Internet Anxiety 2
[ Home ] [ Up ]

Jumping on the Bandwagon


Traditional companies in all kinds of industries are furiously mapping out Net strategies


UNIVERSAL MUSIC

WHAT IT'S DOING
Getting ready for the time, probably later this year, when their music is available over the Net. Working out piracy guards and supporting online CD seller getmusic.com.

GOAL
Compete with smaller labels already selling online and ensure that Universal isn't cut out as the middleman between artist and audience.


MERRILL LYNCH

WHAT IT'S DOING
Recognizing that not all customers will remain true to traditional brokers and brokerage services, it's setting up online trading.

GOAL
Stem the tide of customers moving to online leaders such as Charles Schwab and E*Trade. Lure E-traders' assets with a supermarket of services from financial-planning advice to Visa cards.


NBC

WHAT IT'S DOING
Merging several of its Web sites--but not its interest in MSNBC--with Xoom.com to create publicly traded NBC Interactive.

GOAL
Gain Internet currency to acquire Net-content companies and build a bigger presence online.


QVC

WHAT IT'S DOING
Expanding iQVC so television shoppers can turn to the Web for greater selection and variety.

GOAL
Support the TV shopping business with Web-based sales and use the mass reach of television to steer customers online.


ALLIEDSIGNAL

WHAT IT'S DOING
Pushing top executives to include the Internet in their business plans for 1999.

GOAL
Dramatically reduce the amount of working capital AlliedSignal uses to manufacture and distribute its products by establishing virtual networks with customers and suppliers that can cut inventory and time to market.


AMERICAN AIRLINE'S SABRE INC.

WHAT IT'S DOING
Considering a tracking stock for its Travelocity travel reservations Web site.

GOAL
Cash in on the multibillion dollar values accorded the stocks of much smaller Net-based rivals without risking Travelocity's key role linking SABRE's reservations system with airlines and travel agents.

A Brutal Survival Plan


The Innovator's Dilemma by Harvard Business School associate professor Clayton M. Christensen has become required reading for Internet managers. Christensen believes that the Net offers a superior business model with the potential that will displace those companies unable to adapt. Christensen recently talked to Business Week reporter Paul C. Judge.

Note: This is an extended, online-only version of the interview that appears in the June 28, 1999, issue of Business Week.

Q: What's the lesson today's managers should take away about the Internet?
A: There are certain dimensions of managing the flow of information over the Internet that help make your product or service better in the marketplace you currently serve. Using the Web in ways that can sustain your existing business model is an absolute imperative. But in other ways, particularly in retailing now, the Web can be what I call a disruptive technology, and historically, those are what cause companies to fail.

Q: Do you see those disruptions now?
A: Oh yeah. Online trading of securities is creating an enormous disruption to the full-service brokerage firms. It's gone from 3% of trades in 1997, to 14% in 1998. And underwritings are beginning to be done over the Internet, as well.

Q: What's the most common mistake made by managers confronting disruptions?
A: The typical pattern is that your best customers will be among the last to embrace this sort of disruptive technology, because usually a disruptive technology does not provide the same kind of service and performance that your best customers prefer. The people who will embrace these technologies first are the ones that you have trained yourself to pay the least attention to. It can creep up on you like a stealth attack, until it's right on you.

Q: How are the fundamental measures of business value being challenged?
A: Look at bookselling. Once you've got a bookstore, the way to make more money when you're starting out is to try to operate the store at full capacity -- pack in as much selection and as many customers as you can fit. But after you've achieved capacity, the only way to increase business is by boosting margins.

On the Internet, there is no limit on the capacity of the store, or the number of customers who can come in. Therefore, percentage margins really aren't important. What's important online is the total dollars you can bring in divided by the total amount of capital required to get those customers. I calculated that Amazon could equal the return on investment capital that a bricks-and-mortar bookseller achieved if Amazon had only 5% gross margins, vs. 30% for a traditional retailer. It's so different because of the scale available to stores online.

