SAN FRANCISCO (05/04/2000) - Compaq Computer Corp. and Hewlett-Packard Co. are the top-selling retail personal computer brands, but these days they'd rather be known for their array of Internet services.
Compaq and HP each posted about $40 billion in revenues for 1999. After installing new CEOs within a week of each other last year, both companies embarked on initiatives to develop services for the e-business market.
Currently, they're neck-and-neck. HP's services unit posted $5.9 billion in revenues in 1999, compared with $6.6 billion for Compaq. And now they're allies, in one venture anyway: The two announced plans last week to join 10 other companies, including PC maker Gateway, in creating an independent company to set up an Internet exchange for computer components.
Computer makers reshaping themselves as service providers are emulating IBM, which over the past five years has successfully recast itself as an Internet solutions provider. IBM Global Services, the $29 billion services unit that combines consulting with e-business services, is considered the linchpin of IBM's mid-1990s turnaround. Goaded by restive investors, most of the firms that made their names in the PC era of the '80s and '90s - not only Compaq and HP, but also Dell and Intel, which last month announced the addition of 1,000 consultants - are trying to reposition themselves as service companies.
The reason is simple: Although there's plenty of room for PC sales growth, profit margins are eroding steadily, and the Internet has made the quest for faster, more powerful PCs irrelevant. Selling services to businesses that are looking to go online or expand their dot-com branches offers bigger profit margins and more chance for growth. According to Jeff Lynn, VP and general manager of Compaq's professional-services unit, two trends are driving the demand for these services: More companies are willing to outsource their information technology, and the New Economy is forcing everyone to operate at Internet speed.
"It used to be you'd have two- and three-year life cycles [for technology purchases]," Lynn says. "That's laughable today. Now it's every four months or less." HP and Compaq acknowledge that they can't compete directly with IBM for consulting business. HP has about 7,000 consultants, compared with IBM's 130,000. (Compaq declined to give the number of consultants in its 15,000-person services unit.) What's more, many industry insiders dismiss the companies' attempts to portray themselves as e-business players.
"HP and Compaq are still product companies," says Tom Rodenhauser, an analyst who heads Consulting Industry Services of Keene, N.H. "IBM has done a much better job of repositioning itself." That perception is not lost on the companies. "If you say IBM, people think services," says Nick Earle, chief marketing officer of HP's enterprise computing solutions group. "If you say Compaq, most people still think hardware. HP's probably in the middle but slightly leaning toward hardware." To change those perceptions, HP is trying to implement a multipronged e-services strategy.
As CEO Carly Fiorina sees it, the Internet is "distant, cold, alien and threatening" for most people. She has vowed to make HP the conduit for an "intimate, warm, friendly" Internet. The key to Fiorina's warm and fuzzy approach is to spot Internet-based opportunities for other companies. Swatch, a Switzerland-based wristwatch company, is working with HP to add Internet functionality to its watches. Swatch wants to provide its customers with real-time updates on stocks and weather, charging them on a subscription basis. Although the service would be branded by Swatch, HP would provide the back end. Swatch would pay a percentage of the revenues to HP, as if the service were a utility, like electricity. This application service-provider model might sound familiar to anyone who was around during computing's early days and recalls the pre-PC model of tapping into a mainframe and paying by the hour.
"It's the revenge of time-sharing," Earle says. It might seem ironic that HP - now No. 1 in U.S. retail PC sales, according to researcher PC Data - would push this model. The fact is that PCs play a minor role in HP's e-services vision.
Instead, Fiorina says she sees the future in Internet appliances - single-function, Net-enabled devices ranging from wristwatches to cell phones.
HP sells $16 billion worth of non-PC devices annually, mostly printers. Last month, HP announced that it is leveraging its printer business through agreements with FedEx, ImageTag, NewspaperDirect, PrintCafe.com, Stamps.com and others to provide printing services for electronic documents. Fiorina also has moved to give away HP's hardware in return for equity in hot, Internet-focused firms.
In May, HP gave Qwest Communications, a Denver-based telecom company, an estimated $500 million worth of equipment in exchange for a cut of Qwest's future Internet billings. Is the strategy working? Fiorina says she doesn't expect the e-services unit to make a profit until next year at the earliest.
Analysts, meanwhile, give the company credit for putting together a coherent strategy. Compaq, on the other hand, is less specific about its e-services plans.
That may be why Compaq's stock has remained flat since the arrival of new President and CEO Michael Capellas while HP's stock has nearly doubled since Fiorina took over. Capellas calls Compaq's Internet strategy "everything to the Internet," meaning that he wants the Compaq name on all types of devices that connect to the Web. In November, the company released the iPaq, a stripped-down PC designed for business use that represents an estimated $50 million to $60 million in potential sales.
Compaq manages back-end Internet services for DirecTV and Microsoft, among others, but according to company officials, the word hasn't yet gotten out.
"We're one of the best-kept secrets around," Lynn says. "We have a real branding and awareness change to get done in the marketplace." Compaq hasn't said how it plans to integrate the 22,000-person services business it inherited from its 1998 takeover of Digital Equipment. Analysts say the unit is still focused on maintaining legacy systems rather than building e-business.
"It's a fair observation that there hasn't been a real effort to draw them together," Lynn says. "It's part of the whole corporate effort to rebrand our services." That branding effort includes reassigning Compaq's $300 million advertising account. In late April, Compaq signed with Foote, Cone & Belding after dropping incumbent DDB Worldwide of New York. Capellas hopes to expand Compaq's so-called vertical service offerings, which are targeted at the telecom, manufacturing and finance industries, as well as state and local government.
Compaq offers services for telecommunications, manufacturing, finance and state and local governments, but it is hatching plans to move into other industries, including retail and related businesses. Going from moving boxes to pushing services is a leap that few companies have made successfully. Officials from both companies admit in private that they are late in going after the e-business market. Given the current shakeout across the Internet landscape, time is not exactly on their side. "I think it's going to take 18 months to determine whether HP has its ducks in a row," says Craig Johnson, an analyst with the Pita Group research firm in Portland, Ore.
"Eighteen months is probably about the amount of time it will take Compaq to come up with a strategy." On the other hand, these are companies that have redefined themselves before. Compaq, as the name suggests, originally marketed portable computers. And Hewlett-Packard, founded in 1939, didn't even sell PCs at retail until 1995. Todd Wasserman writes for BrandWeek magazine.