Insight - Compaq's own Digital revolution

Compaq, the young upstart which has put in an IT industry record $9.6bn bid for old-timer Digital, has a history of firsts since it came into being 16 years ago. Its first year revenues were $111m, then a US record for a start-up, and it hit $1bn-a-year sales sooner than any other company in history.

But Compaq had two problems. Being number one in the fast-growing PC arena was one thing, but staying there would mean being able to offer more complete solutions to increasingly global corporations. It needed to fill out its product portfolio with high-end servers; gain expertise in enterprise computing; bolster its service and support infrastructure; and most important of all, get influence at the highest level of strategic corporate IT decision making.

It also faced a financial worry, less immediate, but ever present. Growth can be stellar in the IT world, but once it slips, even marginally, shares can plummet. Oracle recently announced its growth had fallen from 30% to 23%; its market value dropped by almost a third. And with nearly $7bn in the bank, Compaq clearly needed to supplement organic growth with acquisitions.

High-end server manufacturer Tandem was bought last year. But on its own, that didn’t actually give Compaq much leverage into the enterprise.

And that is where Digital comes in. It had lost billions of dollars over the last few years (like fellow IT dinosaur IBM) and its shares hadn’t moved significantly since 1996. With a massive installed base of corporates, Digital has a huge infrastructure of support, and experience at selling complete systems to big companies. So it’s not too expensive and the fit is excellent.

Compaq president and CEO Eckhard Pfeiffer cited Digital’s recent $1.6bn deal with the US Postal Service as the kind of project he wanted to win.

“We did not have all the capabilities to sell complete enterprise solutions … in many bidding sites, we couldn’t offer as much as the customers want,” he says.

That, then, is the goal – as the Americans like to say, “soup-to-nuts” technology provision. Merger-mania to create dominant players in industry sectors is nothing new – just look at pharmaceuticals or the drinks sector.

But Compaq’s customers, the customers it wants, must be prepared to bet the farm on its technology. These days, if your tech is bad, your company can go down the pan. So what can we expect from New Compaq?

On the face of it, an easier life. The day after the Digital announcement, Compaq launched its E2000 initiative, aimed at standardising computing.

This means hardware ought to be easier to bolt together, will be more scalable and will require less support.

It also means that if you aren’t already evaluating Windows NT, Microsoft’s “enterprise server” operating system, you should be. Both Pfeiffer and Digital CEO Bob Palmer boasted of their companies’ experience with Windows NT. Pfeiffer is proud of being Microsoft’s number one client. He’s sure to want to sell you hardware all standardised around Intel chips (with some exceptions) and Microsoft software. Easier for him, easier for you, he’d say.

If the packaged application market really does take off and you’re not running the standard hardware and software (Windows NT), your choice of business applications may be limited. But where does that leave Digital, with its own collection of proprietary technologies?

Its groundbreaking Alpha chip – which stole the march on Intel with fast, 64-bit technology – now hangs in the balance. True, Intel licensed Alpha technology last year. But many industry pundits saw that as the death sentence for the architecture, and since Compaq is Intel’s biggest customer, it’s unlikely the Alpha chip, in its current form, will survive.

Digital also has a huge installed base of users for its OpenVMS and Unix operating systems. Are we really to expect Compaq to commit long-term to this “non-standard” software? Pfeiffer says yes, but Microsoft is keen to make the same jump into the enterprise as Compaq and will demand nothing less than full backing from its partners towards this goal.

Supporting lots of different operating environments will make it hard for Compaq to generate economies of scale and build a decent (but cost-effective) support structure. All this is good news: cheaper, more adaptable, and more streamlined technology all from one company. And if you’re a Digital customer, Pfeiffer, by his own admission, is something of a messiah.

“There were customers who were wondering about the losses and the layoffs and where (Digital) was going,” he said. “Now the message is clear: Digital will start rising with Compaq and Tandem.” Pfeiffer won’t be happy until he’s got your whole IT budget. “We want to do it all,” he said. “We want to provide any kind of service customers are looking for.” Compaq should now be considered, alongside Intel and Microsoft, as one of the industry’s truly big hitters.

In an industry full of megalomaniacs making rash promises, Pfeiffer now has the opportunity to prove his word. In 1991 he swore to make Compaq the world’s number two IT company, and it’s happened. And with another billion or two in the bank left to spend, we may not have heard the last of him yet.

Richard Young is deputy editor of FD