Q: Can you point to others?
A: Financial services. The impact the Web will have there is to fragment and render irrelevant the integrated financial institutions like commercial banks. It will take time for this to happen. But consider a business like credit cards, where four variables determine 99% of the variance of whether someone will pay their debts or not. You can apply for a credit card over the Net, get it over the Net, and have it serviced over the Net. Because of that, nonbanks, and ultimately Internet banks, will capture that business. Ten years ago, that was a very profitable piece of business for banks like Citi. But that will just go away.

Same for the mortgage business and auto loans and small-business loans. Those kinds of things will begin to be conducted more and more by specialized financial services companies using the Net.

Q: Can old-line companies that excelled before the Internet master this next phase?
A: They can do it, but the only way is if they set up a completely independent organization and let that organization attack the parent. If you try to address this opportunity from inside the mainstream, the probability of success is zero. I've never seen it happen.

Q: Do you expect a new business hierarchy to emerge led by the Net companies?
A: You won't see the old-line retailers or brokers disappear. But to survive, those guys will have to move toward products whose metrics can't be clearly specified and measured. In retailing, there's already been one big disruptive wave: discount retailers disrupting traditional department stores. Look at the patterns: They stole the market dominance by starting with branded household goods -- not big appliances, but little ones, kitchen goods where clear metrics existed. Things you did not need to try on. Gradually, they migrated their product lines to higher and higher gross-profit-margin tiers in the market. The Internet is the ultimate wave coming in that way.

Q: How can executives balance managing for a future that's being changed by the Internet without sacrificing results today?
A: The current business doesn't fall apart. You need to have a different business organization concentrating on building a business model appropriate to the future, while the existing business organization can focus on being as successful as possible with the client base that's still uncomfortable with the Internet. Citi can't escape the cost of its legacy customers. But it simply can't burden the new Internet business with serving those customers, because Citi will be competing against Internet banks without those legacy customers. The only way to compete is to have an organization focused completely on the new opportunity.

How Schwab Grabbed the Lion's Share


Dawn G. Lepore, Charles Schwab Corp.'s chief information officer, likes to tell the story of a recent panel she sat on that featured executives from several Internet upstarts. At first, her fellow panelists seemed surprised to see her. ''But when I mentioned that our site gets 76 million hits per day, the eBay guy sitting next to me gasped,'' she laughs. ''I got a lot more respect after that.''

The wired world may not have noticed, but Schwab has been far more successful than most brick-and-mortar companies at moving the core of its business online. In doing so, it has already worked through many of the tough challenges that are bedeviling managers who are just arriving at the online party. If everyone now knows that the Net is revolutionizing business, Lepore warns, ''actually living that on a daily basis is pretty difficult.''

ACCOUNT EXPLOSION. Of course, the rewards of success are pretty high, too. Having captured 42% of the assets invested in online-trading accounts today, the San Francisco-based discount broker has made itself the player to beat in online financial services. In the past 15 months alone, it has added 1.3 million Internet accounts. Those gains have sent Schwab shares soaring: Even after the recent market swoon, its stock has leaped 329% over the past year, to around 89.

So how did Schwab make the switch so quickly? For starters, its managers recognized the Web's potential long before Internet frenzy spread beyond Silicon Valley. Their wake-up call came in 1995, the first year more personal computers were sold in the U.S. than televisions. Although no techie, founder Charles R. Schwab quickly got on board. That gave the initiative a big boost and helped win it adequate funding, even though any payoff was highly uncertain.

The decision to launch the online business as a separate unit was another key move. ''Those people were completely focused, so it's not, 'I have now 20 things to do, and by the way, the Internet is my 21st thing,''' recalls Lepore.

Early on, she and her colleagues also worked hard to end resistance from Schwab's branch staff, who felt threatened by the online unit. The company sent frequent E-mails to employees highlighting the rapid growth in online trading. And the branch staff was trained first, so they, not the tech staff, trained customers to use online services. Lepore says that ensured that ''they felt like part of the change.''

