Compaq Suffers from Indigestion

Legend has it that the company whose name comes from an acronym formed from the words "compatibility and quality" was hatched at a lunch meeting at the House of Pies in 1981 in Houston, Texas. Three engineers (Rod Canion, Bill Murto, and Jim Harris) who worked on high-capacity disk storage at Texas Instruments formulated a plan to reverse engineer the IBM PC and create a portable computer after a visit to a computer store across the street. They showed venture capitalist Benjamin Rosen their plans on the back of placemat, and Compaq Computers was born. With Rosen as chairman of the board and Canion as president, Compaq created the first PC clone and portable PC in 1982. Rosen had previously funded Mitch Kapor's startup of Lotus in 1981, and subsequently funded Citrix, Cypress Semiconductor, and Cyrix. Despite Rosen's involvement in these other ventures, Compaq has always been closest to his heart, and he has stayed on as chairman throughout the years. In 1991, Rosen felt that Compaq's pricing strategy was out of touch with market reality, and Compaq lost $70 million. As a result, Rosen replaced Canion, founder and president, with Eckhard Pfeiffer. Rosen had some engineers build a PC overnight from parts in a hotel room to show it could be done cheaply, and Canion's fate was sealed. In the past year, Compaq grew from a company worth $3 billion to greater than $40 billion by building the number one PC business and by acquiring Tandem and Digital Equipment. Experts attributed Pfeiffer's savvy in marketing and pricing PCs as a key factor fueling this growth. While Pfeiffer was trying to explain Compaq's lame Internet strategy derived from Tandem's NonStop e-business program, the difficulties integrating Digital Equipment's 27,000 person service business, a muddled channel policy, and a disappointing earnings quarter at Compaq's Innovate 99 forum in Houston, Rosen was at work again. Compaq's board of directors met in a New York restaurant on April 16 to discuss Compaq's future. After conferring with key Compaq executives past and present, the board asked for Pfeiffer's resignation, and he agreed. Earl Mason, Compaq's CFO followed Pfeiffer out the door. Pfeiffer commented to CNN afterwards, "The feedback I've been getting from many, many people is that the board should hang their heads in shame." The move and its swiftness surprised many movers and shakers in the computer industry. Although some analysts pointed to Compaq's poor Q1 results as the reason for the dismissal, an analysis of the figures does not suggest disaster. Compaq grew sales of $5.96 billion in Q1 1998 to $9.42 billion in Q1 1999 (mainly because of acquisitions), and had net income rise from $16 million to greater than $281 million in the same period. True, analysts predicted twice the earnings of 15 cents per share that Compaq posted, and Wall Street punished Compaq for it; however, Compaq is basically sound. The board has decided not to pursue a different path--every message so far has been "stay the course." However, Rosen and the board felt that they had the wrong person in command at Compaq. The company needed someone to make decisions quickly, articulate the vision, manage the acquisitions, grow a service business, and lead Compaq into the enterprise space as a vertically integrated entity. In short, Rosen and the board wanted to replace a PC guy with an enterprise guy. In an open letter that appeared in the Boston Globe on April 18 (probably meant for the large Digital Equipment contingent in that area), Rosen specifically mentioned "the fundamental correctness of Compaq's strategic direction," and that the company required the "ability to operate at Internet speed." Rosen used the phrase "Internet speed" twice in the letter to describe the attributes desired in a new CEO. Many analysts believe that Compaq has not moved quickly enough to exploit the developing Internet market-as a result, the company may be threatened by its tardiness. Terry Shannon, editor of the "Shannon Knows Compaq" newsletter ([email protected]; archives at said that several factors got Pfeiffer fired. "I don't believe that anybody on the new triumvirate could point to one single defining moment or factor that led to this," he said. Shannon added that with Compaq's acquisition of Tandem and Digital Equipment over the past year, "juggling as many balls as they were at the time, they might have taken their eyes off of some of them." He went on to say, "I also believe that Pfeiffer obsessed over Dell Computer and failed to realize that even though he had spent $9.6 billion to become an enterprise player, he continued to exhibit knee jerk reactions to the exploits of the Round Rock Kid. Clearly there have been channel problems. In Compaq's efforts to emulate Dell and install a direct sales and a build-to-order model, they certainly alienated their channel partners." The exodus of key Compaq management continued in May as John Rando, the highly regarded general manager of computer services, announced his July 1 departure from the company. In the meantime, sales chief Michael Heil left while the interim management team continued to shuffle the deck. These moves presage changes in two key operational groups--sales and marketing--as Compaq changes its channel model. Although attendees at this month's Compaq/Digital Equipment DECUS show were in clear denial, the company continues to shuffle the deck. Swallowing Digital Equipment was a big meal for Compaq. An analysis of the acquisition 1 year after Compaq-tion is a mixed bag. Problems still remain meshing the two cultures, integrating sales and marketing systems, and unifying Compaq's channel model with Digital's direct sales. AltaVista, Digital's Internet search engine, could have been a major portal on the Internet but isn't. Digital recently spun off AltaVista as a separate business group to rise or fall on its own. On the up side, Compaq has been active in the high-end storage market with good results. While Compaq's strategy for its processors and OSs has been to advance both the Alpha and UNIX platforms, the company has done almost nothing to keep OpenVMS alive--so it appears that OpenVMS users are migrating to Windows NT and UNIX. And although Compaq appears to have held onto Digital's customer base, Compaq has done little to promote or expand Digital's service business and integrate it with Compaq's own offerings. From the outside looking in, Compaq hardly seems to have stumbled. Compaq has worked well with Microsoft on Windows 2000 (Win2K) and has demonstrated 64-bit NT in emulation on an Alpha machine. Compaq has consolidated blue box Alpha for VMS and True64Unix and beige box Alpha for Windows NT into one product line to reduce customer confusion. Plans to build a common NT and True64Unix password management scheme exist, and Tandem's NonStop Cluster software with a 1-second failover of applications will appear in TruCluster 6 within the next year to year and a half. Finally, Compaq is continuing development of Tandem's NonStop kernel. To continue to grow and increase market share, Compaq will have to target high-end systems and services that companies such as Dell don't possess. Compaq hasn't done particularly well recently relative to other players in the commodity PC business. With this sector under increasing margin pressures, many analysts believe that Compaq will have to abandon its channel model and move to direct sales. Much to the dismay of many Value Added Resellers (VARs) and channel partners, Compaq began the move toward a new channel model when the company announced in May that it was consolidating its distribution from 40 current distributors down to 4 key distributors on August 1. The four accounts that Compaq chose were Inacom, Ingram Micro, Merisel, and Tech Data. This action was one of the current interim team's first moves, one that many company insiders had discussed for a long time. Whoever eventually takes over at Compaq will be faced with articulating a unified message. Compaq clearly has a major communications problem with press and analysts. As Terry Shannon said, "If the company does not aggressively engage key influencers, it is the key influencers or competitive vendors who will set the ground rules. The enterprise story, once I get it out of these folks, is pretty good; it's just that they haven't told it yet." Right or wrong, you have to like the decisiveness of all of this. Had Digital Equipment had this kind of leadership, Terry Shannon's newsletter of 14 years would still be called "Shannon Knows DEC," and Digital management would be trying to figure out how they were going to put high-performance Alpha chips into desktop PCs and compete with Intel.

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