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Other Articles by Art Wittmann

With Friends Like These..., Columnists, March 8, 1999 Network and Systems Management: Not Happening, Columnists, March 22, 1999 Reading Between the Headlines, Columnists, April 5, 1999 Is Video Broadcasting Coming to Your Network?, Columnists, April 19, 1999 Is Microsoft Edging Into Open Source?, Columnists, May 3, 1999

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Compaq's former CEO, Eckhard Pfeiffer, set a goal for the company to be a $30-billion concern. To make that happen, he aimed to enter markets now dominated by Hewlett-Packard, IBM, Sun Microsystems and, to a lesser degree, SGI. However, integrating Digital and Tandem into the mix to form a company that provides seamless solutions from desktops to high-end servers takes tremendous time and effort. Just owning the pieces doesn't assemble the puzzle. At the same time, razor-thin margins in Compaq's PC and server business mean that Compaq's pockets are not deep enough to bankroll the integration of Digital on the back of the PC business.

A Goal Without a Path While Pfeiffer's goals for the company may have been overly ambitious, I don't expect that the remaining management has a much better vision for the company. They want to capitalize on the Internet boom and Digital's offerings for that market. That seems like a reasonable goal, but probably one that Compaq won't easily accomplish. Although Digital's machines are fast and its software catalog is relatively thick, Compaq's machines aren't that fast and its catalog isn't that thick. Sun and IBM are well-entrenched and often offer best-of-breed solutions. It will take more than a slight edge in price and performance to displace them.

Then there's the question of how long the Alpha will maintain a performance edge over Intel-based servers. The current price edge is marginal, mostly by Intel's design, as the company carefully regulates the cost of its top-performing Pentium computers. However, Intel's next line of microprocessors may close that performance gap. The Merced chip, with its long-instruction-word technology, could be the silver bullet that pushes Intel systems to parity with proprietary RISC architectures. If that happens, continuing the Alpha development will be hard to justify, and that will render the Digital purchase even more dubious in the eyes of investors and server buyers.

Bad Strategy or Bad Execution? Compaq's board chairman, Ben Rosen, has been quoted as saying that he doesn't think the company had made any strategic errors, just that it hadn't performed well since the large acquisitions were made last year. That perhaps is the scariest statement of all: There is little that Compaq can do about the margins in its PC business. Dell, Gateway, HP and IBM will see to that. The advantage offered by the Alpha processor appears to be fleeting. Compaq has not become a powerhouse in networking or remote-access hardware and isn't likely to become so through the acquisition of second-tier players in that market. If Rosen simply installs a new CEO whom he feels can better execute on Compaq's business strategy, the future is not bright for the company.

Compaq needs to get out of at least a few businesses it's entered during the past two years. Probably the most sensible ones to drop immediately are its networking, modem and remote-access divisions. While these can be relatively high-margin businesses, Compaq doesn't own the right combination of products to flourish in them. Those products that do shine, particularly in the networking arena, are resold from other vendors. Compaq also should examine the Alpha business carefully and determine the realistic life of that product line. If it is less than two years, the company may as well phase Alpha out now. But if Compaq can squeeze more life out of the line, then jumping on the Internet bandwagon may be reasonable.

Whoever snatches the reigns of Compaq can expect a bumpy ride. No business is more competitive than the PC market, and forthcoming decisions about the future of the company need to be right on the money. That's not a pleasant prospect for any new CEO.

Send comments on this column to Art Wittmann at awittmann@nwc.com.