RISKY SHIFT. The staffers' backing proved vital when customers began to rebel against the two-tiered pricing system that schwab.com initially set up. Full-service customers were charged an average of $65 to trade on the Net, while Schwab.com users were paying just $29.95. Faced with complaints, the branch staff warned that the price differential needed to go. So in January, 1998, David Pottruck, Schwab's co-CEO, brushed aside fears that a shift would cannibalize Schwab's traditional business and priced all Net trades at $29.95. The move cut $150 million from expected revenue and sent Schwab's shares tumbling from 41 to 28.

But soon, the risk paid off, as volume soared. That made Schwab a Net rarity: Unlike a lot of other online ventures, it makes money. ''E-commerce has been very profitable for us,'' Lepore says. And that's how she plans to keep it.

By Nanette Byrnes in New York

GE's Welch: 'This Is the Greatest Opportunity Yet'


Jack Welch, CEO of General Electric Corp., has plenty to say on the topic of the Internet. For instance, he says it's "number one, two, three, and four" on his list of priorities as GE moves into the next century. Welch recently spoke with Connecticut Bureau Chief Diane Brady about the challenges companies face in establishing an Internet presence. Here are edited excerpts of their conversation:

Q: Some CEOs are scared that the Internet could pose a threat to their long-term corporate survival. Do you think they're right to worry?
A: It's like any big change. You can look at it in one of two ways -- as an opportunity or as something to fear. You have to have a certain amount of fear to see the opportunities. But I see huge opportunities.

Q: Everyone talks about the nimble startups. Do you see any advantages for old-line companies and old-line models?
A: Of course, there are a lot of advantages for existing companies. They have the business processes. They have the fulfillment capabilities. They have the brand recognition, and they often have the technology. The disadvantages are that they're fighting an existing model. They've got to break the mold.

Q: There are a lot of ways to get into the Internet. What sets the best ventures apart from rest?
A: The ventures that win have to be customer-centered. Are they really filling customer needs? I'm not qualified to say who will win out. That's to be determined. Look at the Dow Jones first 30, look at the genetic engineering companies. Several went on to great futures, and others have disappeared.

Q: What kind of companies are you looking to buy?
A: We're not looking to buy Internet companies. We want to become Internet-enabled. It's an enabler of commerce. I'm looking to capitalize on what I have. We're looking at all kinds of industries, and we're making all kinds of investments. We're deeply into Six Sigma, so our business processes have been refined. We're farther up the curve. We've been talking about the boundaryless corporation, and this moves us closer to being that boundaryless corporation.

Q: What about NBCi? Could you have done that with just NBC?
A: We could have taken NBC assets and tried to create an Internet company, but this is better. You have a combination of NBC assets, Zoom assets, and Cnet assets that are tough to beat.

Q: You've called some of these Internet stocks wampum. Do you think companies are trying to get in on the wampum? There must be some envy out there.
A: Envy is the last thing you should think of. This has created a whole new energy for corporations to excite and organize their people, to leverage and capitalize on their strengths. We always talk about change being an opportunity. This is the greatest opportunity yet. The great thing about the Internet is it makes everything transparent.

Q: But a lot of these Internet plays are losing money, yet they're worth more on paper than successful brick-and-mortar firms. GE has to meet quarterly expectations, or you hear about it from shareholders.
A: That's a plus. We're going to make more than $10 billion this year. Look at the size of these Internet companies. They're all popcorn stands! We have a number of units you could call DestroyYourBusiness.Com aimed at attacking our existing businesses. We can afford to do that.

Q: One person said to get a stake in the Internet, you have to lose money. You have to go through a Valley of Death, as he put it, to succeed.
A: What the hell is a Valley of Death in these things? They're popcorn stands. We can afford to make these investments. So what if they don't generate billions? Look at the size of what you're dealing with here.

