From...

January 15, 1999
Web posted at: 11:27 a.m. EST (1627 GMT)

by Mike Hogan

(IDG) -- Two fast-moving trends--plummeting PC prices and exploding online product sales--met in the middle this week, demonstrating the rapidly growing importance of the Internet as a PC sales channel.

In separate deals, number-one PC maker Compaq Computer purchased the online PC product retailer Shopping.com, while Benny Alagem, cofounder and one-time CEO of Packard Bell NEC, purchased rights to about 75 percent of AST Research, a subsidiary of Samsung Electronics.

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Compaq, which began selling lower-priced PCs online at its Compaq.com site in November, will add Compaq PCs to Shopping.com without changing the site's focus or broad menu of brand names, said Compaq spokesperson Alan Hodel.

"Neither one will supplant the other," said Hodel, "but the Internet is clearly becoming a transaction as well as a content medium."

Compaq will use its Alta Vista search-engine portal to drive still more customers to Shopping.com, as well as to Compaq.com. With 40 million page views a day, Alta Vista is among the 10 most frequently visited sites on the Net. Meanwhile, PC sales at Compaq.com are almost three times what was anticipated when the site was rolled out this fall, Hodel reported.

"The Internet is a distribution channel that is growing and, from a supply chain point of view, it is becoming a very important one," noted Charles Smulders, a Dataquest distribution analyst.

The Net's new sales prominence comes just in time. According to ZD Market Intelligence, during the holidays the average retail price for a desktop PC dropped below $1000, to $983, for the first time. What's more, that is almost $350 cheaper than the average price for the same bundle of hardware a year ago, said analyst Matt Sargent, who identified PCs priced under $600 as the hottest-selling category.

Distribution genius

That category is also Alagem's home turf. A distribution genius, he is widely credited with opening America's homes to low-priced PCs in the late '80s by using mass merchants and mass-marketing techniques. Alagem hopes to work his magic on former retail PC powerhouse AST, once the world's fifth-largest PC maker. This time, the Internet is the centerpiece of his low-priced PC distribution strategy.

"A strategy is only good for so many years and then you have to change because we are in a dynamic community," mused Alagem. "Definitely, the Internet is the coming revolution and an important new channel of distribution. Retailers will continue to be important and, for more complex solutions, we will use value-added resellers. These will exist in parallel."

Alagem plans to continue to market AST's current line of desktops and servers, which are now sold primarily to corporate accounts. But by next quarter, he expects to introduce home products that he calls "Internet appliances" and small-business computers bundled with services delivered over the Internet.

Alagem's rationale is that consumers have been sold corporate PCs and use only 15 to 20 percent of the systems' power. He maintains that people could get along with network devices that are optimized for different jobs.

"Half of all American homes have computers, but half don't," Alagem noted. "We will have units that can optimize consumer productivity at very economic price points that will grow this market."

Promising razor-thin margins on his hardware, Alagem said he plans to sell the systems alongside Net services. He declined to say whether he will offer free or extremely low-priced PCs to those who sign up for the company's services.

This is a strategy typified by Gateway's Yourware service, said Dataquest's Smulders, and it's one that every PC maker will be compelled to consider in the months ahead. The Internet may not be about to take over, but at these prices, it's hard to imagine how a PC vendor can be a sales leader without an Internet distribution strategy.