Compaq bets on continued growth

By Richard Morochove

First published April 17, 1997

HOUSTON -- A computer company with a proud record of innovation is in trouble. Sales are slipping and losses are mounting. Some prospective computer buyers object that the company’s PCs aren’t compatible with industry standards. Finally, the board of directors fires the president.

While that may seem like today’s troubled Apple Computer, this was the unhappy situation at Compaq Computer Corp. in 1991. At that time, Compaq’s annual sales were about $3 billion (U.S) , or half those of Apple Computer. This year, Compaq revenues are projected to exceed $20 billion (U.S.), twice the sales of Apple.

Clearly, Compaq has been doing something right in the intervening six years.

I first met Eckhard Pfeiffer, Compaq’s president and CEO, in the spring of 1992. The former chief of European operations, Pfeiffer replaced Compaq co-founder Rod Canion as company head just a few months earlier.

As I was ushered in to Compaq’s executive boardroom with its immense inlaid table, I realized this is where Rod Canion learned his fate. Striding in from his office next door, Pfeiffer spent a good hour explaining why Compaq was changing its operating strategy. The days of high-priced computers with custom components were over. The company was reinventing itself into a volume producer of competitively-priced industry standard computers.

Later that day, I saw the new computers rolling off the assembly lines in preparation for their release the next month. Then it hit me. This endless line of radically different computers was a gutsy move. Would Compaq customers accept the new machines? Would sales increase enough to offset the much lower profit margins?

By the time of Innovate 93, the first of Compaq’s biannual technical conferences and trade shows, it was clear the new strategy was working. Yet Pfeiffer’s pledge at that time to grow Compaq into the world’s largest personal computer company by 1996 seemed rash. After all, the company had returned from its near-death experience just one year earlier.

Pfeiffer delivered early. Compaq has been the world’s largest personal computer company since 1994. In Canada it’s a strong number two, nosed out last year by IBM Canada.

At last week’s Innovate 97, Pfeiffer pledged to grow Compaq to one of the top three global computer companies by the year 2000 (today they’re number 5.) To get there, Compaq has closely aligned with Microsoft and Intel. One measure of the company’s clout is that both Microsoft chief Bill Gates and Intel CEO Andy Grove spoke on the same stage at Innovate 97. After all, how could Gates or Grove decline a speaking invitation from their largest customer?

Grove’s presentation focused on the Pentium II processor. More than a dozen computer companies are currently manufacturing Pentium II-based computers which will be available at retailers early in May. Grove demonstrated the low-end 266 MHz. Pentium II running in a Net PC box. Other versions of the new chip run at up to 500 MHz.

Grove didn’t talk about the vigorous competition Intel’s Pentium processor is receiving from AMD (Advanced Micro Devices) and Cyrix. Look for Intel to slash the prices of Pentium processors around the end of April, by as much as 25 to 30 per cent. The Pentium price cut will be reflected in lower computer prices at retailers by the end of May.

While Compaq has had a tremendous run over the past six years, I think the easy growth is over. It’s still weak in many international markets where competitors like IBM are strong.

Furthermore, in going after growing markets like the Internet, it faces a stiffer challenge. It’s more difficult to convince someone to change operating systems than to persuade a buyer of a Windows computer to buy your brand.

Take the Internet Acceleration Server technology Compaq announced at Innovate. It aims to unclog the arteries of the World Wide Web by slashing the time it takes to download GIF and JPG graphics by up to two-thirds. All the user need do is install a free browser plug-in.

At the server end, the graphics compression is accomplished by some fairly heavy-duty hardware and software codeveloped with Integrated Computing Engines (ICE). Compaq hopes this will appeal to Internet Service Providers who want to gain an edge by offering higher performance to their subscribers.

But few ISPs in Canada use the MS Windows NT operating system needed to run the server compression software. Most use some variant of UNIX. In addition, many ISPs are losing money and can’t afford to replace their servers.

Will ISPs will switch systems to buy the Acceleration Server from Compaq and ICE? No dICE. Will Compaq reach number 3 by 2000? I wouldn’t bet against Pfeiffer. CW