Q: You've built your personal fortune over decades, and some of these Net billionaires do it overnight. Doesn't that bother you?
A: I've never heard anyone feel sorry about me and my wealth before. Am I frustrated at these Internet billionaires? I'm thrilled. That's what's great about this country. Everybody can take a swing and make billions.

Q: So how high is the Internet on your agenda?
A: I don't think there's been anything more important or more widespread in all my years at GE. Where does the Internet rank in priority? It's number one, two, three, and four.

Q: How will it change GE in the coming years?
A: I know GE will be faster, it will be more energized, it will be better, it will be more global, and it will be more customer-centered.

Q: Does it make your job easier in managing the corporation?
A: This is about as good as it gets. This takes everything that's mundane, everything that's slow, and it takes them out of the game. You're not pulling an organization in this one. You're letting it grow like flowers. You have a group of people dying to get into the Internet. That's so much easier to manage. You're asking them to break the mold. Everybody is excited. They want a piece of this too. And we can give it to them. It just doesn't get much better than this.

PaineWebber's Cyber-Seer: 'We're Only at the Beginning of This'


As a managing director and head of technology investment banking at Paine Webber Inc., Frank J. Drazka keeps a very close eye on the Internet. He sees a time when the business model being forged on the Web and the traditional business model will come together. But he also sees plenty of gut-churning change ahead for old-line businesses that don't start cyber-strategies soon. Recently he spoke with Business Week Department Editor Nanette Byrnes. Here are edited excerpts of their conversation:

Q: Are traditional companies finally starting to take the Web seriously?
A: The way I perceive the market, you've got the ostrich who sticks his head in the sand. That's how I characterize a lot of companies in the brick-and-mortar world. In many cases they've been in business for 100 years plus. It was easy for people up front to dismiss online business as the flavor of the day. Now they see it's an evolution in the cycle of business models.

Q: Why now?
A: In the last year there have been a lot of board meetings in which management was asked: "How do we compete against the newbies on the block?"

Q: What brought on that question?
A: The exceptional valuation of Internet companies. Because of their ability to grow rapidly, get their name recognized fast, and a business model which should generate good cash flow, Net companies are selling at a premium. That also means traditional companies can't afford to go out and buy their Internet competition. They have to start from scratch, like Merrill Lynch. Or they have to try to buy smaller or private company. At the end of the day, you could see a lot of Internet businesses buying up traditional companies.

Q: What happens then?
A: Head-count reduction. If you think about it, Net technology allows greater flexibility in the workforce, and that allows reduction in the workforce. It's pretty draconian. The physical business will still represent some value added, but look at E-tailing. What happens if Amazon goes out and buys Borders? Do they really need all those sales people?

Q: Why didn't traditional management recognize this threat sooner?
A: Emotionally it's very challenging to suddenly have to accept there's a new challenge and it is very different. You've been doing something so well for so long. By traditional measures you're doing great. You go to the board to say you're happy to report you've had a record year, and they say "But what are you doing about this other thing that's coming at you, the Internet?" And you're scratching your head saying, "But I had a record year."

Q: Does that mean the Internet model will be the future model for all businesses?
A: I think there will be a hybrid model. One could argue that one of the most successful business models today is Dell's. It's not an Internet company, but it's leveraging the power of Net sales and marketing. They have the better margins, the lower cost of transaction of the Net. You'll see that kind of convergence. If you bring traditional thinking to the Web, you won't succeed. The model is different. The target is different.

The second model is a partnership. A traditional retailer through a joint venture working with an E-tailer. The traditional retailer does inventory management, shipping, customer service. The E-tailer focuses on merchandising, the front end. You'll see more joint ventures.

Q: Do traditional companies stand a chance of catching up to Net-born competition?
A: The leaders of tomorrow are not necessarily going to be the companies we're looking at today. Somewhere in some garage the next great idea is being put together. We're only at the beginning of this. There are still many questions. Like can the physical businesses adapt fast enough? Adapt a model that works for them without jeopardizing their base business? They're using technology to change, but digital businesses are using it to create. They have a leg up because they're not stuck with someone else's mindframe. Physical businesses are challenged because they are trapped by their legacy.

