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Does hardware still matter?

Does hardware still matter?

Ever squeezed margins, bundled solutions and high support costs might cause some in the channel to wonder if hardware is worth being in. Yet for all the grief, someone is making good profits. ARN's Tom Allen discusses some of the issues raised by the question of whether hardware still matters to the IT channel.

According to channel research specialist Inform Business Development, the shift in business focus away from the supply of hardware towards consulting, network design, and other services is gaining momentum in most parts of the channel with each review of the market. Direct PC vendors Dell and Gateway have challenged the traditional reseller model to the extent that the supply of hardware is at risk of disappearing from the channel. Gateway's "Associates program" manager, Tony Hughes, is on a mission to convince resellers they should relinquish their interest in hardware supply - there is no margin left in it for them - and leave it to the hardware specialists. In response to the direct vendors, there are moves by the others and their distributors to find more economies of scale in their go-to-market model. These include channel assembly on a build-to-order basis and automation of the ordering and inventory management processes.

To question whether hardware matters may appear to be a little glib, but in the age of PCs bundled with Internet access and ever-shrinking hardware margins forcing the IT channel to seek alternative revenue streams, the point deserves to be canvassed.

Of course hardware matters - to people using it, to the people frustrated by the restraints it imposes, and to the people who design and build those things called computer systems. But does it really matter to the channel? Is hardware now approaching commodity status where it is a given? Or is it such an insignificant part of the sale for some that it has become an afterthought?

From a business perspective, some in the channel estimate hardware to represent as little as 20 per cent of the revenue and 80 per cent of the problems. Yet Mike Nicholls, managing director of startup reseller Nicholls Price, leverages the hardware component of the business to gain access to the more profitable services income. "It doesn't not matter," Nicholls says. "In fact, it's the thing that defines us as being in the information technology business. However, from a strict profitability standpoint, hardware is not now our major concern."

But the plight of hardware suppliers is not prevalent across all sectors of the channel. LAN Systems' chief marketing officer Nick Verykios says that there are still very healthy margins in networking and communications hardware, but it is important to understand how corporate customers buy.

"The hardware is the catalyst that creates the sale. The transactional relationship is based on the supply of infrastructure. In the first instance, that infrastructure is hardware, in the second instance it's applications. In network integration business, it's the plumbing [hardware] that creates the network," Verykios said. In the enterprise market, the competition is intense, but 80 per cent of small-to-medium businesses still don't have their network infrastructure in place, according to Verykios. He says there is some confusion about hardware being sold as a commodity as though it's a completely discretionary decision by the customer. "There's nothing discretionary about computer equipment, it's always a considered purchase," he says. "Vendors and resellers need to understand buying habits better so as not to fall into the trap of selling IT equipment as a commodity."

The other factor preserving the business of hardware supply across all product sectors is the innovative transaction initiatives and more creative financial arrangements such as leasing deals. These, according to Verykios, are hardware-centric and are revitalising sales of even small systems, while improving the capacity for resellers to retain reasonable margins.

Why would a reseller bother to sell hardware? According to Chris Dimmock, sales and marketing director at specialist whitebox server builder Genitech, it comes down to four reasons.

Firstly, the client still needs to buy hardware, and if the reseller decides not to sell it they will lose some control or influence over their customer.

The second issue is the demand for one-stop shopping. "This is what the outsourcing market is all about, customers wanting a complete solution," Dimmock says. "Not all hardware is a commodity. In the more complex areas such as servers and larger networks, the reseller is paid by better margins."

Thirdly, in Dimmock's own words: "If you decide not to sell hardware, you effectively lose that vendor relationship. In a business climate where partnerships are becoming more important, this is a source for the reseller for leads, technical support, migration planning, and other relevant information."

And finally, and perhaps most telling for resellers according to Dimmock: "They still have to understand the hardware, even if they don't sell it."

And the only way he suggests resellers can recoup the costs of understanding and supporting the hardware is by selling it, unless the hardware support is done on a fee for service basis.

"We found that software value-added resellers have returned to hardware supply because they were finding that their support costs were inflating when they had no involvement or relationship with the hardware vendor. A lot are coming back to specifying hardware and selling it as part of the solution as a way to control support costs rather than the margin on offer," Dimmock says.

The $50 PC?

PC prices took another giant step toward zero with the announcement of a new hardware/Internet access bundle that takes the effective price of the computer to $US50 for the first year of ownership.

