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HP Balances on Tightrope. Move To Sell Directly to Consumers Irritates Dealers

By Benjamin Pimentel
San Francisco Chronicle
February 10, 2003

Facing stiff competition from Dell Computer Corp., Hewlett-Packard Co. has been trying to emulate the strategy that made its Texas rival so successful: Sell more products directly to customers.

But the move is ruffling the feathers of some HP dealers, who say the Palo Alto firm is dumping longtime partners that helped the company build its base of users and customers.

Recently, a group of resellers filed a complaint with the Federal Trade Commission alleging that HP illegally used proprietary customer information on such matters as buying preferences and sales information it solicited from dealers to expand its own direct-sales network.

"Those are my customers," said Belinda Guadarama, an HP reseller in Novato. "That information, it took me years to put it together. What happens to the resellers who, for years, have been cultivating a relationship with those customers?"

Kevin Gilroy, HP's vice president and general manager for its North American commercial channels, denied the charge. "There is absolutely no substance to those allegations," he said.

The dispute underscores the tricky balancing act facing HP, which still does about two-thirds of its business through more than 300,000 outside firms, including more than 20,000 in the United States.

Called channel partners or resellers, they help the company sell its products to small and large businesses. They also offer technical support to businesses using HP products.

Like other major tech firms, HP has been attempting to gain market share by following the example of Dell. By selling directly to customers, the Texas firm has become a dominant PC seller.

In the United States, Dell was No. 1 in PC unit shipments in 2002 with a 27. 9 percent share of the market, as shipments grew 20.7 percent.

HP was second with a 19.8 percent market share, as its PC unit shipments slipped 7.7 percent.

Because of its merger with Compaq Computer in May, HP was narrowly ahead of Dell in worldwide PC unit sales in 2002, a 16.2 percent share for HP compared with 15.2 percent for Dell.

The direct-sales push won't be easy for HP. It faces the delicate task of building a competitive direct-sales network without disrupting its established network of partners that serve as a link to its customers, especially companies that use HP equipment and services.

As it expands its direct-sales operations, the company stresses that it has no intention of abandoning its partners.

Still, Gilroy admitted that its much publicized effort to expand its direct- sales reach has caused some confusion and consternation among dealers.
Although HP had been developing its direct-sales network for years, the biggest changes occurred after HP's merger with Compaq.

During the past eight months, HP, through its direct-sales staff, has revamped its Web site and catalogs to go after more corporate customers directly. The direct-sales push is focused mainly on specific markets, especially PCs and low-end servers.

HP plans to sell other products, such as printers, through its existing network of partners, which work hand in glove with a separate HP staff for resellers.

This is a bone of contention for some of HP's partners. They claim that HP's reseller staff has been leaking proprietary information to the company's direct-sales staff in their bid to win corporate customers.

Through the years, the partners routinely have turned over customer information to HP staff as part of the company's programs for rebates and other incentives. The partners say that there was an understanding in the arrangement that HP would not share the data with its direct-sales force.
Lloyd Chapman, president and founder of the Microcomputer Industry Supplier Association in Novato, is concerned about the handling of customer information.

He believes that "customers' names, addresses, phone numbers, specific contact information, what they buy, when they buy it and what they pay for it would clearly be considered trade secret and proprietary information."
HP denies any wrongdoing.

Gilroy, the HP vice president, stressed that a fire wall exists between the reseller and direct-sales units. "The data that is reported by our partners is not shared with our direct organizations."

He also said that HP's direct-marketing teams buy customer data in the open market, noting there are other ways for the company to get the same data that its partners consider proprietary.

Gilroy said the tech giant also has a program for partners in which HP identifies customers in specific markets that it hopes will buy directly from HP. That way, HP's partners will have a clear idea of where they and HP may be competing for the same customers.

Gilroy said most of HP's partners are satisfied with the program. "The feedback has been just fantastic," he said.

Geoffrey Lilien, president of Lilien Systems, an HP dealer in Mill Valley, said he is content with the direction of HP's sales programs for its partners. The merger helped expand the line of HP products, including new data storage systems and servers dealers could offer to customers, "which strengthens our position and strengthens HP's position," he said.

"I have generally been pretty happy with what's going on," said Lilien, who has been selling HP products for 12 years. "I have a lot of faith in that company. They really are a good partner."

Steve Wangard, president of Vanguard Computers in Wisconsin, also praised HP, saying it helps promote his firm to customers.

"They've been very progressive in their interaction with me," said Wangard, whose company has been an HP dealer for more than 15 years.

Other resellers feel differently.

Cammy Ticknor, owner of Computer Cite, an HP partner in Vacaville, said business has gone down ever since HP began its big push in direct sales.

"Customers say, 'I can get this direct from HP cheaper,' " said Ticknor, whose company has four employees. "So I have to negotiate, and sometimes I don't make money."

Chapman's association, which has about 1,000 members, filed a complaint with the FTC late last year. Chapman said he wants the federal agency to make HP stop using members' proprietary information.

An FTC spokesman said the agency does not comment on pending complaints.

Asked if his group plans to file a lawsuit, Chapman would only say it is "exploring what legal remedies would be available to us to protect our trade- secret and proprietary information."

Gilroy stressed that HP's goal is to have a blended model that includes both direct sales and partners.

Crawford del Prete, an analyst with International Data Corp., said that strategy makes sense, but it won't be easy to implement.

"Not everyone can be happy in this situation," said Del Prete, who does not own HP stock. "At the end of the day, this is absolutely a balancing act."

2003 San Francisco Chronicle. Displayed by permission. All rights reserved.



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