Viewpoint: Compaq cashes in on direct question

The channel may grumble, but Compaq?s decision to sell direct will please shareholders, writes Simon Meredith

It?s not often that you see jaws dropping in this business. But the idea that Compaq might consider going direct is one of the few pieces of news that everyone will find genuinely astonishing. At the time of writing, the news is still just speculation, but what if it is true? What if Compaq did decide to make systems available through some kind of direct service? So what?

The story is news because it?s about Compaq. Even if Compaq is only thinking about going direct for a very small part of its business, it is news because, for the past decade, Compaq has been the champion of the third-party channel. While IBM wrestled with its mixed models, Compaq won the loyalty of dealers by sticking to the third-party gospel.

OK, so it?s news, but what does it mean to anyone? If Compaq goes direct with its marketing or its sales, it?s going to go direct for a reason, probably because it?s what the customer ? that?s the end user ? wants.

We can set Compaq to the side at this point because this debate is not just about Compaq, it?s about the forces in the PC channel or, more precisely, the supply chain for the PC in the future. Whether it?s Compaq, IBM, Dell, Digital, Gateway 2000, AST, SNI, Mitsubishi, Olivetti, Zenith, whoever, the issue is the same. How do they deliver the best value and maximise market potential?

Fundamentally, the PC is now a commodity and has been for years. Margins are wafer thin and fewer dealers are happy about ?stocking? PCs. We have the retail sector and mail order as options for the smaller business.

Many vendors are now focusing on the corporate market. This is the case with Olivetti now and, for the most part, with SNI, Zenith and Digital as well. To win business these companies already have to sell directly by sending in their corporate accounts teams to convince a company to consider their systems. Then they will bring in the reseller to service the account.

For Compaq and IBM, the incumbents, the fulfilment channel (and that?s what it is now ? pure fulfilment) is already in place, and so is the corporate buying policy. It?s a question of keeping the pressure on with pricing, product and availability.

Fewer vendors are concentrating their efforts on the SME market, in spite of the predictions of massive growth in the sector. They want big deals that bring in repeat business and are relatively easy to plan for and to service.

SME is a harder market to address, or at least, it?s more expensive to address. SMEs are highly price sensitive, they don?t plan their purchasing, and they don?t want to wait for their systems. The SME market is a bigger risk for the vendor.

Some SMEs will buy from Byte or PC World, but not all of them are comfortable with this way of shopping. Yet dealers who will handle small beer business are harder to find, especially if you want then to match prices advertised in the magazines.

Many SMEs turn to those pages and because they trust the names Dell and Gateway 2000, will buy from these companies. Now, what would happen if they could buy Compaq systems from Compaq? Well, they just might just do it.

Really, Compaq is in an impossible position here; it?s damned if it does and it?s damned if it does not sell direct. Dell, whether we like it or not, is eating into Compaq?s market share and Compaq has to do everything it can to resist any further degradation. Looked at in this light, it?s in the dealer?s interest for Compaq to set up the direct arm.

In all probability, indirect sales will remain the main route for PC products over the next few years. Dell will need to move into the channel if it is to challenge for leadership in the PC market. Compaq?s move into direct selling (which already works for the firm in the US, by the way) is also a pre-emptive strike. If Dell goes after quality PC resellers, it is Compaq that will suffer most.

If selling direct is what Compaq, or any other leading vendor, feels it has to do, dealers ought not to feel aggrieved about it. How many years have we been talking about adding value, about getting into services? For most dealers the sale of PCs is not the core of the deal, just something they provide as part of the overall service, along with the networking, integration, training and so on.

By now, we will know exactly what it is Compaq is trying to do. Whatever it is doing, it will be in the best interests of Compaq, and not necessarily of its resellers. Yes, Compaq in particular owes a lot to the reseller channel, but it can?t go on repaying that loyalty forever, especially if the market forces (and Dell) are compelling it make a more direct appeal to the SME. Remember, Compaq has shareholders as well as dealers and, in the end, public companies are judged on their results.