Q: We're still just in the early days then?
A: When we get to a point of critical mass on the Web -- it's still only a minute part of say the $200 billion spent on advertising -- when you get to trillions of dollars in E-commerce, then there will be an inflection point. When it does, you'll see a lot of traditional business wake up -- and it will be too late.

Q: Doesn't the recent volatility in Net stocks spell some trouble for the Net-only companies? Particularly in their ability to raise capital and grow?
A: I don't think we have hit any kind of wall in terms of investment opportunity. The market has grown hard and fast, and then gone into a cooldown. But every time we say the bubble is going to burst, it's come back. I think these companies will continue to have very good access to capital. More venture capital than ever is going into this. There's been no pullback in the private market.

Some companies are building a war chest today. Amazon has already raised $1.3 billion in convertible debt, and another $300 million. Recently they did a shelf registration for $2 billion. Think about typical traditional businesses and what they'd have to look like to raise that much money. There are so many different dynamics. No one can tell you today what the impact of any move on the chess board will be.

Toys 'R' Us' Nakasone: 'We Needed to Move Quickly'


How does Toys 'R' Us plan to fight back against upstart cyber-rivals like eToys? CEO Robert C. Nakasone has some answers. He's in the midst of revamping his Web venture, recently creating a separate unit to be run with his new partners, Silicon Valley venture capitalists Benchmark Capital. Nakasone spoke with Business Week Department Editor Nanette Byrnes at Toys 'R' Us' New Jersey offices about the $80 million he's putting into the Web -- and what he expects to get for it. Here are edited excerpts of their conversation:

Q: Why did you decide to change your approach to the Internet?
A: The entire move was to underscore our commitment to being the leader in E-commerce in childrens and toys in the fourth quarter of '99. How do you get that done? One thing was the move to take our toysrus.com site and make it a totally separate operating subsidiary and move it to Northern California, the heart of Silicon Valley. In reviewing and studying this whole Internet ecommerce we really felt that that truly is the tech capital of the world if not the universe. It was important for giving us focus, of really being able to attract world-class talent to drive an organization like this. You're going to need the option to offer [employees] much more lucrative stock incentive plans.

Q: Why partner with Benchmark Capital?
A: Even prior to deciding on them, when we had philosophic discussions on where the Internet was going, they really believe when done correctly, brick and mortar has the advantage. E-commerce when done right has the clear advantage long term to be the winning strategy.

Q: But the Internet is not the same as your land-based business.
A: We purchased a 500,000-square-foot fully automated state-of-the-art distribution center. We really felt that was critical. We have great distribution and logistics capability, but it's primarily as a retailer. We're very good at taking from manufacturer to store, but to ship directly to customer, we really didn't have the kind of capacity we needed to.

Q: Why should brick-and-mortar companies have the advantage?
A: Toys 'R' Us has been in business over 50 years, We've invested millions of dollars in advertising, thousands of pages of newspaper ads, millions of dollars invested in television. We now have the preeminent brand among children and families. We do Q rating scores, which measure popularity, and our Q score among children is 77 for a toy retailer. To give you an idea, Disney's Q score is 78 for entertainment, and McDonald's is 76 for fast food. That's the kind of brand power we have, and we really think we can leverage.

Another reason is just sheer customer convenience. Imagine being able to buy on the Internet and just return in the store. Right now E-retailers have a lot of difficulty making a convenient return policy. You have to wrap it up, go down to the mail station, return it, whatever, and pay the freight going both ways. Very soon we believe we're going to be able to develop a capacity to have the instant gratification of buying on the Internet at 2 in the morning and then picking it up in the store and get the gratification a land-based retailer can deliver. We have much bulkier product than others. The cost of shipping can be much higher relative to the cost of the product, than say CDs.

