Compaq Computer's Effort to Stay on Top Of IBM Compatible Market Faces Big Test

By Mark Zieman, Staff Reporter
The Wall Street Journal

June 27, 1984

Houston -- After getting its start in a pie shop, Compaq Computer Corp. set out to fill a niche in the small computer market that even International Business Machines Corp. had ignored: portable computers that would run IBM-compatible software.

Tomorrow Compaq will again swat at giant IBM when it announces a line of desktop computers. They contain a souped-up microchip that makes its models much faster than IBM's.

Compaq is putting a lot of effort into its New York announcement, and for good reason: The product could make or break the company. Hundreds of analysts and reporters have been invited to the day-long event at the Essex House Hotel. They will be feted with free food and cocktails, a laser-and-slide show 14 months in the making and music from the movie "Flashdance." Says Kenneth Price, coordinator of the Compaq "strike force" running the event: "We're going up there like we're going to plant the flag at the top of the mountain."

The war-like mentality is part of Compaq's effort to solidify its standing as king of the IBM "clones" -- those companies whose computers run on the same software that runs on IBM computers. Some clones -- such as Victor Technologies Inc. and last week, Franklin Computer Inc. -- have sought court protection from creditors under the Bankruptcy Code. And even a big clone like Compaq has found that tying its fortunes to IBM can be precarious.

Founded by expatriates of Texas Instruments Inc., Compaq in February started an advertising campaign boasting of "the most successful first year in the history of American business." But on the day that Compaq announced its first-year financial results (net income of $4.7 million on sales of $111 million) its stock tumbled $1.125, following a downturn in IBM's share price.

Clearly, the stock market believes that a successful first year means nothing without a successful second year, particularly when IBM is looming. Compaq went public in December 1983 at $11 a share; since then, despite steadily increasing sales, its shares have changed hands at prices as low as one-half their original value. It was traded yesterday in the over-the-counter market at $6.75 a share bid.

More recently, Compaq's stock price has suffered because of price cuts by IBM on its PC line, as well as the introduction of IBM's portable computer. In a business where companies can live or die based on their access to capital, a perpetually low stock price would make it hard for Compaq to expand.

"Every month there is another challenge that people think will 'do in' Compaq," says Rod Canion, a former Texas Instruments hardware engineer who helped found the company. "Sooner or later," he insists, "the world will quit viewing us as high risk."

For that to happen, Compaq will have to spend a lot. This year Compaq plans to pay $20 million for image advertising and product promotion -- 400% more than it spent last year. A television campaign recreates the pie shop meeting at which the company was born. During the summer Olympics, the company will promote the virtues of Compaq's products. The high-cost image-building is part of the plan to "play hardball" with IBM, says promotion-man Price.

Another aggressive tactic involved raiding IBM of top talent. Compaq offered a $150,000 salary (more than the company president made), a $100,000 sign-up bonus, and the chance to regain the entrepreneurial spirit to lure away H.L. Sparks, the chief marketing man for IBM's personal-computer line. Today, the Compaq personal computer sits alongside IBM's at many of the Sears Roebuck, Computerland, and other stores that sell IBM. Compaq has also lured away top executives from Datapoint Corp. and other computer makers to expand its employee roster to 912 from the founding group of three.

The corporate culture at Compaq breeds a love of success. The company throws surprise champagne parties whenever a major announcement is made. "It's a blast," says Robert Brent, a quality control supervisor at Compaq. But the company is acutely aware of its vulnerability. To keep its technological secrets intact, a poster in the cafeteria reminds employees that "loose lips sink chips."

Wall Street's wariness about Compaq is based on its size, which is big by clone standards but puny compared with IBM. "You've got to believe IBM isn't going to sit back and let everybody come out with a faster machine," says Douglas Cayne of the Gartner Group, an industry research firm. "It will just get incredibly bloody in the whole IBM-compatible business."

Mr. Cayne and others note that Compaq's early success occurred when the IBM PC was in short supply. The shortage no longer exists and could even turn to a glut when IBM triples production later this year. Compaq also faces new pressure from yesterday's entry of American Telephone & Telegraph Corp. into the personal-computer market. AT&T's PC is also an IBM clone.

For its part, IBM acts above it all. "There's no difference" among companies manufacturing look-alike small computers, an IBM spokesman says. "We view them all as competitors." The company has a policy of refusing to comment on specific companies, but the spokesman notes that "our actions can make or break companies on a day-by-day basis."

Founder Canion acknowledges that the company's continued growth requires a new product that's successful, and that's where tomorrow's festivities in New York come in. Compaq's new 16-bit personal computers, called the DeskPro series, run on Intel Corp.'s 8086 microprocessor, and thus can function two to three times faster than IBM's machines, which rely on a less sophisticated Intel chip, the 8088.

The DeskPros are priced comparably with IBM models, Compaq says, from $2,495 for the basic model with 128,000 bytes, or units of memory, to $7,200 for the showcase Model IV, with 640,000 bytes of basic memory plus 10 million bytes of backup cassette-tape storage capacity -- an option IBM doesn't offer.

"They're exciting products. They'll get an excellent reception," says Mr. Cayne of the Gartner Group. "But if IBM introduces a new generation next month, they're going to be in trouble."

Compaq officials grow testy when analysts and others mention IBM in the same breath as Compaq. "That's really not a concern of ours that some hypothetical future machine is going to come out from IBM," says Compaq Chairman Ben Rosen. Adds Mr. Price, the publicity man: "Sure IBM can come after us. Sure the world can come to an end." But he says experience and ingenuity will help Compaq thrive. "We didn't get where we got today by sitting around and blowing on dice."