With the US economy growing soft and the PC market going flat, these are interesting times for the digital creative industry, Compaq chairman and CEO Michael Capellas told a group of journalists at a breakfast meeting in London on Thursday. But he thinks that his company has positioned itself strongly for a conservative expansion that is ready to take on upcoming technological challenges such as wireless and storage demands as well as big industry players like IBM. Pointing to Compaq's recently released fourth-quarter earnings report, Capellas said that traditional PC sales now make up less than half of the company's revenues with strong performances by Compaq's server and storage businesses have helped offset the industry-wide slowdown in consumer PC sales. "I think we are taking a realistically conservative approach," Capellas said. Specifically, the key areas for Compaq are wireless, software, Internet content, storage, services and strong strategic partnerships, Capellas said. "We really have spent some time thinking about where the market is going. And over the last six months, we've really seen dramatic progress in our ability to go high end. I think we're getting broader market acceptance," Capellas said. Looking five years out, Capellas sees a 70 per cen t/ 30 per cent split in the company's revenue stream with the majority of Compaq's revenue coming from "other solutions and portfolios (apart from PCs). We will continue to grow our services and servers at a very fast rate," Capellas said. Compaq will also focus on the wireless Internet, which Capellas thinks will experience "absolutely explosive" growth. The company also will look toward the next wave of applications designed for new wireless devices that access the Internet. "We have to change the applications because we no longer know what the form factors will be. Access will have to be build into every device. We are very interested in application integration," Capellas said. As a result, the company that made its name with PC sales will spend more time developing software. "We sell software inside of our products, though we sell it as a solution so the software is not as evident; our software is a little more bundled. But I do think we have to add software content over time," Capellas said. System management software is the direction the company plans to take with middleware being embedded in the database products by vendors like Oracle and manageability being built "on top of it," Capellas said. Compaq is also making room for Linux, which will run on some of its upcoming server products, but Capellas is certain that the open-source Linux technology will not receive the investment necessary to make it a powerful presence in the corporate market. Therefore, Compaq is putting its main muscle behind Microsoft Corp.'s Windows 2000. "We do think the Windows 2000 adoption rate will pick up. We see Linux being positive around the edge, but it will not cannibalize Windows at all," Capellas said. As for another high-profile technology, Capellas was enthusiastic about the Bluetooth wireless technology, though realistic regarding its limitations. Bluetooth "is an effective technology, it is cost effective and it works. There is a market for it and there will also be a market for wireless LANs (local area networks) in the home. But Bluetooth is not an end-all technology," Capellas said. Compaq will support wireless LANs in the future and it will support Bluetooth, but the company will also "accept that wireless will roll out at different speeds with different standards," Capellas said. For example, Capellas predicted that GSM (Global System for Mobile Communications) wireless telecommunications networks will dominate in Europe, CDMA (Code Division Multiple Access) technology will dominate in the US, and Compaq will have to offer full support for both. In terms of the PC market, Compaq appears content to leave the consumer market to rival Dell while it sets its sights on IBM Corp. "Dell is being very aggressive on (PC) pricing. We are not chasing traditional PC prices all the way down. Another thing we are saying is it's not just about price, it's about wrapping services around it. Just a box for price is not a long-term solution," Capellas said. Rather, Capellas sees "huge parallels" between IBM and Compaq. "Overall, we are in the same space. I think growth numbers are about the same. The philosophical difference is that IBM's strategy is to start at the top and drill down," he said, whereas Compaq starts from more of a middle position, looking at the device and building the services and software around it. "We get to the same point, but command it from different ends. Our ability to innovate is our core competency," Capellas said. Compaq has put a large investment behind the ASP (application service provider) model, although Capellas stressed that the company was not intending to become an ASP. "We are never going to be an ASP. We will create technologies for ASPs," he said. Overall, Compaq realizes that it can't rely on its US because of the economic slow down, but Capellas thinks that will be temporary as the administration of President George W Bush takes over and can begin to make decisive moves to revitalize the economy. A tax cut could be part of that, he said. "We are hoping for a very unequivocal and decisive move on taxation. It's got to be a big enough tax cut to be detected at mid-market so as to change consumer confidence," Capellas said. He also welcomed Wednesday's half-point cut in interest rates by the US Federal Reserve.