Sally Putnam is on a mission: to get even. The systems sales manager at Document Technologies in Phoenix had been moving more than $60,000 of Compaq Computer Corp.'s equipment each month. Until last November -- when Compaq began selling its small-business Prosignia models via a heavily promoted Internet site, cutting out middlemen like Putnam. Now, the world's largest computer maker ships $1 million worth of tech gear a day directly to consumers.

In Putnam's view, that makes Compaq as much a threat as a supplier. So, rather than help her new $31 billion rival, she points customers to the desktops and servers of Hewlett-Packard Co., a company she says is "more friendly" to small resellers such as her 88-employee company. Compaq sales at Document Technologies have now plunged to $10,000 to $15,000 a month, and Putnam intends for them to stay low.

"We're the ones who placed their products out there and did the job of name recognition," fumes Putnam. "Now that we've done our job well, it's like they're saying, 'We don't need you guys anymore.' "

In the past few years, the futuristic-sounding convenience of electronic commerce -- direct contact between supplier and customer, shorter delivery times, and ready customization -- has become business as usual. E-commerce has allowed computer manufacturers to wring inefficiencies out of their supply chains, but with painful, and sometimes unavoidable, consequences -- especially for small shops like Putnam's.

Compaq's case is notable because its success has been so intertwined with its small dealers. And it's ironic because the shift away from resellers coincides with the tech companies' big push to woo the small-business customer. As resellers are quick to note, they have sold Compaq PCs enthusiastically since they hit the street in the 1980s. Back then, its brash red logo represented one of the few quality, low-cost challengers to IBM. "Compaq was historically a strategic and profitable product for retailers," says Richard March, senior director of CMP Channel Information Services, a market-research firm. "They had a great deal of loyalty to Compaq."

Last November's announcement that Compaq would sell via the Web "shook that loyalty," says March. Not least because Compaq had been the holdout of the big three PC makers -- the others being Dell and Gateway -- to use the low-overhead, direct-sales model.

"NO CHOICE." The news shouldn't have been a complete shock. After all, PC industry analysts had been saying that Compaq couldn't afford to ignore the Web any longer. By the third quarter of 1998, 30% of all PC sales were direct (via the Web or telephone), compared with 25.1% in the same period of 1996, according to market researcher Dataquest Inc., a unit of GartnerGroup. "In the current climate, they have no choice but to deliver the product the way the customer wants it," observes Dataquest Analyst Charles Smuthers.

Nonetheless, it has created a major dilemma for Compaq, which has 11,000 dealers, of which 2,000 are designated as specialists in small and midsize businesses.

Compaq says it feels the resellers' pain. "We're completely committed to them," vows Kenny Kurtzman, general manager of Compaq.com. "Even as the business model evolves, we want to help them in the transition." Compaq now gives dealers a 6% to 10% commission for referring customers to the Web site. (Such referrals now generate 20% of Prosignia Web sales, the company says.) Compaq also compares its customer database against that of its resellers to ensure it does not send catalogs to its resellers' customers. In all, Compaq contends that its Web site has stolen few sales from resellers. That's because internal research shows only 30% of direct Web purchases are coming from customers who would have bought Compaq anyway.

Kurtzman says he realizes that some of the resellers are never going to accept the change. But, he says, 25% of Compaq's small-business specialists are already earning referral commissions. "Change is coming from the customer, from economics, and, frankly, from our competitors," adds Kurtzman. "We want to bring the resellers along with us."

Drag may be more like it. Consider Tim McCoy, a sales representative at Jedermann's Software & Hardware in Camarillo, Calif. He's now pushing no-name "white boxes," which Jedermann's assembles in-house. "They burned us hard," says McCoy about Compaq. One business customer who "bought a computer a week" at his shop recently switched to Compaq's DirectPlus. "Why would we want to sell our competitor's computer?" he asks rhetorically.

Dataquest Analyst Stephen Clancy says resellers like McCoy are misguided. "If resellers are disappointed with Compaq, they're disappointed in the wrong culprit," he says. "They need to be disappointed with the fact that their marketplace is leaving them behind."

"BLIND FAITH." Still, some computer dealers say that for all its sympathetic talk, Compaq is pulling the rug out from under them in other ways. At Camira Technologies in Elgin, Ill., which specializes in Compaq servers, Sales Manager Chris Szallaj struggles to keep some Compaq equipment in stock. All the while, customers can get the same equipment -- without a wait -- direct from Compaq.

Dealers are also skeptical about such gestures as the 6% to 10% referral commission. At Document Technologies, Putnam says Compaq's DirectPlus salespeople aren't asking direct buyers to name a sales agent -- so no one gets the commission. "It's built on a lot of blind faith," says Putnam.

Kurtzman admits Compaq has had some problems filling custom orders sold through resellers. But he says the company will improve its service soon. He also says the "script" used by telephone order-takers does ask about sales agents, adding that Compaq clearly needs local resellers to help service its millions of individual customers. "After the direct sale, we ask the customer if they need support from a reseller," says Kurtzman. "We want to link in the reseller."

Computer Life, a Colonial Heights (Va.) computer retailer, has been forced to accept just such a scenario: Customers are abandoning the $2 million company to shop direct on the Web, says Owner Bill Avery. Revenues are down 30% over the past year. To adapt, Avery is shifting his business into higher-margin services. "Even if they buy direct, we want to be able to network and hook it up," he says.

The fact is that the direct-sales model is driving home the reality that PC-selling alone isn't very profitable. "Resellers are learning that they have to turn to the service model. There's not a lot of money being made pushing boxes," says Alan Weinberger, president and CEO of ASCII Group Inc., a $10 billion buying cooperative for some 1,000 independent resellers.

Retail margins on name-brand desktop PCs have been shrinking for years and now are just 4% to 5%, according to CMP Channel Information Services. At Document Technologies, pressure from direct sellers such as Dell has forced some margins to 2%. Even among so-called white boxes built by the resellers themselves, margins have dropped to 8% to 10%, from as high as 24% a year ago, CMP says.

Yet even in the young and fast-evolving computer business, some resellers are bitter to see a new technology push them aside. Says Putman: "There's no loyalty out there anymore. A lot of resellers had a loyalty to Compaq, and the name just rolled off people's lips. Now people are saying a PC is a PC is a PC." Funny, that's exactly what IBM discovered a few years ago. And like IBM, resellers will have to reinvent themselves to survive.

By Dennis Berman in New York
dennis_berman@businessweek.com

To: TECHNOLOGY