A Pc War That's Not Exactly P.C.

Compaq Computer Corp. tried everything. Lots of advertising, lawsuits, pleas to state attorneys general. All that, and its two-year-old push to move personal computers into the home remains bedeviled by Packard Bell Electronics Inc., a $3 billion rival. Now, no more nice-guy stuff: Compaq, it seems, has resorted to insults.

At a June trade show, Compaq Senior Vice-President Ross Cooley characterized Packard Bell as nothing but "some Mexican factories and four Chinese engineers," according to a wire-service report. Packard Bell Chief Executive Beny Alagem, an Israeli immigrant, demanded an apology from Compaq CEO Eckhard Pfeiffer. "Clearly, Compaq is feeling the heat," Alagem says. "But there is no excuse for its executives to make racial slurs." Cooley declined to comment.

This little lovefest began on Apr. 10, when Compaq sued Packard Bell in Federal District Court in Wilmington, Del., charging it with false advertising. The suit came after Packard Bell PCs outshipped Compaq's for three straight quarters (chart). Compaq's gripe: Packard Bell wasn't telling consumers that some of its computers were made with used parts.

DAMAGE CONTROL. In fact, Packard Bell hadn't been entirely up front about its use of the parts. And within days, a score of copycat class-actions were filed against it. Then, in late April, Compaq blanketed state attorneys general with an eight-page letter urging them to "consider an investigation...to determine if firms such as Packard Bell are not honoring the legal distinction between used and new products." Twelve states, led by Florida, launched a joint probe in June.

Just then, Cooley opened his mouth. The Associated Press story reporting his trade-show comments also inferred that Compaq had studied Packard Bell's business model and had determined that its rival's profit margins were too thin to withstand the added costs of litigation. "Mr. Cooley has basically drafted Packard Bell's complaint for malicious prosecution with his own mouth," says attorney Marshall B. Grossman, who represents Packard Bell.

Compaq's damage-control specialists now are trying to clean up the mess. A spokesman says Cooley wasn't implying that the lawsuit was intended to force Packard Bell to raise prices by burdening it with legal costs. Rather, the spokesman says, Cooley meant that if Compaq wins its suit, Packard Bell likely would have to bring its manufacturing practices in line with Compaq's. That could "cause [Packard Bell] to raise prices at least 10%," says David Wu, PC analyst at S.G. Warburg & Co.

Packard Bell recertifies good components from computers returned by customers and uses them to build new computers. Other PC makers do the same. Indeed, there is a class-action suit pending against Dell Computer Corp. in a Texas court alleging it failed to notify customers that used parts were included in its machines. Compaq uses only new components, selling returned machines as used in its factory store in Houston.

The distinction between new and used can be a fine one: Clothing and other goods are commonly returned to mail-order houses and department stores, where they are put back on the shelves to be resold as new. A computer processor that has been used for several thousand calculations is indistinguishable from one just off the shelf. Indeed, manufacturers routinely "burn in" their products by running them for several hours to test them.

"NECK AND NECK." The Federal Trade Commission informally has asked several computer makers, among them Compaq and Packard Bell, for information. Packard Bell is urging the FTC to escalate its inquiry into a formal rulemaking procedure "so that we have government review and sanction of the practice on an industrywide basis," says attorney Grossman.

So far, though, there's no evidence that Compaq's verbal and legal broadside has slowed Packard Bell. "We think that Packard Bell and Compaq will end up neck and neck for No.1 this year," says Eric R. Lewis, PC analyst at International Data Corp. Indeed, Packard Bell is just weeks away from shipping its new fall line--which should allow it to keep its lead in the market. One new feature: fine print to the effect that its computers may contain "serviceable used" parts. Compaq already is considering turning the admission into full-page comparison ads. The battle, it seems, has a long way to go.

    Before it's here, it's on the Bloomberg Terminal.