How Compaq's Portable Leaped Ahead of the Pack

Information Processing

Computers

Business Week

August 15, 1983

Hearing the siren song of the venture capitalists, three senior computer executives from Texas Instruments Inc. jumped ship 20 months ago to seek backers for a new company. Their first idea -- building plug-in memories for International Business Machines Corp.'s Personal Computer -- was vetoed by prospective investors, because too many companies were already competing in that market. A month later, two of the founders -- J. Rodney Canion, 38, and James M. Harris, 39 -- were eating dinner in a crowded Houston restaurant when suddenly they got a better idea.

The two engineers hurriedly sketched the first product for their prospective company on a napkin: a portable version of IBM's Personal Computer. "We saw a great need among businessmen for portable computers and at the same time we saw the growing dominance of IBM," says Canion. No one then was selling a computer, much less a portable model, that could share the fast-growing library of software written for the IBM PC.

That, so the story goes, was the beginning of Compaq Computer Corp., the Houston startup that fast became one of the most successful makers of products compatible with the IBM PC (page 88). At least four other portables compatible with the IBM machine have since hit the market, but Compaq has outpaced the others. As a result, it has the momentum that could give it the fastest start of any new manufacturer in history. Declares L. J. Sevin, a Compaq director whose venture capital firm was the company's first backer: "We have a billion-dollar company in the making."

PROVERBIAL SHOESTRING

The 28-lb. portable computer -- better described as a transportable -- is selling so well that, barring manufacturing problems, the privately held company could ship as many as 50,000 computers in its first year of production. With the machine retailing for $2,995, about $400 less than IBM's PC system, 1983 sales could reach a nifty $100 million. By comparison, Apple Computer Inc. took four years to reach $100 million in sales. "Compaq has been able to build up a high-quality image in a very short time period," says John Kiefer, a market researcher at California's InfoCorp Inc.

Like most companies, Compaq started on the proverbial shoestring. In January, 1982, Canion, Compaq's president, peruaded Sevin Rosen Management Co. to put up $20,000 to develop a prototype. With future funding dependent on having a working model ready to show prospective dealers in June, a five-man engineering team began working day and night to complete the design. Then, one day at 2 a.m., only hours before its demonstration to dealers, the prototype was plugged in for the first time. "When it lit up, it was hard to believe -- it was like a dream," recalls Canion.

RECORD FINANCING

The first dealers to see the machine were ferried in by Sevin's partner in Sevin Rosen, Benjamin M. Rosen, a well-known former industry analyst and newsletter publisher who used his contacts to introduce Compaq. Among that first group were representatives from Sears, Roebuck & Co.'s Business Systems Centers who later greed to sell the Compaq computer in the 45 Sears computer centers.

Because of the strong dealer reaction, Canion and Rosen, who had been elected chairman of Compaq, set their plans into high gear. In the following 12 months, Rosen and Sevin raised $30 million in three rounds to fund Compaq. The original business plan, says Rosen, was "very aggressive but it kept on getting more and more ambitious."

A key reason for the strong dealer interest in Compaq's model was that, unlike most so-called IBM-compatible machines, it could run IBM PC software right out of the package. And with IBM unable to meet the huge demand for the PC, dealers wanted to carry the Compaq to fill the gap. Suddenly, says Rosen, "dealers were coming to us." Says Seymour Merrin, president of Computerworks, a Connecticut dealer: "I would have lost a lot of money if not for Compaq." To meet this demand, "we had to get big fast," says Rosen. "We saw an opportunity to go for the brass ring, to be one of the major producers in the same category as IBM and Apple."

In order to reach this ambitious goal, Compaq decided on a two-prong strategy: Beef up management with experienced executives from large corporations, and build a major production facility capable of churning out the portable by the thousands. Compaq employed a hefty stock option to hire away John R. Walker, who was formerly a senior vice-president at Datapoint Corp., a half-billion-dollar computer company. More recently, Compaq hired H. L. Sparks, director of retail sales for IBM's PC, to run its sales program.

BLOWING FUSES

One of Walker's first moves at Compaq was to buy expensive, automated test equipment -- a large capital investment -- to maintain quality control at mass-production rates. Following IBM's lead, Compaq decided to assemble its computers using components made by outside producers, a strategy that almost backfired. Compaq took delivery of a video monitor that, because of an unexpected design change, caused the fuses to blow after it was plugged in. Compaq shipped some of these faulty machines to dealers but moved fast to fix them once the flaw was detected. The vendor also quickly modified the monitor design. "Vendors know that if we get a bad piece of equipment in a batch we send it all back," says William H. Murto, marketing vice-president and another former TI executive who is Compaq's third co-founder.

One year after showing retailers its first prototype, Compaq was turning out about 5,000 units a month. By contrast, Corona Data Systems Inc., a California maker of PC-compatible portables, could make only 1,500 machines a month. With demand growing, Compaq plans to move next year into larger, automated manufacturing facilities capable of turning out 10,000 units a month -- more than its competitors but far less than IBM's monthly output, which is estimated at 85,000 Personal Computers.

By reaching high-volume production quickly, Compaq was able to penetrate the major computer stores. Compaq "filled the shelves before we had a chance," says Cyril N. Spratt, director of communications at Computer Devices Inc., a Massachusetts competitor. Computer Devices has fewer than 100 stores selling its product, while Compaq has 450 dealers, with plans to add 400 more by the end of the year.

Looming over Compaq's success, however, is a lawsuit filed by TI in January, charging Compaq with pirating trade secrets and infringing TI patents to build its computer. Neither side will comment on the suit, but Compaq has countersued, asserting that TI is trying to destroy the company (BW -- Apr. 18).

MORE POWER

Perhaps more threatening to Compaq's future, however, are IBM's product plans. Industry experts expect IBM to come out with its own portable personal computer. When that happens, Compaq's backlog of orders "could vanish overnight," says John T. Floyd, vice-president for manufacturing at Computer Devices. Compaq executives counter by saying they latched onto the IBM PC bandwagon only to establish a foothold in the personal computer market. "We realize a niche like this for an IBM PC-compatible computer doesn't last long," says Harris, vice-president for engineering. But, he adds, "we have a number of exciting products coming out, too."

Although the company will not discuss its new products, two are expected to be introduced next year: possibly a smaller version of the current model and a higher-price machine with more power. "From what I see today Compaq will have no problem surviving," says John H. Rollins, national manager of Sears Business Systems Centers. But he adds: "I don't know what will be around to compete with them next week, next month, or next year."

The company is now concentrating on strengthening its already good position with retailers. Compaq has a strong dealer-oriented program offering high profit margins -- in the 38% range, compared with IBM's estimated 32%. Just as important, the Houston company has not set up its own direct-sales force. Dealers constantly criticize IBM and Apple for allowing their factory sales teams to compete with dealers. Compaq's dedication to retailers, says Computerworks' Merrin, means that "I am willing to really fight for the company."

GRAPHIC: Picture, COMPAQ'S MURTO, ROSEN, CANION, AND HARRIS: TO BEAT A LEGION OF IBM LOOK-ALIKES INTO THE PERSONAL COMPUTER MARKET, "WE HAD TO GET BIG FAST," SAYS ROSEN, DAN FORD CONNOLLY