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Compaqting the PC Distributor Business

There's no money to be made there. Plus, looks at Brookstone and Palm Computing.
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Compaq's (CPQ) widely anticipated announcement Monday that it's cutting its list of authorized distributors by 90% -- Ingram Micro (IM) , Tech Data (TECD) - Get Tech Data Corporation Report, Inacom (ICO) and Merisel (MSEL) seem to be the four survivors, from an utterly unmanageable 40 -- is a nice reinforcement of Chairman Ben Rosen's oft-quoted determination to be much more than a caretaker, while the company searches for a replacement for the deposed Eckhard Pfeiffer.

But it's a lot more important than just a positioning statement for Rosen. Compaq has got to rebuild its distribution channels, with an emphasis on direct sales -- something it's never done well. So despite brave words about much closer and more intimate relationships with the surviving Four Mohicans, Compaq's gain here mainly lies mainly in reducing, short-term, its reliance on distributors, period. The fewer distributors you have, the fewer angry phone calls when you very visibly shift away from channel distribution. Plus, with only four, not 40, firms competing for the limited profit that will remain in distributing Compaq products, the business remains worthwhile longer for those in the winner's circle.

But no one should mistake this move as a vote of confidence in a bright future for the present, aging distribution model for PCs.

Sure, PC makers will need some channel distribution for a while longer. But as the relative importance of big box-movers such as

Best Buy

(BBY) - Get Best Buy Co. Inc. Report


Office Depot

(ODP) - Get The ODP Corporation Report




increases to Compaq,


(IBM) - Get International Business Machines Corporation Report

and a few other big names -- with most smaller resellers moving to so-called "white box" house-brand systems and the direct model continuing to squeeze all retail PC sales hard -- computer distribution is not a good place to be. PC makers that rely on channel distribution will increasingly sell and ship directly to retailers if they want to keep their business. (Of course, they deny that; you and I would, too.)

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Meanwhile the alternative paths to making dough out of PCs that distributors have tried -- such as so-called "channel assembly," in which big distributors such as



actually build the IBM


and other computers they ship to resellers -- have largely failed, leaving only losses and abraded relations with PC brand-name owners. (How can we call them "manufacturers" if their distributors actually build their machines for them?)

It's hard to spot a long-term winner among PC distributors, even among the four chosen by Compaq. Take a look at the performance charts of Compaq's four choices -- pretty clearly the strongest performers in their industry -- over the last year, and you'll see that there's an overall downward trend in all four.

There's a reason.

Likely ahead: ultimately profitless consolidation.

Greasing the Palm

Did you notice that right in the midst of our



package on the future of handheld PCs last week,


(COMS) - Get ComSovereign Holding Corp. Report

Palm Computing

division cut prices on its two bottom-of-the-line models?

The manufacturer's suggested retail price on the aging

Palm Pilot Pro

, which has been pulled from production and will be available only so long as retailers' stocks remain, was cut from $199 to $149. The price of the newer, more desirable Palm III fell from $299 to $249.

These cuts, while not exactly down to the bone, will be appealing to some who have not yet jumped into the handheld personal digital assistant game.

My advice: Don't do it. Both marked-down models have dim, hard-to-read screens and less memory than you want. The Palm you want right now -- by far the best machine Palm's ever produced -- is the thin, bright, elegant Palm V, which is better in every way ... but still lists for $449. Longtime Palm users may prefer the IIIx, which is in the vein of earlier, thicker Palm Pilots, but with a better display and more memory; you can buy a Palm IIIx for $369 list.

FYI, the best price I've found for Palm Vs is at


, which lists them for $374, but also usually shows the device out of stock. Reminds me of the old saw about the retailer who tells a customer complaining that Joe, down the street, has something for a few bucks less. His rebuttal: "I'll beat that price ... as long as I don't have it in stock, either."

Babbling Brookstone

I put



on my

25 Stocks to Watch in 1999 list back in January, in the expectation that management would end its Rip Van Winkle act, and make a major move to the Web, in many ways the natural demographic home for its merchandise mix. And I kept it there in up update of that

list last month, because there were signs of progress.

Brookstone offered its investment in an expensive redesign and remerchandising of its retail stores as one reason it had to move slowly on the Web front. That answer was only marginally satisfying, but so be it. Well, I finally got to see one of those new Brookstone mall stores this weekend ... and I wanted to run for the nearest telephone and scream "SELL! SELL!" into the handset.

Brookstone stores had long attracted customers by offering an appealing mix of unusual, genuinely useful and only slightly trendy merchandise, much of which you couldn't find anywhere else. What I found Saturday in one of those new Brookstone stores was an appalling effort to become a

Sharper Image


clone: cheeseball goods of the most transient and ephemeral appeal, in claustrophobic and wildly disorganized displays.

Brookstone's off my list, and unlikely to return. Especially with its determined tilt towards brick and mortar, vs. online sales, these new stores, and especially the new merchandise mix, give me little hope the stock will get back on track.

Heck, even Sharper Image is having trouble being Sharper Image these days. Why would Brookstone choose such a model?

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in the companies discussed in this column, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at