Compaq Computer Corp.'s Web site is open 24 hours a day, and it puts the minutiae of product specs and prices almost instantly in consumers' hands. How could mere stores hope to compete? When Compaq started its Web sales effort six months ago, it certainly looked like they couldn't. The company's small resellers saw business drop off precipitously -- and they were fighting mad. In fact, many of them stopped pushing Compaq's products altogether.

Now, after six months of hawking its small-business line primarily via the Web and telephone, the computer giant has discovered that the Net may be a good place to sell computers -- some $1 million in small-business products alone per day -- but it's not the only place.

In part to combat a slowdown in overall small-business equipment sales, Compaq announced on Mar. 29 that it's expanding store sales. It will offer its Prosignia line of small-business PCs and servers through retail giants CompUSA, Office Depot, OfficeMax, and Staples. Small retailers will also sell Prosignias through what Compaq calls an "inventoryless distribution model": Retailers phone in customized orders, which are then assembled and shipped directly to retail buyers.

BURNED. Compaq is hardly billing this as a retreat. The company "is the first to successfully marry reseller distribution with direct," boasts Eckhard Pfeiffer, president and CEO.

That's cold comfort to some small Compaq resellers, who say they feel burned by the company's move to direct sales. Since Compaq announced its strategy in November, many have redirected their efforts into promoting Hewlett-Packard, IBM, and low-cost, generic "white boxes," which resellers build in-house.

Some resellers, at least, aren't shy about expressing their feelings, either. "I hate Compaq," says Nader Yousefzadeh, president of Micro League, a Santa Monica (Calif.) retailer and cyberspace merchant who now sells Compaqs only because his customers ask for them.

"In 1996, it was pretty fair. They referred clients to us," recalls Yousefzadeh. "Now, they're taking them for themselves, moving away from distribution and going direct."

Yousefzadeh admits, however, that Compaq had little choice but to offer its wares via the Net, especially given the success Dell Computer has had selling direct. Still, he says, in its rush to compete in cyberspace, Compaq neglected the retailers on whom many small-business customers rely.

"BEING EVERYWHERE." Compaq spokesman Arch Currid admits that some resellers are upset by the online selling. But he maintains that Compaq's relationship with resellers is still one of the best in the industry. What's more, he says, the company's move to direct sales came only after the company sought extensive input from its sales channel and offered 4% commissions on direct purchases referred by dealers. "We want to be everywhere our customers are," Currid adds.

Apparently, that now includes old-fashioned retail stores -- where roughly 16% of small-business computer buyers make purchases, according to Compaq research. It remains to be seen whether Compaq can sell direct and still keep the little guys happy -- and, most important to Compaq, how much it matters at the bottom line.

Some people say it matters a lot. "Compaq's sweet spot is still the resellers. And they can't alienate the channel. Compaq has no option, really," says Alan Weinberger, chairman and CEO of ASCII Group, a buying cooperative of 1,000 computer resellers.

Resellers will have to wait until April -- when Compaq's first-quarter financials reveal whether their boycott really hit home. There may be some inkling in a recent announcement from the company: Despite robust Internet sales, Compaq warned of sluggish overall small-business sales during early 1999. Maybe those resellers aren't so expendable after all.

By Dennis Berman in New York
dennis_berman@businessweek.com

To: TECHNOLOGY