CompUSA Is Killing Itself--On Purpose The PC retailer is floundering, so it's making a big bet on a Web venture. Can a fine young cannibal save the company?
By Julie Creswell

(FORTUNE Magazine) – For the past couple of years, personal-computer retailer CompUSA has been under a deathwatch. Competition and falling PC prices have strangled its margins and murdered its stock price. (Trading at $37 just two years ago, CompUSA shares have plunged to $6.) Now, with the launch of its e-commerce site, Cozone.com, this fall, it looks as if CompUSA, the nation's largest computer retailer, is killing itself.

Finally, the company is getting something right.

CompUSA's e-commerce site, Cozone.com, is something of an anomaly. Though it's a wholly owned subsidiary, Cozone. com doesn't bear the name of the corporate parent and has few ties. (In fact, CompUSA isn't mentioned anywhere on Cozone.com's home page.) Each business has its own warehousing, distribution centers, and help desks. "CompUSA's board became our venture capital firm, really," explains Stephen Polley, CEO of Cozone.com. "We're kept completely at arm's length from CompUSA."

He's not kidding. While other companies have tried to bring their brand names to the Web, integrating real-world and virtual stores, CompUSA has done the opposite. You won't find a single CompUSA exec in Cozone.com's ranks. Its offices are located in Marlborough, Mass., far from its parent's Dallas headquarters. Goods bought at Cozone.com cannot be returned at CompUSA stores, and the two companies have difference prices for PCs and other electronic products. ("I don't have any idea what price CompUSA is selling a particular PC at," says Polley, shrugging.) Even its executives are rewarded differently. Polley and his management team are getting stock in the subsidiary. What does CompUSA get from this arrangement? Execs get to tout an e-strategy--something that a computer retailer probably should have. CompUSA sees synergies from purchasing discounts. Most important, CompUSA execs hope a Cozone.com spinoff will bring in huge returns for them and for shareholders. "We're looking to take it public within the next 12 months or so," says CompUSA CEO Jim Halpin.

It makes sense for CompUSA to start from scratch; a confluence of events practically destroyed the company. Manufacturers like Dell sold PCs directly, lessening the value of storefront retailers. The company's ill-timed purchase of Tandy's Computer City chain in 1998 hasn't boosted profits. Most seriously, it stuck with a single type of product--PC hardware, software, and peripherals--while competitors Circuit City and Best Buy soared by expanding into a broad array of goods. Sure, CompUSA is diversifying. ("You're going to see us moving away from being a computer superstore to a technology superstore," says Halpin.) But its name is something of a hindrance--consumers see CompUSA, and think "computers" and "America."

Cozone.com, on the other hand, offers no hints about what's for sale. Steering clear of the CompUSA brand lets Cozone. com easily move into international markets. It also avoids a sticky tax situation in states where CompUSA has stores, and it has no PC orientation. Cozone.com will in fact sell all kinds of electronics--it already offers digital cameras, Sony PlayStations, and even MP3 players.

Like a growing number of executives in the Internet age, Polley, 48, cites the doctrine of Harvard Business School professor Clayton M. Christensen. Christensen's book The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail concludes that large corporations can avoid failure only if they create subsidiaries that attack the parent. It's a philosophy Halpin seems to share. "If there's going to be cannibalization, I'd just as soon cannibalize myself," says Halpin.

So he set Polley free to do just that, and Polley pulled together a team of first-rate Hannibal Lecters. Working with Landor, the design team that thought up Lucent's name, Polley and Michael Laskoff, the chief marketing officer, who came over from Bertelsmann's respected online group, settled on Cozone.com, a name signifying absolutely nothing.

As it turns out, that stuff was the easy part. When it came to selling online, Polley and Laskoff found that they had no real role models. Dell sells lots of PCs, but they're all one kind, designed to work together. And, says Polley, "Amazon.com was the gold standard for Internet sites. But no one calls because of interface problems between John Grisham's books and Tom Clancy's. These are problems our customers face."

Of all the Websites they examined, Polley and Laskoff found that financial services companies did the best job of explaining--and then selling--sophisticated products online. So they hired Iang Joen, who had directed Fidelity Investments' first Internet site. The result of their effort is a site that is clearly superior to its rivals. While many PC or electronic goods sites offer little more than an online catalog, Cozone.com is chock full of information. One basic example: Alongside pictures of its printers is a box of text explaining the difference between inkjet and dot-matrix printers--in English, not computerese.

The best feature on Cozone.com is its adviser, "Jill," a computer-generated brunette who's already getting fan mail. She guides consumers through a series of questions, then comes back with a number of choices that customers can compare side by side. Executives plan to expand this feature to other products, including digital cameras and printers.

Cozone.com faces a whole mall of online competitors. Circuit City and Best Buy have Websites, and retailers like Buy.com sell electronic equipment at cut-rate prices. Polley wants to avoid the price war. He's betting the site's emphasis on information will lure loyal computer fanatics as well as novices in need of basic technical help.

Which leaves a simple question: If customers can get retail help on the Web from helpful, nonpushy salespeople, why would they ever go into a CompUSA store?

The deathwatch continues.

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