Seattle-based Microworkz Computers is reported to be selling over the Internet the Webzter Jr., a full-featured Windows PC whose $US299 list price includes one year of all-you-can-eat Internet access worth $240.

Powered by a Cyrix 300 MII processor, Webzter Jr. includes 32MB of memory, a 3.2GB hard drive, 2MB of onboard video memory, a V.90 voice fax-modem, a 16-bit 3D sound processor, Corel's WordPerfect Suite 8, and the usual complement of ports and accessories. The year of unlimited Internet access comes from national service provider EarthLink.

Like so many low-priced PCs, Webzter Jr.'s price does not include a monitor. A 15in colour monitor is available from Microworkz for another $129.

Webzter Jr. is actually the entry point for a family of three Internet specials. The other two PCs in the line are the Cyrix 366 MII-based Webzter selling for $499, and the AMD K6-2-400 Webzter Sr., which sells for $699.

In mid-February, FreePC.com's Web site was deluged with visitors when the company announced that it would be distributing a hardware/Internet access bundle for free to users willing to look at ads constantly and to let their Web viewing habits be monitored.

Microworkz expects its own sales of low-cost PCs to triple the size of the company by the end of the year. by Mike HoganHow to build computers that don't crashby Stan MiastkowskiMost of us just live with the inconvenience of a system reboot from time to time, but it's not an option for servers running critical applications such as a nationwide telecommunications network, an assembly line on a factory floor, or life-critical medical equipment.

Highly reliable redundant computer hardware has been available for years, but creating truly "crashless" computers has required very expensive hardware, specially modified operating systems, and carefully designed proprietary applications. However, US vendor Texas Micro says it's developing what it claims will be a virtually crashless server that uses unmodified Windows NT server software and off-the-shelf apps.

The company, which got its start in the '80s building ruggedised PCs for the rigours of oil exploration, says its servers will offer "Five-Nines" availability, meaning they'll be up and running 99.999 per cent of the time, which translates to a total of no more than five minutes of downtime per year.

Texas Micro, which intends to ship its servers by year's end, is employing a three-tiered approach to reach its goal.

The first is using its own high-reliability PC hardware, which includes a ruggedised design and redundant components such as power supplies, and puts almost everything in individual hot- swappable modules that can be changed without the need to power down the machine.

Next is the Intelligent Platform Management Interface (IPMI), a system management tool that combines hardware and software to automatically and continuously monitor server hardware. IPMI is designed to anticipate impending failures, as well as detect and recover from many failures as they occur.

Third, and the heart of Texas Micro's design, is System Directed Checkpointing (SDC) technology. A typical SDC system consists of two identical Windows NT servers, each equipped with a special communications board and connected by a cable separate from the main network. The hard drives of the second server are continuously mirrored to the master server.

The company says it can't say yet how much SDC will add to the cost of a fully redundant dual-server setup, but hastens to add that the hardware that system requires is relatively inexpensive. The high-reliability PC hardware needed, however, is another story. The company declined to comment on the additional cost of its ruggedised PCs over off-the-shelf servers.

Although Texas Micro will initially be marketing "Five-Nines" systems to its traditional customer base, the company hopes to be working with major PC makers to eventually make the technology available to servers in small-to-medium sized businesses.

Gazing at new hardware? Time to take a step backSo you've decided to dump your "old" system. You've gone and hired a consultant equipped with gold cuff links and a full set of titanium golf clubs, which he uses to lose against the CEO of your company. Because he's never seen a computer the colour of the one your company has, it's obviously time for another one. So the CEO calls the IT director into his office. "We need to modernise our outdated computer equipment," he says.

Companies still look at hardware as the most important part of a technology decision, but that's not where the real dollars are spent. When mainframes cost millions of dollars and took up huge warehouses, people acted differently.

Now, the hardware cost is practically insignificant, so the temptation to change platforms is stronger.

When I muse about getting a hot new model of car, my father and uncle say, "The old one still runs, right?" I tell them, "I must get rid of it!" just like my CEO counterparts say. But my relatives remind me that with a paint job, routine maintenance and better care, I can get many more years out of my current car.

Rattles and shakes are just indications of necessary minor maintenance, nothing more. Add storage, get faster processors as needed - that's all fine. But why change the whole platform?

Admire the new models. Take a few for a test drive. Just appreciate what you're driving now. And know when what you really want is a new toy, rather than a truly necessary change in your systems.


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