October 12, 1998 5:20 PM PDT

Compaq headed for high end

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Compaq's software shift

October 5, 1998
Compaq's acquisition of Digital Equipment Corporation and Tandem is giving the company a serious and growing presence in the world of high-performance, "enterprise" computing, industry observers say.

The incorporation of Digital and Tandem into Compaq's ranks has gone relatively smoothly, say sources, and will begin to result in an increasing array of Compaq-branded hardware, software, and corporate service offerings at the high end. Further, Compaq's management team appears to fully understand the benefits of its new high-powered technology products.

Recent growth outside of the Houston company's traditional base is reflected in the breakdown of Compaq's sales figures. Enterprise computing--non-PC products including services and Windows NT servers--accounts for 57 percent of revenue at Compaq, according to Gillian Munson, an analyst with Morgan Stanley Dean Witter.

Compaq still has a heavy presence in its traditional business, selling PCs, which accounts for the remainder of its revenue. In comparison, PC sales are about 15 percent of IBM's revenue and 16 percent of Hewlett-Packard's revenue.

The Digital purchase should be key to Compaq's transition. "Compaq has taken a quantum leap into being better positioned for addressing the enterprise market," said Roger Kay of International Data Corporation. Munson agreed. "With Digital, they bought up a bunch of great technology," she said.

Part of Compaq's strength comes from new hardware projects now under way, said Jerry Sheridan, a Dataquest analyst. As a result of the mergers, the company now has roughly three lines of servers: Windows NT servers mostly based around the ProLiant line; Alpha-based servers running Digital Unix or Windows NT; and Tandem's Himalaya servers, which will use the Alpha processor.

Although Alpha does not have a huge market share now, the chip platform will give Compaq distinct advantages. With the delay of Intel's 64-bit Merced chip, it's likely that the 64-bit version of Windows NT 5.0 will run first on Alpha, Munson said.

"There is an early adopter pocket of profitability for Compaq" because of its Alpha chip, she said.

Compaq also has new muscle in its own operating system. An increasing number of Fortune 500 customers are considering Digital Unix as an alternative, said Craig Froelich, products marketing manager at Novaquest, a Los Angeles-based integrator. Microsoft's Windows NT is making inroads into server markets formerly dominated by Unix, but Froelich said it'll be five to ten years before NT is robust enough to tackle the high-end, "mission-critical" servers.

In addition, Compaq is making use of the Digital sales force, Froelich added. IBM and Hewlett-Packard have had their own direct sales forces for years, unlike Compaq. These units have largely been responsible for landing large, multiyear contracts.

With all the new technology from Digital and Tandem, the question now is whether Compaq can "leverage that [new technology] into sales in the high end," Munson said.

Selling services such as installing, testing, and maintaining equipment is a growing piece of the IBM revenue pie, and Kay believes Compaq must follow suit if it's to become a household name in enterprise computing. "Services are something that you have to have if you're working with large enterprises," Kay said.

Munson said she believes that Compaq's push into the enterprise hinges on its ability to convince big software developers that the Compaq operating systems are important enough to write software.

"We firmly believe that software drives hardware sales," Munson said. So Compaq needs to convince companies like Oracle and SAP to port its products quickly to Compaq operating systems like Digital Unix and OpenVMS. "The critical thing here is to shorten that lead time" so those programs don't show up six or nine months earlier on Sun or HP platforms, she said.

Although layoffs of Digital staff probably won't wind down until the end of 1998, the merging of Compaq and Digital personnel seems to be going smoothly.

"People seemed happy," Munson said, based on conversations with both executives and workers in the trenches. Several Digital personnel are now in Compaq's upper ranks. "It's pretty clear that the Compaq executives understand where the important assets are at Digital," Munson said.

Kanan Hamzeh, general manager of reseller Tri-Pole Corporation/Microage, said he saw a "good fit" between Compaq and Digital.

However, Hamzeh said he did have difficulties with Digital personnel trying to bypass his company and deal straight with the customer.

 

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