Low-cost PC sales battle halves profits at Compaq

COMPAQ, the troubled US personal computer giant, yesterday revealed the full damage done to its business by the ruthless PC price war when it reported earnings at half the level expected by Wall Street.

The Houston-based PC maker, whose two top directors resigned on Sunday, reported net income of $281m (pounds 175m), or 16 cents a share. Before a profits warning 10 days ago, analysts had expected 31 cents.

Benjamin Rosen, the chairman who is stepping in as chief executive, called the results "disappointing and unacceptable". He blamed the group's performance on the price war and slackening demand.

Profit margins were cut as the group was forced to slash its prices and go for volume. Sales jumped by 66 per cent to $9.4bn, but costs rose by 52 per cent and expenses almost doubled.

Like its rivals Hewlett Packard, IBM and Dell, Compaq has been devastated by the sudden popularity in the US of PCs costing less than $1,000 (pounds 600).

"There are few other areas of technology where there's such an enormous price war going on. All the big brand names have totally underestimated the appeal of the sub-$1,000 PC. I think they are going to seriously suffer," said Ali Mortazavi, IT analyst at Credit Lyonnais.

Joe McNally, Compaq's UK managing director, said the price war had forced the group to slash its prices by 15 to 20 per cent, cutting the price of a standard PC from pounds 1,000 to pounds 850.

Mr McNally admitted that the group had failed to execute its corporate strategy fast enough. The group's stated aim is to become a "one-stop shop" for PCs, software and service.

Compaq reported its results after Microsoft, the software behemoth valued at $450bn, posted a 43 per cent jump in earnings, powered by sales of its Windows NT and Windows 98 operating systems.

Shares in Microsoft slipped slightly in early trading when the corporation warned of a slow-down in the software market ahead of the year 2000. Compaq shares were steady.