Compaq Scales Back E-Commerce Strategy

At the beginning of the year, Compaq (NYSE: CPQ) CEO Eckhard Pfeiffer declared that his company’s “top strategic priority is Internet leadership in the industry.” Well, for now, it looks like that strategy surprisingly includes making Compaq computers harder to buy on the Internet. Compaq confirmed Tuesday that it is has stopped selling its computers to Internet-only retailers.

This move affects major players like Cyberian Outpost (Nasdaq: COOL) and Shopping.com (OTC: IBUY), which derive revenue from the sale of Compaq computers. Ironically, Compaq has made plans to purchase Shopping.com and merge it with the AltaVista search engine.

However, the move may not be permanent. The new policy officially began on February 15, and Compaq will reexamine things after 90 days.

Why the Shift in Policy?

Many online retailers sell items at cost, or just above cost. This competition is hurting brick-and-mortar retailers, which simply can’t match those prices because of their overhead. Compaq’s move was partially a concession to these stores.

Another reason for the move is that Compaq is evaluating whether it should sell computers on its own Web site. After all, if somebody is selling Compaq computers wholesale over the Internet, it might as well be Compaq.

If anybody can succeed with such an unlikely strategy, it’s Compaq. The company is the biggest worldwide suppliers of PCs. Compaq is simply the 800-meg gorilla of retail computing.

More Online Retailers Will Be Hurt

It’s hard to imagine this move hurting Compaq’s bottom line in a dramatic way. This, after all, is just a 90-day experiment for now. Pfeiffer is a wise man, and a move like this one was obviously calculated.

But, it’s likely that numerous online retailers that sell all sorts of products could be hurt in the future. Compaq’s move into the sub-$1,000 PC market led to major changes in the computer industry. The company has started trends before, and if it’s starting one now, a lot of online stores should be concerned.

Imagine if a mega-corporation like Time-Warner (NYSE: TWX) decided to stop selling its products — all its books, magazines, videos, music, etc. — to Internet-only retailers. While this certainly would not cripple any sites, it could be a big blow to sites like Amazon.com (Nasdaq: AMZN) and CDNow (Nasdaq: CDNW).

The power of the manufacturer to profoundly affect e-commerce resellers should be taken into account more seriously than ever.

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