Q: Aren't you afraid toysrus.com will end up cannibalizing your own store sales?
A: I would rather take my own sales than have someone else take it. That's the way we look at it. If we don't take it from ourselves, someone else will. That's a tough one for brick-and-mortar retailers to really look at.

I honestly believe it will be additive. It's not just a matter of cannibalization by the Internet, but it's the idea of added sales because of added convenience to our customers.

Q: Why do you have to launch so quickly?
A: In my working career this is as revolutionary an event as I've seen. I'd equate it to something close to the Industrial Revolution. It is very important to move quickly. You can talk to the Internet experts, and they'll talk about first-mover advantage, and I think there's some truth to that. But more importantly, the benefit of being first to establish a relationship is very key.

Q: Why was it important to have this as a separate business?
A: The small-company, entrepreneurial culture. It's moving in Internet time, the 24-by-7 clock.

Q: Could you have done it yourself?
A: While I've got a great deal of faith in our people, we have some of the most talented retail executives in the world, this type of retailing requires a tech bent that's a bit different from what we're used to. Over time we could have gotten it right, but we don't have the time. We didn't have the time to wait. We needed to move quickly.

Q: What about Internet companies like eToys' high stock price. Some Net companies are now using their stock to buy up real-world assets and companies. Is that fear another reason for separating toysrus.com?
A: We have now the flexibility to spin our online company off and use that same currency to do the same thing. If anything, that is at best an equalization of what we've got, and more likely the brick and mortar have the advantage because they can use this bubble to finance entry into the Internet space.

Q: How will you measure the return on your Internet investment?
A: I'm just a retailer, I'm not a prognosticator. I've heard people like Bill Gates say E-commerce could be as high as 50% [of all retail commerce]. I think that's a bit high. But it can be at least what catalogs are -- 10% to 15% -- and maybe even a little bit more. So it's an important piece of E-commerce. I don't think anybody knows exactly how much it will be or could be, but it's very important that we carry over the leadership we have in land-based to the Internet as well.

Q: How will you know how much crossover you have between online and land-based sales? It seems it will be tough to measure your long-term return on your Internet investments.
A: It's no different from trying to measure how effective advertising is. We actually believe the Internet can be a springboard for us. Which will help our land-based stores as well as our Internet sales.

For Compaq, Nowhere Left to Go but Up?
Slow to the Net, no CEO, and another negative earning surprise: Could be time to buy

It's not often that a company shocks Wall Street with a warning of dramatic quarterly losses and its stock price barely budges. That's what happened to Compaq Computer Corp. (CPQ) when it announced on June 17 that it may lose as much as 15 cents per share in its second quarter. Despite the company's lack of a CEO and its well-known struggle to meet the challenges to its business model posed by the Internet, analysts surveyed by First Call were expecting Compaq to earn 20 cents a share for the quarter ended in June. Yet even with the company's June 17 surprise, the stock actually rose a quarter point that day to close at 22 1/2.

''I would have thought that the stock would have at least fallen to $18,'' says Tom Dehudy, an analyst with investment management firm Lord, Abbett & Co. ''There must be value investors out there buying the stock today.''

Ashok Kumar, an analyst with Piper Jaffray who may have been the only Compaq observer on Wall Street to foresee a potential operating loss for the quarter, said in a June 8 research note that the stock could fall into the high teens on more bad news. That it didn't indicates to him that the only investors left are large institutions with big positions. ''It doesn't make sense for them to exit at these levels,'' he says.

DOWNGRADED. For beleaguered Compaq investors, the good news is that the shares have likely bottomed out. Compaq is now 54% below its 52-week high of 49 1/4 on Jan. 27. Much of the slide came after the company warned in April that first-quarter earnings would be weaker than expected. On Apr. 12, the stock fell 22% and was downgraded by at least nine analysts. Chief Executive Officer Eckhard Pfeiffer was ousted shortly thereafter, and the company is still looking for a new CEO and chief financial officer. Still, the reasons for the anticipated second-quarter loss are the same as for the first-quarter shortfall. PC pricing pressures, slower-than-expected revenue growth and a ''noncompetitive cost structure'' were all reasons sited by Chairman and Acting CEO Benjamin Rosen.

