November 10, 1999 11:10 AM PST

Compaq hopes iPaq jump-starts its PC push

Compaq Computer is attempting to bolster its beleaguered PC business with its small-scale iPaq, a business computer that will cost $499.

As previously reported, the new device sheds the "legacy" ports and connectors common to typical PCs and comes in a smaller, more stylized case.

The new PC comes at a crucial time for the company. Business sales are vital to the Houston-based PC manufacturer, which recently lost its leading market share in the United States to rival Dell Computer for the first time. Compaq's commercial PC unit accounted for 30 percent of the company's third-quarter revenue, but it lost some $169 million in that segment, following a second-quarter unit loss of $225 million.

As with other major computer makers, Compaq is reducing the overall size and shape of its PCs to both reduce manufacturing costs and to give their PCs some sort of distinguishing character other than low price. With internal technology becoming virtually identical across brands, PC makers are now experimenting with external factors to build a following.

"The more the technology becomes the same, the more people will tend to stake out their territory in the soft areas," said Roger Kay, an analyst at International Data Corporation (IDC). "This goes back to Detroit and tail fins."

The iPaq, which uses USB for more easily attaching peripherals such as printers, is expected to ship in January. The new computer weighs about 10 pounds and takes up 75 percent less space than typical Compaq PCs.

"There will be a natural cannibalization of traditional [PCs] with Internet access devices, the Internet appliance, particularly in large companies where application people are writing more server-side applications that exist on the server," Compaq chief executive Michael Capellas said in a recent interview with CNET News.com.

Compaq, in partnership with American Express, CMGI, Microsoft, and Intel, also announced a new information portal for business professionals. Compaq is calling the information portal B2E, business to employee. B2E, available in the first quarter, will offer "profession specific" tools, research and information, and goods and services for finance, sales, marketing, and human resource professionals, among others.

The combined announcement is twofold in its approach: delivering simpler, easier to use and manage PCs and offering more Internet services with products.

"It's no secret that if you can't sell Internet services, or some services with the box, you won't make very much money," Capellas said. "So with the compression of the device, the compression of the prices on it, and really with the commoditization of it, yes, you have to bundle some level of service."

The dropping prices continue to change the PC industry, analysts say.

"It's the era of land-fill computing," said Technology Business Research analyst Lindy Lesperance. "As the cost of PCs goes down and people focus on total cost of ownership, it becomes cheaper to just get rid of PCs and buy new ones rather than upgrade what you have."

Compaq plans a range of new Internet appliances, some with wireless capabilities. The company also plans to eventually extend wireless connectivity to iPaq.

It isn't the only PC maker moving in the direction of simpler PCs. IBM on Monday said it would introduce a simpler, Internet-ready PC, code-named EON, early next year. Hewlett-Packard unveiled the e-PC, a sealed-box system for accessing the Internet.

The iPaq is a whole new product category that will expand over time, said Mike Winkler, senior vice president and group general manager of Compaq's commercial PC group.

Besides the basic iPaq, Compaq also showed off prototypes of handheld wireless PCs, cellular phones with data storage capabilities, and an all-in-one PC built around a flat-panel display. Most of the products include wireless network connectivity.

Winker said that while he anticipates traditional PCs and notebooks to "survive for a substantial period of time as the dominant full-function client," he expects customers to switch to simpler devices, particularly in the mobile and handheld categories.

Initially, Compaq expects the new category will account for 15 percent of its volume, reaching 60 percent or more within as little as two years.

Compaq will only offer four basic iPaqs, unlike the "the hundreds or thousands" of other models currently available, "very much playing into the direct, simplified world," said Winkler.

The $499 model comes with an 500-MHz Celeron processor, 64 MB of RAM, a 4.3 GB hard drive, 4 MB of video memory, and keyboard.

Compaq will sell iPaq direct only, either to the customer or through dealers collecting a commission.

"If you believe the whole characteristic about our message here today, it's really snapping to a much simpler, faster distribution model," Capellas said. "The key to this is it's also an Internet distribution model."

PC manufacturers backing e-commerce cannot also support the traditional two-tier distribution model, said Capellas. Compaq plans to take 40 percent of its business direct next year.

Merrill Lynch's Steve Fortuna didn't see enough in today's announcement to revise his rating of Compaq. "Our Intermediate Term Neutral rating on the shares of Compaq remains intact," Fortuna said in a statement. "We believe that the introduction of this $499 PC to some extent validates our view that the pricing environment remains difficult, and is in fact becoming increasingly aggressive in the corporate market."

 

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