Compaq's Capellas sees bumpy ride ahead

Growth in IT spending will not stabilize anytime soon and PC innovation is stagnating, said a somewhat gloomy-sounding Michael Capellas, Compaq Computer Corp.'s chief executive officer (CEO), Monday during a keynote at International Data Corp.'s (IDC) European IT Forum here.

Just before Capellas' speech, market research firm IDC came out with a new worldwide IT spending forecast, which has IT spending leveling off at about 10 percent per year between 2002 and 2005. The forecast was adjusted downward for the effects of the economic slump and the terrorist acts last week in the U.S.

"I am not a great believer that the period of stable growth is going to happen. I think the pattern of spiking up and down is one that's going to be with us for a while," said Capellas who delivered his keynote via video conference. He couldn't make the trip due to last week's terrorist attacks.

There will be growth in certain areas, such as IT services, a sector the combined Hewlett-Packard Co. (HP) and Compaq will focus more on, said Capellas, who is slated to become president of "the new HP."

The "brutal pricing" in the PC market -- stemming from the PC becoming a commodity, the industry maturing and the manufacturing of an excess of PCs -- is leading to a slowdown in innovation, according to Capellas, who also said that the heavy discounting in PCs "will be with us for a while."

"We're now going to a period where we see innovation starting to stagnate," said Capellas.

Stagnation doesn't have to be bad, he said. Demand for PCs, boosted by the rise of the Internet, will shift into demand for complete packages of more advanced hardware and services, according to Capellas.

Earlier on Monday, Lester Thurow, professor of management and economics at the Sloan School of Management of the Massachusetts Institute of Technology, said in a presentation that Compaq had given up on PCs and bailed out of the price war led by direct seller Dell Computer Corp. Capellas confirmed that Compaq has decided not to engage in this price war as it had been doing before.

"We are not giving up at all on the access business," he said, using the term "access" to refer to PCs, handheld computers and other devices that can be used to access a network. Compaq is focused on leading this market in the future, he added.

On the merger with HP, Capellas echoed the words spoken by Carly Fiorina earlier on Monday in her own keynote address.

"This merger has been seen as a consolidation of the PC business; I see it as driving a new model for the enterprise," said Capellas.

Capellas repeated that the Compaq brand will continue to exist, but said that it would be premature to say what products will carry a Compaq sticker.

On the IT services side, Capellas said HP and Compaq would grow organically and make acquisitions to be able to take on primary rival IBM Corp.

"The hardest thing to do for a services company is to create a global service infrastructure. Both companies will probably target and make some acquisitions in professional services and consultancy, not of larger companies, but in targeted areas in vertical markets," Capellas said.

One conference attendee, a senior manager at one of the larger IT services companies who asked not to be named, said he was happy not to hear any conflicting statements in the keynotes from Fiorina and Capellas.

"There were no conflicting statements. I enjoyed hearing the speakers; (it's) good to hear everything from the horse's mouth, instead of reading it in the press," he said.

IDC's European IT Forum will continue until Tuesday Sept. 18.

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