It seems too perfect that the electronic frontier’s version of High Noon is being staged in Texas, the legendary territory of gunslingers and upstarts. The showdown is between two Texas companies—Compaq, the world’s largest manufacturer of computers, and Dell, the world’s fastest growing computermaker—that have come to represent different ways of doing business in the insanely competitive PC market. Both have reached the top of the field from humble beginnings, and both pioneered their respective business models, reshaping the industry along the way. Now they’ve taken their fight to the World Wide Web, which they view as the key to future success—and other companies are watching closely to learn what they can about the evolution of electronic commerce. Compaq, which is based in Houston, thrived in the eighties and early nineties by selling computers through resellers and wholesalers, a sector of the business known simply as “the channel.” This approach gave Compaq an edge over its larger rivals, particularly IBM, since it didn’t have to reproduce their worldwide sales forces or match their marketing budgets. But the copycat mentality of the computer business has created problems for Compaq and other name-brand companies. These days PCs are nearly all the same in terms of components and performance; in fact, the largest slice of the world PC market—between 30 and 40 percent—goes to “white boxes,” generic PCs that are assembled from Asian-produced components and sold by channel resellers at cut-rate prices. To compete, companies like Com-paq have had to slash their own prices, so their profit margins have become razor thin.
That has made the cost of doing business all-important. And that’s where Round Rock—based Dell has upended the industry: by avoiding the reseller channel and selling directly to users. Back when he was still hawking PCs from his dorm room at the University of Texas at Austin, CEO Michael Dell went the direct sales route as a way to compete with companies that had locked up the channel with exclusive or preferred contracts. The cost advantages have been clear. When a company like Compaq ships computers to resellers, it has to use a build-to-forecast model, meaning the company has to predict market demand. It doesn’t always do so successfully. “Channel inventory has been as high as ninety days in the past two years,” says Neal Johnson, an assistant vice president of Robinson-Humphrey, an Atlanta investment banking and brokerage firm that produces a quarterly survey on channel activity. By contrast, Dell doesn’t hold parts longer than eight days. Its manufacturing line gets its orders from confirmed sales, so the company doesn’t have to predict what customers will want and doesn’t burn up money sitting on unsold product. Moreover, when PC component prices fall, build-to-order companies like Dell can ratchet down their system prices, but the inventory of build-to-forecast companies stays stuck at a higher cost.
Because of this disparity in pricing almost identical products, Dell has catapulted itself to neck-and-neck parity with Compaq in U.S. sales: Both companies are now shipping about a million and a half computers per quarter. Yet while Dell posted gains in revenue of 65 percent by late 1998, Compaq saw much smaller gains—partly as a result of its acquisition of Digital Equipment Corporation ( DEC) but also as a result of its inventory problems. “The channel hampers Compaq’s ability to go out and directly market to customers the way Dell has,” says Kevin Hause, a senior analyst with International Data Corporation in Mountain View, California. Compaq’s resellers don’t want the company to abandon them and jump to direct sales, but Compaq may not have a choice—and the company knows it, judging by recent moves it has made.
Over the past three years, the battle between Dell and Compaq has shifted to the Internet. Dell launched its Web sales site ( www.dell.com) in July 1996, and it quickly exploded in volume and traffic: The company gets 20 percent of its customers through the Web today, and Michael Dell wants to see that rise to 50 percent by the end of next year. Dell spokesman Dave Dix says the company should soon hit $1 billion in online sales per quarter. Already it’s selling $10 million worth of PCs on its Web site each day, triple the amount of a year ago.
Compaq CEO Eckhard Pfeiffer said last July that his company does about $6 mil-lion in sales from the Web every day. But that hasn’t been from Compaq’s own Web site ( www.compaq.com), which was launched in October 1997; it’s from other Web sites through which Compaq computers are sold, including those of its resellers. The challenge for Compaq is to increase online sales with a build-to-order model without damaging the resellers, a tricky proposition. Last November Compaq retooled its Web site with just this purpose in mind, adding a direct sales pitch. But the company offered its resellers the chance to participate in the new program by offering commissions on any direct sales they initiate, thus cutting into any additional revenues it generates. In January Compaq announced plans to consolidate all its online sales efforts into a new division of the company; the goal, Pfeiffer said, was to sell more than one million computers a month over the Internet.
The main difference between Compaq’s Web site and Dell’s reflects the difference in their approaches to manufacturing. Compaq’s basic systems are all at the low end of the market, for home users. Dell, on the other hand, has tended not to go after the consumer market, concentrating instead on volume business sales and sales to techies who want to configure their own computers. “Our philosophy is that the Dell Web site should be our customers’ first and most frequent contact with Dell,” Dix says.
The public part of Dell’s Web site is only part of the story, however. The company’s most successful venture has been its Premier Pages, the private, customized Web conduits to Dell’s purchasing department set up for more than 8,500 preferred business customers. These