Compaq also announced on June 17 that it's restructuring in hopes of improving its competitive position and eliminating $2 billion in ongoing operating costs -- which likely enticed some investors to buy the stock. ''We are at the threshold of a new Compaq,'' Rosen says. He's realigning its business into three groups dealing with PCs (mostly for corporate users), consumers (including upcoming new handheld devices), and enterprise solutions (emphasizing setting up businesses for E-commerce). To cover the costs of restructuring, which will include layoffs, Compaq will take a ''substantial'' charge in the third quarter.

''I'm encouraged that the acting CEO is moving ahead quickly and decisively, not waiting for someone to drop out of the sky,'' says David Wu, an analyst with ABN AMRO. ''It's better to act -- to do something more or less right -- than to wait for the perfect candidate to come in and do the perfect thing way too late.''

FULL PLATE. But several buy-side analysts say the company still hasn't really confronted the major problems that brought about the downturn. They fault Compaq for not acting decisively when it became clear that the direct-distribution model for PC sales was more popular and more efficient than Compaq's retail dealer network. They also say the company had too much on its plate to confront the changes in the industry while trying to integrate its June, 1998, acquisition of Digital Equipment Corp. at the same time

''Companies like IBM and Dell, which didn't have to deal with a huge acquisition, saw what the Internet was and figured out how to exploit it,'' says Megan Graham-Hackett, an analyst with Standard & Poors equity research group. ''Now they are benefiting from first-mover advantage -- and Compaq is having to play catch-up.'' Compaq also didn't capitalize on its AltaVista search engine, which it gained through the DEC deal, although it plans to spin it off later this year. Compaq did eventually launch a hybrid direct/indirect distribution plan, but some analysts say it was muddled. ''They were so afraid of cannibalizing their own business that they didn't move quickly enough,'' says Michael Tucker, an analyst with Federated Investors. ''The competition is really going after them.''

Several analysts say they won't recommend the stock until they get more specifics on the restructuring. They want Compaq to come out with a full-fledged strategy for addressing the direct-distribution model for PCs, to explain why operating costs rose so dramatically in the second quarter (the anticipated loss is due more to higher costs than lower revenues), prove the Digital acquisition is working, and bring in a new CEO. ''I don't think you can do a full restructuring until you have new management,'' says Tucker.

On top of that, Lord Abbett's Dehudy has concerns about the PC business in general because of lower average selling prices, thanks to the popularity of sub-$1,000 PCs. ''It's not just a Compaq issue, it's a PC issue, too,'' he says. With so many big questions for Compaq remaining, ''we'd rather wait for a little more visibility on those issues before getting back in,'' he says.

''DEAD MONEY''? On the flip side, other analysts see plenty of upside from here. ''The downside is limited,'' says Kumar, who has a buy rating on the stock. ''At worst, it's dead money. That's your risk. And then you have the upside potential.''

''Compaq has leading market share in some very key computer markets,'' points out

Graham-Hackett. It is now selling for only 13 times her 2000 earnings estimate, while the S&P 500 has a forward p-e of 24. ''Expectations are so low and the stock is so cheap, that you could have a new CEO walk in, do a little tweaking, and before you know it, the stock could double.''

It may take a few good quarters for Compaq to return to favor. New management, which Rosen promises in the ''not too distant future,'' will have to come in, and Compaq will have to prove its new strategy is working. A Compaq play may pay off for bottom-fishers. But even then, Wu's cautious strategy makes sense: ''I won't back up a truck,'' he says, ''but I'll probably nibble.''

By Amey Stone in New York
HOME   PREVIOUS  TOP