Network: Looking out for number one

It's tough at the top: Compaq's new boss tells Stephen Pritchard about his plans to keep his company ahead in the PC world

If you are the market leader, the only way you can go is down. For Compaq, holding on to a hard-won position as the world's best-selling PC maker has become - increasingly - a tough task.

The latest figures from Dataquest show that Compaq has finally surrendered its lead in the all-important US market to arch-rivals Dell. Compaq has retained its position as the top computer maker globally, mostly due to a strong performance in Europe, but these are difficult times to be in the PC business.

For Michael Capellas, Compaq's president and chief executive for little more than three months, maintaining the company's position represents a true challenge. Compaq's profits in the third quarter this year were flat, and Capellas admits that the company lost money in its traditional heartland - business computers.

Capellas believes that the desktop computer market, especially the business PC market, is increasingly a commodity business; he describes the competition as "brutal". Compaq's preferred solution is to extend the business, both upwards and downwards.

Acquisitions, especially of Tandem e-business solutions and Digital hardware and software, have brought Compaq a presence in the all-important "enterprise" computing. Here, global customers want complete solutions, from laptops to massive servers running electronic commerce and business databases. But Capellas has high hopes for the consumer market, too. In the last quarter, Compaq's consumer business made a profit.

In Europe to give a keynote address to the Gartner Group's annual symposium, Capellas admitted that the company has made mistakes. His predecessor as CEO, Ekhard Pfeiffer, left the company swiftly after poor sales figures and boardroom disagreements. Capellas believes the company can turn itself round. But much will depend on the CEO's strategy of being open with customers, the press and shareholders. Capellas says Compaq has some outstanding strengths: in design, production, services and support. Much of the problem stems from the company's inability to communicate its plans to the outside world.

Compaq has been a late convert to the idea of selling computers directly. Traditionally, the company has sold its products through a network of dealers, while rivals such as Dell and Gateway have sold built-to-order PCs, first by phone and now increasingly over the Internet. Capellas wants to see direct sales, including the Internet, account for 40 per cent of Compaq's sales by the end of 2000.

"We are very very efficient as volume manufacturers," Capellas says. "We might have been slow to adapt to built-to-order configurations, but having manufacturing volumes on our scale gives us an advantage."

Compaq under Michael Capellas remains committed to making computers. The company is bound to see services account for more and more of its income, especially in the higher echelons of business computing, but Capellas believes building PCs is vital to its future. "There is not enough margin to have multiple tiers of suppliers," he explains.

Consumer products - not necessarily just personal computers - are an area where Compaq expects to see growth. "Our core strategy is built around the concept of `e-tronics'," Capellas says. "You will have the convergence of electronics, PCs, wireless technology and the Net. People will want consumer electronic devices that are connected to the Net, such as an MP3 [digital music] player."

Compaq has revamped its range of Aero handheld organisers, and the company is currently integrating the Aero with the GSM mobile phone standard. There is a business demand for this sort of device, with applications such as sales force automation or stock control, but consumers and business users buying handheld computers for their personal use are driving the market forward.

Capellas concedes that the consumer market is hard to conquer. Companies with a PC business heritage such as Compaq have to compete with consumer electronics firms such as Sony and Casio. Capellas believes that the engineers and industrial designers at Compaq are more than equal to the task.

Nor is investment in consumer devices entirely a side-show from the company's main business of PCs and servers. Capellas sees the lessons learnt from selling in the demanding consumer market feeding into Compaq's business PC division. "A lot of the product designs from consumer PCs will find their way into the commercial space. That is very different from the past," he suggests. "There is an opportunity to remake the business PC market using some of the consumer techniques, including products that are better and easier to use. To succeed in the consumer space, products have to be extremely efficient and simple. These are good things in the commercial space, too."

Capellas believes that home and office PC users will both benefit from the increasing power of even entry-level computers. Today's PC is more than equal to the task of running most mainstream software packages. Extra speed, he says, can be diverted to make the computer more accessible. "We will have more sophisticated user interfaces using touch and voice. On the inbound side, people have an increasing appetite for powerful graphics and colour. The growth of power, in the consumer market, will not be driven so much by the application but by [the needs] of networking and user interfaces."

Computer companies, though, have advantages when it comes to developing handheld devices such as organisers and smart mobile phones. Computer companies understand the engineering issues around integrating hardware and operating systems. Using a fully featured OS - Compaq uses Windows CE in its Aero products - gives more power and, therefore, more flexibility than the proprietary systems used in some other handhelds or in mobile phones.

"Windows CE has advantages, especially for people from business backgrounds, but there will be other operating systems out there," says Capellas. "There won't be a single OS, because there are different operating systems for different needs. The advantage of a fully featured operating system, though, is that you can use it to give a device specialised functionality such as playing MP3 files."

For Capellas, creating innovative new products and being clearer about the products and skills Compaq has, go hand-in-hand. Handheld and portable computing is only going to grow, and the number of computers in the home is set to rise. At the same time, Capellas feels the company can fight of challenges from rival PC makers such as Dell. "Two to three years from now, you will see home LANs (local area networks) developing, that will be wireless. There will be multiple points of Internet access in the home. There will be a PC in two or three rooms, a set-top box and a couple of cellular phones," he says.

"Companies such as Dell have grown their market share, but from a numbers point of view, we are still number one in the world. But there will be a huge shift in the personal computer business." Economies in distribution alone will not be enough to give PC companies the edge.

"Complexity is the enemy," he insists. "Where we will regain market share is by saying that we will make personal computers about access. In the next quarter we will launch some fabulous products. You will see the integration of handheld devices and of wireless technology. We will make simple to use products with compelling industrial designs."