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Thin end of Dell-shaped wedge, Simon Meredith reckons

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Compaq’s announcement that its Q1 earnings would fall short of expectations due to a slowdown in demand for business PCs should not come as a surprise. This merely confirms we have known for months -- that PC sales will increasingly go direct and that companies with the lowest cost model will do best. Right now that means Dell is in the driving seat. Compaq is trying to respond...it has to! But there are more worrying signs for Compaq partners and customers. The company has been too slow to react to Dell and, in a market that’s reluctant to grow, the impact on its business has been worse than expected. There was also a hint of panic in the timing of the announcement – made retrospectively, a week after the quarter ended rather than in mid-quarter when the tide looked like turning. Perhaps Compaq did not realise the scale of the problem or thought it could turn things around. Also of concern is the lack of extra margin in the server business. Dell is taking a chunk out of this market too. The top end is very competitive and confused. From this position,shareholders should consider what they really got out of the Digital acquisition. The answer may be a long time coming. Global reach, services business and extra corporate credibility provide the rationale for buying Digital. But none of those will deliver short-term advances in EPS. So the forthcoming announcement of Compaq's new "enterprise strategy" may not comfort many shareholders. More cost cutting plans will be welcomed but they may be the thin-end of the wedge. Further and much more substantial cutbacks are needed to boost the shares in the difficult Spring quarter. But with prices lower than ever, Compaq will be forced to accelerate its move towards direct and on-line sales. That will mean more consternation in the channels but if this means Compaq is a sounder supplier and is able to compete more effectively with Dell, it won’t be bad news for anyone. There is no need for anyone to be unduly worried about Compaq – it is a big company, it will survive. But it must be realistic if it is to remain a strong competitor and not suffer long-term damage during this difficult period in its development. The company, its partners and customers need to brace themselves for a succession of blows to morale. In the end though, it will be the shareholders who need to hold their nerve steadiest of all. They have the ability to inflict real damage to confidence and weaken Compaq’s long term ability to compete. Compaq aims to be something more than just a PC supplier to its customers; Compaq wants to sit beside IBM and HP as global computer systems and services suppliers. To achieve that aim, it will need impeccable corporate credibility. Compaq then must manage the stock market’s expectations very carefully and act swiftly and decisively to curb the rise of Dell and cut its cost model. It is far better to under–promise and over deliver than continue to insist that everything is wonderful in the garden when very clearly it is not. ® Simon Meredith is a freelance computer journalist

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