The Trend in PC Sales: Be Direct

Only a few years ago, nearly all personal computer users--home and business--bought computers in a store or through a distributor. But current trends suggest that direct purchases via the Internet or telephone will dominate PC sales within the next few years.

Direct sales have risen to about 30% of the PC market, according to Dataquest in San Jose. The change was fueled by the stunning growth of Dell Computer Corp., Gateway Inc. and other manufacturers that sell only directly to consumers and organizations.

Dell’s unit sales are projected to grow at a feverish 60% pace this year, compared with industry leader Compaq Computer Corp.’s 23%, according to ZD Market Intelligence in La Jolla. In the last quarter, Dell overtook Compaq as the leading vendor to the U.S. business market.

Although retail stores, distributors and value-added resellers--”the channel,” in industry parlance--still command most of the market, the balance is shifting rapidly. Plummeting PC prices have wrung most of the profits out of the reseller model.

“The market could easily be more than half direct in the next three to five years,” said Roger Kay, an analyst with International Data Corp. in Framingham, Mass.

In a dramatic sign of this trend, Compaq on Wednesday announced an aggressive direct-sales effort for its new line of Prosignia computers, targeted at small and medium-sized businesses.

Compaq follows the entry of Apple Computer Inc. and even top retailer CompUSA into the direct-sales market.

Houston-based Compaq now sells far less than 10% of its computers directly to buyers. That proportion will soon rise, according to Chief Executive Eckhard Pfeiffer.

“Why should we be serving all these segments, all these customers only in the traditional way through the distribution channel when many of them in each segment have indicated that they want to buy direct?” he said.

Compaq took pains to reassure resellers that it is not abandoning them--emphasizing “customer choice” among sales options as a new corporate mantra.

Buyers can order direct from Compaq or walk into a retail store and get help custom-configuring a PC for the same price, shipped directly by Compaq--a new hybrid model.

But analysts suggest that the shift will hasten the day when retail stores and distributors become junior partners in the marketplace.

“Quite honestly, we have not seen anybody pull this direct and indirect thing off yet,” said Bill Schaub, vice president of personal computing for Dataquest.

For the last year, Compaq has tried several programs to speed up its order-filling process and increase customization, including “channel assembly,” in which dealers partially assemble PCs. But these haven’t streamlined the process enough.

“We’ve never been a fan of channel assembly,” said Schaub. “It’s not very efficient to have parts of PCs in 12 locations around the U.S.”

Compaq’s channel assembly and limited direct-sales efforts were designed to pressure Dell and Gateway without fundamentally shaking up long-standing sales and distribution relationships.

“The big change this time is it’s not a program launched on a test basis,” Pfeiffer said. “It is a full program, totally funded. It is one that will give us the capability to compete with the direct providers head-on, which I believe will lead to some changes in the industry.”

Currently, Compaq sells 9.5% of all PCs worldwide, with Dell selling 6.2%, according to ZD Market Intelligence. Compaq’s key challenge in holding onto or increasing that lead, analysts say, will be executing its direct program as effectively as Dell has done.

If the move represents a threat to Dell, investors shrugged it off. Shares of the Round Rock, Texas, company rose $1.63 to close at $71.94 on Nasdaq.

Compaq shares rose $1.63 to close at $34.50 on the NYSE.

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Computing Sales

Compaq Computer is planning to sell some computers on the Internet and by phone in an effort to capitalize on the “direct” sales channel. In the first half of this year compared with last, personal computers sold by phone, fax and over the Internet rose from 25.4% of the market to 29.6%. How computers were sold:

Value-added resellers/ dealers: 37.4%

Retail stores: 33%

Direct sales: 29.6%

Source: Dataquest

Researched by Jennifer Oldham / LOS ANGELES TIMES