Compaq's Gutsy Bid to be More Than an IBM Copycat

Information Processing

Computers

Business Week

July 9, 1984

Compaq Computer Corp. made the record books in a big way last year. It became the first company' in history to hit sales of $111 million in the first year of production. Its "transportable" version of International Business Machines Corp.'s Personal Computer easily outdistanced the rest of the so-called clones that run programs written for the top-selling IBM PC. Compaq did not even slow down this winter when IBM introduced its own transportable model. In fact, the company's sales are still going so well that industry analysts predict they could triple this year, to $300 million.

Despite this stellar performance, Compaq needs a surefire encore if it is to maintain this market momentum. "We don't want to be a niche player; we want to address the mainstream [personal computer] market," declares Rodney Canion, Compaq's president. The company is so confident of its success that it is even building an elaborate new corporate headquarters. But a number of retailers believe that a new line of desktop computers the company is readying for introduction on June 28 may be hard-pressed to do the job.

For one thing, the personal computer market will prove far more competitive. The new Compaq computers, called the Deskpro series, will run head-on into new machines from such better-known and better-financed companies as ITT Corp. and American Telephone & Telegraph Co. In addition, the new desktop computers will be hitting the stores just as a more aggressive IBM has caught up with demand and slashed its prices (BW -- June 25).

Even Compaq executives admit that much of their original success in the market was because soaring demand for the IBM PC so outstripped available supplies that desperate dealers turned to the more readily available Compaq. With the new computers, however, "Compaq is trying to break in at the worst time," maintains one major East Coast dealer. Adds Gene C. Sprouse, president of Rainbow Computing Inc., a Los Angeles retailer: "The pipeline is almost full."

QUICKER MACHINE

Compaq's strategy centers around four new desktop computers that collide with IBM's leading PC models. The Deskpro series, however, offers more features than the IBM PC family. They will run the same software as the PCs, for example, but will execute the programs two to three times faster. And the top-of-the-line Deskpro is the first computer to include a built-in magnetic-tape memory that permits users to make backup copies of files stored on the computer's Winchester hard disk.

Compaq is also doing something else novel: The new Deskpro line will cost more than comparable IBM models. That surprising bit of news could be a problem for Compaq, since IBM PC-compatible computers are normally priced at least 15% below the PCs. "If a product is incorrectly positioned, the market is unforgiving," warns Enzo Torresi, senior vice-president of a retail computer chain called BusinessLand Inc.

Compaq is pricing models from $2,495 to $7,195, with each model being from $50 to $100 higher than the comparable IBM product. For example, a Deskpro unit that sells for $4,995, and which can store 256,000 characters of information internally and an extra 10 million on a hard disk, competes with a comparably equipped IBM Personal Computer XT model listing for $4,920.

Some retailers believe that the company's new Deskpro line is too late, but Canion defends it as "right for the time." He adds: "We could have done like everyone said and come out with a 'me-too' product earlier. But we wanted to produce a better product -- one with long-term potential."

Compaq's determination to have a better encore product caused it to scrap plans to introduce a truly portable, "lapsize" computer earlier this year -- even though it was only months away from launch. Management dropped the light-weight model because that machine was too limited to win a large enough share of the market. The portable did not have either a built-in floppy-disk drive or a full-page display, for example. "If you give up 20% of the functionality, you give up 80% of the market," says Benjamin M. Rosen, Compaq's chairman.

'BULLET TEAM'

This setback put the heat on the Deskpro development team. Compaq had to squeeze into eight months a product development effort that usually would have taken more than a year. Canion hired B. Kevin Ellington, who had directed the development of Texas Instruments Inc.'s Professional personal computer, to head up a special task force called the "Bullet Team." Ellington's biggest challenge was to build in the new features that make the Deskpro models better than their IBM PC competition without losing product compatibility. In order to be on the safe side, Compaq engineers began development work on a slower-operating model, to be built around the microprocessor in Compaq's first product, in case Ellington's advanced version turned out to be incompatible with the PC.

This belt-and-suspenders approach to product development shows just how critical the Deskpro line is to Compaq's future. A failure to reach a monthly sales rate of the more than 12,000 Deskpros that Compaq plans to be producing by October could force the company to look for additional capital. The company still has more than $48 million of cash in hand. A combination of venture capital funding, bank debt, and its first public offering in November, has provided Compaq with about $120 million. But be tween the general market decline and investor nervousness in the wake of IBM's price cuts, Compaq's stock has tumbled to just 4 3/8, down from a high of 14 5/8 and is now trading at about 7.

Just how successful Compaq will be in marketing Deskpro now rests with the kind of support that it gets from its dealers. The transportability of Compaq's original model was an obvious selling point. But the differences between the company's new series and IBM's machines are far more subtle. "This time the challenge is more complex," says BusinessLand's Torresi. And the selling job will be harder. For example, the backup tape recorder is not now widely used in personal computers. For features such as that to sell, "the customer will have to be educated," Torresi says.

To accomplish such things, Compaq must maintain the support of its dealer network. The company rapidly assembled an impressive distribution system in 1982 for its initial machine by offering high profit margins and promising to sell the product through premium computer stores only. By late 1983 it had signed up about 1,000 dealers -- more than any other independent personal computer maker and nearly as many outlets as IBM itself had.

DAMAGED RELATIONS

But Compaq wanted to sign up even more dealers. A year ago it hired IBM's director of retail sales for the PC, H. L. "Sparky" Sparks, who quickly launched a more aggressive campaign to reach 2,000 retail outlets by the end of this year. This spring that strategy began to backfire when many of the new stores began to discount the Compaq computer -- drawing screams of protest from Compaq's original dealers. "The rampant discounting is destroying the integrity of the dealership," charges Thomas Niccoli, who owns a ComputerLand store in Las Vegas and six in Arizona. "Dealers are upset because they can't make any money on Compaq."

Compaq denies that it has any problem with its dealers. But industry observers say that it has moved quietly -- and quickly -- to repair damaged relations. "They're earnestly trying to correct the situation," says Fred Kinder, vice-president of development for the ComputerLand franchise of Dallas. "The damage wasn't irreparable."

Sparks recently was shunted to another Compaq unit, and Compaq founder William H. Murto moved in to manage dealer contacts. At the same time, Compaq has ended its "co-op" ad program, which reimbursed local dealers for part of their advertising costs, because that setup was encouraging dealers to over-order and to discount products.

To support its expanded line of personal computers, Compaq is boosting its advertising outlays tenfold, to $20 million, this year. A nationwide campaign will portray Compaq as the "practical choice" to IBM. And humorous TV spots will feature Monty Python comedian John Cleese. If Compaq's beginner's luck holds, Canion could end up having the last laugh on the fickle marketplace for personal computers. He reports that orders are already starting to roll in. "[Compaq] brings value to the table," says Anthony P. Morris, president of Morris Decision Systems Inc., a New York retailer. "There is room for folks [who offer] added value rather than a [clone] with just a price advantage."

GRAPHIC: Picture, PRESIDENT CANION: CONFIDENT ENOUGH TO BUILD A NEW HEADQUARTERS IN HOUSTON, DAN FORD CONNOLLY