ANALYSE THAT: The wind of change

ANALYSE THAT: The wind of change

It has long been popular to characterise hardware, especially PCs, as a commodity. The word is used as a semi-insult to indicate there is next-to-no profit to be made from them, and playing in that space is a mug’s game.

The description is not strictly accurate, of course, because you cannot trade PCs as you can with true commodities. Nevertheless the cut-throat strategies of vendors to win the business can make the trading markets look pretty lame on occasions.

Hardware sellers have been hacking away at their price list for years, prioritising volume over profit just to stay in business. Corporate desktops now go for less than $1000 and flat-panel screens are thrown in for $400 — the price of a bulbous CRT.

IT chiefs who not so long ago bought a notebook for $8000 plus change now snap up machines for $2000 and a tip.

CIOs relish this environment; some even see it as a sport.

Two people told me independently how they had each pushed Dell dodgers from the Sydney Morning Herald across the table to an account manager and asked: “Why can’t you give me prices like these?”

On each occasion, the incumbent vendor buckled and dropped their prices.

Account managers at some of the major PCs vendors are reputed to even show prospects the prices paid by their biggest clients in an effort to convince them they cannot make any further concession on price; no doubt breaking non-disclosure and contract rules, not to mention the moral bankruptcy of such disclosures.

“The falling prices for PCs and notebooks have really taken the pressure off my budget,” said a CIO in the construction industry.

“The money I save on hardware, which is already allocated in my budget, is spent in other areas of the business. So, it is put back into the IT industry in another form.

“I realise bargaining hard inflicts pain on the vendor, but there is an unbelievable amount of competition, which is great for me. Vendors don’t have to sell to me if it means they lose money. They can walk away from a deal just as well as I can. The fact they choose not to is not my problem.”

This constant price plunge is one of the key factors behind the rebound in growth of the PC market.

Analyst firm Gartner released figures earlier this month showing that PCs sales had increased by 24 per cent in the previous quarter. Of course, what this data can never tell you is how many of these were actually sold at list price, or represented profitable business.

Current research of the Australian market indicates that these halcyon days of falling hardware prices are coming to an end. Vendors are starting to walk away from deals. One CIO said he was stunned when a HP account manager actually said he would not match the price and politely excused himself.

A combination of the record price of crude oil (a key component in hardware manufacture) plus a strengthening US dollar and rising component prices, are combining to put pressure on hardware prices.

One CIO I spoke to at a fast-moving consumer goods firm said he had told his staff that “the days of falling PC prices are over. We have to budget for an extra 10 per cent in the next financial year for hardware”.

Such an outcome would signify a cultural change in the IT industry should prices for PCs and notebooks start to rise and vendors hold their ground at the negotiating table.

The result is likely to be a significant increase in costs and some late tinkering with budgets for the next financial year will be necessary for those who feel the wind of change already. But how much of these price rises will be passed on to channel partners?

Mark Hollands is a principal analyst for ITR, a new Australia-focused research company for the IT industry.

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