all areas. It will provide better margins which
can (theoretically) lead to lower prices for users. Dell Computer, the leader
in direct sales, and the creator of this model, leverages the model to improve
customer satisfaction and quality. It is not clear that Compaq is looking at
the change as anything other than a bottom-line improvement.
execution of this model will increase Compaq's market share, leading to increased
market consolidation. However, this increase will be short-lived if they do
not address their quality and customer satisfaction issues contemporaneously.
We do not expect this move alone to increase market growth beyond current rates.
Market growth would come in the form of robust iPaq sales, as well as sales
of other appliance-like devices (e.g. Dell's WebPC).
the move to the direct model by the second half of this year is aggressive,
but not overly so. We believe Compaq stands a reasonable chance of accomplishing
its goal - as long as everyone involved is marching in the same direction. [65%
probability] (We are assuming that the implementation plan actually makes sense.
Considering the number of false starts Compaq has had in this area, that assumption
may not be warranted.)
the market is running out of patience and good will regarding Compaq's inability
to commit to a direct sales plan and then execute. Compaq's size and market
share will only carry it so far - if it blows it this time, the market may not
give it another chance to succeed.
Although Compaq has a lot riding on the change to direct sales, there is still
no guarantee that it will execute as necessary. However, customers need not
change their purchasing plans, since the process should be transparent to them.
Cautious purchasers may want to discuss their concerns with Compaq, and try
to gain performance assurances. These assurances might be of the "penalty for
poor performance" clause form.
the longer term, we see this as a benefit to customers, again assuming Compaq
executes sufficiently well (65% probability). We expect Compaq's success/failure
will become clear within nine months. As Dell customers have found, the indirect
benefits of the direct model include higher customer satisfaction and better
response time. Customers will want to monitor whether Compaq is treating this
as a "point solution", or part of a new corporate philosophy. Evidence of a
point solution would be a thing such as: no improvement in response to customers,
no increase in quality. If Compaq shows that they are just looking for the quick
score or "short money", then customers should vote with their feet.