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Compaq Streamlines Product Line

Written By: C. McNulty
Published On: April 10 2000

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Event Summary

[20 March 2000 - ZDNet] Compaq Computer Corp. is betting that slimming down its commercial desktop PC line will increase profitability.

As part of CEO Michael Capellas' strategy for getting Compaq (NYSE: CPQ) back on track, the company will streamline its commercial desktop PC line.

Sources said Compaq will attempt to make this part of its business profitable again by slimming down the product line. The aim is to relaunch DeskPro with a smaller number of models and supporting a smaller number of chip sets and processors, sources said.

Compaq, analysts said, has the widest commercial PC product line available today. The DeskPro line includes nearly 70 models spread across its DeskPro EN and EP lines, according to the Compaq Web site. By streamlining, some analysts believe Compaq could cut costs and better compete with business-market rivals such as Dell Computer Corp. (NASDAQ:DELL), Hewlett-Packard Co. (NYSE:HWP) and IBM Corp. (NYSE:IBM).

Under the prodding of CEO Steve Jobs, Apple Computer Inc. (NASDAQ:AAPL) returned to profitability in part by slashing its product line from dozens of models and configurations to just a few.

The keystone in the move to simplify could be the forthcoming 815 chip set from Intel. The chip set is based on the same architecture as the Intel 810, 810E and 820 but is more flexible, supporting a wider range of configurations. PC makers can base a variety of low- to-high-priced systems on it. Standardizing on a single chip set would please corporations, whose information technology staff generally like to have their PCs based on the same hardware for easier support.

For Compaq, carrying a smaller number of models should reduce manufacturing costs, a necessary move as average selling prices of PCs continue to fall.

Another major part of Compaq's DeskPro vision includes selling a greater percentage of PCs directly to customers, sources said. One source said Compaq hopes to change its product sales mix, which is now largely indirect sales through retailers and resellers, to a mix that is largely direct sales.

Yet another piece of Compaq's commercial PC business is its recent introduction of the "legacy-free" iPaq PC line, which stresses ease of use and simplified support. The iPaq brand includes desktop PCs, notebook PCs, and handheld devices.

Compaq's commercial PC sales have fallen. In its fourth quarter, commercial PC sales totaled $3.1 billion, down 19 percent from the previous year. The unit also operated at a loss. Has Dell finally passed Compaq to become the #1 U.S. desktop vendor last year?

Market Impact

Compaq, once again, is going to emphasize its direct sales model. More direct sales models require more customer self-education. Simplicity is a virtue. Simple rules like "All DeskPros are powerful, nonmobile systems" make it easier for business consumers and resellers alike. 500 page product catalogs make things confusing. Sometimes you can have too much of a good thing.

Compaq's new iPaq is an example of the "less is more" philosophy. It promises to be "legacy free", focusing on USB (Universal Serial Bus) only and eliminating ISA/PCI slot in a compact, sealed case Windows 2000 PC. It comes with the following options:

  • Pentium or Celeron processor (500 MHz)

  • Flat screen, standard or no monitor

  • 64, 128 or 256MB RAM

  • Extra CD-ROM, DVD, LS120 drive or 6GB HDD

  • Optional modem

  • Optional speakers

  • Optional Security Lock

  • 3 or 4 year Warranty option

It doesn't get much simpler than that.

Apart from cost cutting, these moves are critical to deploying a direct sales model. As the technical gap between different desktops narrows, vendors must distinguish their service throughout their products' lifecycle. That includes simplified ordering and delivery. Compaq's January acquisition of InaCom's manufacturing, customization, and call center operations will help.

Compaq must execute its direct sales model. Otherwise, eliminating options and making your customers wait longer for fulfillment is a lethal combination. In light of this, Compaq's promise to avoid direct sales to small and midsize businesses remains puzzling. This makes no sense - it's the smaller businesses whose desktop needs are more of a commodity, and thus more amenable to direct channels.

Accordingly, we forecast a 90% likelihood that Compaq completes its product streamlining, and a 72% likelihood that they improve their direct sales and fulfillment. But we only project a 36% likelihood that Compaq moves to a predominantly direct sales model during the next 12 months.

User Recommendations

Compaq will remain a more-than-viable desktop supplier for the foreseeable future. However, other vendors should at least be evaluated, especially if your organization is planning other major systems deployments soon (e.g., Windows 2000).

Few users are all that interested in chipset consolidation, unless it leads to common hard disk images that can be used to rebuild systems quickly. Current Compaq customers can expect deep discounts in soon-to-be discontinued DeskPro models that are more than adequate for most general business needs.



 
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