Market woes force Compaq net retreat

Under reorganization, internetworking group pushes smaller product portfolio.

By Deni Connor
Network World, 01/11/99

Three years ago, Compaq declared its intention to become a network industry leader - leadership to be earned by dint of advanced, aggressively priced products, and through acquisitions worth hundreds of millions of dollars.

Hamstrung by a strategy that was poorly defined and not terribly ambitious, Compaq last week retrenched. The company is moving key network lines into PC and server groups, and is preparing pink slips for many of its network folks.

The company has moved server adapters into its server group, and shifted modems and work-station adapters into its PC group. Its hubs, switches and routers will remain in the Network and Access Communications Division, which is much reduced in size and responsibility.

Employees in the company's network product areas have been scattered to the wind. Numerous employees have received warnings of impending layoffs, and an engineering group associated with Compaq's Microcom remote communications hardware division received pink slips just before Christmas.

Employees working on switching products in Houston were told to find jobs within Compaq, transfer to Austin, Texas, or be laid off. In Austin, the site of Compaq's network adapter design and test facilities, employees were warned of impending layoffs.

Tough going

Compaq, the server and PC kingpin, has found the network ground a bit tougher to hoe than anticipated. The company so far has proven unable to develop truly standout network technology, has failed to gain the kind of mind share enjoyed by the likes of Cisco and 3Com, and ultimately has been unable to obtain the kind of share it is accustomed to in other markets.

Now, instead of tussling with the big boys, Compaq has adopted a dual-pronged approach. The first is a "burgers and fries" strategy: folks buy a PC or server - the burger - and end up adding a modem or network interface card (NIC) - the fries.

B.J. Johnson, vice president of Compaq's Network and Access Communications Division, explains that when you buy a server, you get an adapter or modem for little extra cost.

With its second approach, Compaq will use its internetwork division to provide customers with more advanced network gear. "When you sell servers and desktops, you need the infrastructure to connect them," Johnson says.

Behind the leading edge?

But Compaq, known for pushing the envelope in desktops, laptops and servers, has failed to distinguish itself in network technology, observers say. Asked what Compaq products stand at the front of their classes, Johnson cites the Digital GIGAswitch router, which it OEMs from Cabletron; the NetVantage technology, which it also OEMs from Cabletron; and Web-based Enterprise Management tools, which it is developing with Microsoft. Johnson argues that other innovative, but-as-yet-unannounced, products are on the drawing board.

While engineering expertise from its Thomas-Conrad and NetWorth acquisitions have contributed to Compaq's prowess in server adapters and hubs, no individual products stand out in the marketplace. Microcom, another acquired unit, is still growing, and Johnson argues it will contribute server-based remote access technology in the future.

Compaq's problems with innovation haven't gone unnoticed. "Compaq has some competitive products, but I can't identify any that are revolutionary," says Lee Doyle, vice president of networking at market research firm International Data Corp. in Framingham, Mass.

Many users and analysts still see Compaq as a PC and server vendor.

"We typically have been, and will continue to be, viewed as a personal computer/server computing company that has networking, storage and some other stuff," Johnson admits.

If Compaq is to establish itself as a network leader, it must have a clear business strategy. This means successfully blending in the Digital acquisition and fine-tuning a $1.1 billion deal with Cabletron to OEM internetwork products. Compaq may look to reduce the cost of the Cabletron deal, but so far Compaq and Cabletron officials have declined to comment on that possibility.

Easing up on spending

The bottom line on Compaq's reorganization is, well, the bottom line. Compaq simply does not want to spend the kind of money that a large network unit and aggressive internetwork market share growth require. "To be perfectly clear," Johnson says, "there is not a P&L business focus associated with networking anymore.

"The networking realignment here is to reduce complexity," Johnson adds. "Compaq is still going to get the same revenue from the NICs or from servers that have special communications cards in them as they would if [networking] was treated as a centralized business."

IDC's Doyle agrees.

"Compaq is certainly looking at the products on a profit-and-loss basis, but it is not looking at networking as a division anymore that is going to generate billions of dollars," he says.

R&D to decline?

Hub, switch and remote access markets are extremely competitive and require aggressive business management to be successful. Doyle questions whether those Compaq product lines will receive the research and development and the management attention they need.

Based on the reorganization, Compaq will OEM remote communications hardware rather than make its own boxes. The company's Austin facility, originally part of Thomas-Conrad, will be retained and will take over switch design and manufacturing. The Austin site will still design and manufacture NICs as well.

But rather than pursuing network company acquisitions, as it has until now, Compaq will seek partners, such as Extreme Networks and Cabletron, to fill out its network portfolio. n