OPINION: Who dropped who?

OPINION: Who dropped who?

When you look at IBM and Harvey Norman breaking up their relationship, you might think it is Compaq all over again. A disaster for a big US PC vendor unable to earn evangelistic support or even shelf space at the Mecca of IT retailing. An errant schoolboy ejected from the class for flouting the rules.

But is it really? Compaq felt the pinch very badly; will this hurt IBM to the same degree? I think not.

When Gerry Harvey said "on ya bike" to the big Q back in 1998 because of the direct-selling Compaq Connect retail stores, the PC market was at its peak. The split created a gaping hole in what was then a $90 million annual retail revenue stream for Compaq through Harvey Norman alone. This cash-flow deficit was exacerbated by an undisclosed investment in the farcical retail experiment.

Compaq's whole retail strategy was an ill-conceived shemozzle at best and gross incompetence at worst. Sources indicate that the Compaq Connect "investment" ran into the tens of millions of dollars. When you add the Harvey Norman bomb, it was an absolute disaster for the vendor which at the time was also trying to digest the huge Digital acquisition.

Naturally, fall guys were created and heads rolled over Compaq's Connect stores, which I understand was originally a US notion based on the high expense of doing business with retail partners in Australia relative to North America. (Sure, they drove the project and were committed to it, but has anyone heard from headless horsemen Ian Penman or Steve Ballmer lately?)It would be my assessment that IBM's injury will be merely a flesh wound. A corked thigh, perhaps, which won't keep them out the action for long -- nowhere near the catastrophe that Compaq faced.

For starters, IBM's current trade through all retail partners would not be anywhere near Compaq's Harvey Norman feast of the late 1990s. Evan Williams, the marketing head of IBM's PC division, made it very clear to me last week that retail is not a focus for the company.

It takes what it can get and will continue to do so through other retail partners, both large and small, but its business fortunes are not dependent on mums and dads buying PCs for the home.

Secondly, doing PC business with Harvey Norman these days is a lot more expensive than it was back then. Servicing the 80 or so franchises Harvey Norman Holdings managed back in 1998 was expensive enough. That number is closer to 140 these days and they each have to be serviced individually through volume contracts, which have every last drop of margin squeezed out of them by one of the biggest IT purchasers in Australia.

Harvey Norman's franchise model makes it an infinitely more difficult partner to deal with than say Dick Smith Electronics or David Jones, which have far less inventory destinations and contacts.

Dispatching relatively small consignments of stock to all corners of Australia at rock-bottom prices, as is required in dealing with Harvey Norman, is neither easy nor inexpensive. Managing that relationship -- including returns, anomalies and ledgers -- eats into the viability of the revenue stream.

I wouldn't be surprised if there is as much relief as there is grief within the PC division bunker over no longer having to bend over backwards for Harvey Norman for no profit. I also wouldn't be surprised if IBM actually engineered the split.

Sure, there will be some sort of hole in retail revenues, but there is also a whole heap of resources that have recently become available, such as new-age "process partnering" deals (see IBM partner Anthony Ciconte's comments on page 6).

This may very well hurt Harvey Norman more than it will hurt IBM. After all, the retailer champions the computer superstore retail business model, which requires the widest possible variety of stock. No superstore concept is complete without the world's best-known PC brand.

Gerard Norsa is the editor of Australian Reseller News. As published in ARN, October 31, 2001.

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