A tale of two vendors: the battle of Compaq and Dell

The direct sales model conceived by Michael Dell has rocketed his company up the charts: the latest IDC figures for Q3 show that Compaq has lost the lead in the US to Dell, but is still hanging on to the top slot in terms of worldwide sales. It has a market share of 13.8 per cent - narrowly ahead of Dell's 11.6 per cent.

In a bold move to stay in pole position, Michael Capellas, president and CEO of Compaq, is clearly stamping his authority on the company by paying $370m in cash for the custom-assembly operations of US-based PC dealer, Inacom (see 'Compaq buys build-to-order PC maker'
http:www.silicon.com/a34926 ).

The move will see Compaq acquire four US assembly and distribution operations based in California, Indianapolis, Nebraska and New Jersey, and will give the computer manufacturer the ability to configure machines to customers' requirements.

Capellas said at the announcement of the deal: "This purchase makes great strategic sense for Compaq because it gives us the right capabilities quickly and cost-effectively. We'll be better equipped to meet the diverse and changing needs of our US customers - particularly our major accounts which clearly want to go direct - increasing our potential for profitable growth."

But will this tentative step towards apeing Dell's direct model while retaining its relationship with the channel (albeit with fewer partners) help it retain that number one spot and increase profits?

Andrew Brown, research analyst at IDC, pointed out that Compaq is indeed trying to have the best of both worlds - direct and the channel. He said: "The next two quarters will show how successful their planning has been."

Adam Dorrell, director of marketing for preferred accounts at rival Dell, thinks they have a stiff challenge on their hands. "To fully imitate Dell's model would be a difficult challenge. They would have to totally alter the company," he said. The reason it works for Dell is that the company was set up to work that way in the first place, explained Dorrell.

Compaq would obviously deny it's doing this, or would ever attempt to do so, but is therefore in danger of being caught in-between going direct and retaining the channel. Compaq needs a strategy to bridge the two, and did address this with its Channels for the Internet Age (CIA) programme.

US customers can order goods 'direct' from Compaq's Web site - but Compaq does not fulfil the order. Instead, it identifies what part of the channel the deal should go through, and then passes on the request to the relevant reseller, which gets a fee for dealing with the sale.

If the move succeeds, it will surely be just a matter of time before the model is brought to Europe. This could impact the channel here too, but its main reseller, Computacenter, does not believe this strategy is a serious threat. In fact, it claims the likelihood of it working in Europe is slim.

It points to the fact that if a customer wants an all-in-one package, Compaq is still the way to go. If customers do go to Dell, especially large businesses, they end up having to deal with a third-party contractor for support and services.

Dell may well point to its alliance with Wang as evidence that it is taking after-sales support and service seriously but a recent investigation by Silicon.com reveals that Dell has some work to do in this area (see 'Dell admits it failed customers' http://www.silicon.com/a35090 ).

But Compaq too has its problems, in particular achieving that awkward balancing act of keeping its resellers happy while satisfying users' direct demands.

Clive Longbottom, strategy analyst at Strategy Partners, said: "If, and that's a big 'if', it's handled correctly and Compaq keeps the channel happy, it will work and help get back some market share. But if it goes wrong, the company will not even be able to compete with even HP or IBM."