Compaq Climbs Into No.1's Hot Seat

PC Sales Leader Eyes Top Spot in Ad Spending

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Compaq Computer Corp. this year intends to double its U.S. ad budget to an estimated $126 million, making it the personal computer market's No. 1 spender-and neatly matching a leap into the top sales spot.

Compaq is causing rivals angst, bringing customers good value and, as will be clear when second-quarter profits are announced this week, taking success to the bank.

The success formula is simple: quality products with industry-standard features, fast product development, broad distribution, heavy brand-building advertising and low prices made feasible by intense cost cutting.

"Everybody [in the PC business] reads out of the same book," said Gian Carlo Bisone, VP-North American marketing. "The game is implementation."

Compaq succeeds largely because it focuses on exploiting, rather than inventing, hot technology. The market wants Microsoft Windows software running on Intel or Intel-clone chips, so that's what Compaq packages. But Compaq can adapt if new software or chips take off, said Eugene Glazer, an analyst with Dean Witter Reynolds, New York.

"Compaq makes its bet based on what they think the marketplace wants," Mr. Glazer said. "They can switch."

That makes Compaq more flexible than IBM Corp. and Apple Computer, companies with fortunes tied to home-grown technology that the market may or may not want. IBM, for example, is trying to create demand for its PowerPC chips and manage overlapping products like workstations and minicomputers.

Mr. Glazer forecasts Compaq will report earnings of $185 million to $200 million on sales of more than $2.4 billion for the quarter that ended June 30, a huge 81% jump in profits and 50% rise in sales from the same period a year ago.

The profit projection is slightly below first-quarter results, and sales have been hampered by shortages of some Compaq PCs. But Wall Street is betting big on Compaq: The stock market value is about $9 billion, more than double that of similarly sized Apple.

In a display of newfound clout, Compaq stunned the PC industry with the March disclosure that it was scaling back involvement in the "Intel inside" program, passing up millions in co-op funds.

Compaq still relies on Intel for most microprocessors. But Compaq showed its intention to put its own brands ahead of the powerful Intel Corp., which accounts for three-fourths of the industry's $9 billion PC microprocessor volume.

"The microprocessor is very important, but there's more to a personal computer than the microprocessor," Mr. Bisone said. Compaq will keep the Intel logo in ads "for the time being," he added. But "if we reach a point where we have to decide between their brand and our brand, ours wins."

To build the brand, Mr. Bisone said Compaq this year will double spending on advertising, direct mail and retailer co-op programs.

Compaq spent an estimated $63 million on ads last year, based on tracking figures from Competitive Media Reporting and computer-specialist Adscope. Doubling that should make Compaq the No. 1 PC advertiser.

Compaq became tops in U.S. and world PC shipments in the first quarter, sweeping past longtime leaders IBM and Apple. The company intends to promote that No. 1 position, but only when convinced the ranking wasn't a one-quarter fluke.

"It's always nice to win the first game, but it's not the Super Bowl yet," Mr. Bisone said.

Compaq also remembers three years ago, when it was losing the game. Selling top-of-the-line PCs at premium prices to Fortune 500 companies-a magical formula in the '80s-was out of gas. Compaq was ill-prepared for price wars, the rise of mail-order and retail PC sales, and the growth of sales to small businesses and consumers.

In late 1991, Compaq reported its first quarterly loss since its start-up days. Chairman Benjamin Rosen ousted founder Rod Canion as CEO and named No. 2 executive Eckhard Pfeiffer to the president-CEO slot.

Messrs. Pfeiffer and Rosen managed a wholesale turnaround.

Compaq fired its original ad agency, Ogilvy & Mather, Houston, and brought in Ammirati & Puris, New York, to handle its North American account. The company cut its payroll and slashed production costs.

Then, in June 1992, Compaq unveiled its turnaround product: ProLinea, its first low-price computer. Compaq moved into the booming retail market and into mail order.

Last fall's introduction of the Presario home computer, backed with a return to big ad spending, a massive $15 million yearend TV and print ad blitz, capitalized on a booming Christmas for PC sales.

Unlike Microsoft Corp. in software or Intel in chips, no PC marketer has ever been able to stay on top. But cellar dwellers have also demonstrated the ability to climb out; IBM and Apple in recent years made impressive if short-lived PC turnarounds, and IBM will swing for another one this fall.

Analysts are hard-pressed to say how Compaq could trip up. But with all eyes focused in its direction, Compaq clearly is on the hot seat.

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