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UPDATE: Channel reaction to IBM's highway to Dell

UPDATE: Channel reaction to IBM's highway to Dell

"It's bad management for resellers in the year 2001 to be getting upset about vendors cutting margins on boxes."

Tony Iannuzzelli, managing director of Sydney-based IBM reseller Vertex Technology, hit the nail on the head in the wake of IBM's new pricing structure.

The company has scrapped its estimated street price (ESP) and general reseller price (GRP) models in favour of a flat Web price advertised on http://www.ibm.com/au. Resellers hoping for straight box dropping will now receive a flat 7 per cent margin.

IBM has now made public its aspirations to compete directly with Dell's online business, and make steps to recover its number one standing in the PC sales race. (Recent IDC figures show IBM slipped to second place in Q4 PC sales with 11.4 per cent market share behind Compaq's 13.2 per cent.)Faced with extremely competitive PC, notebook and server markets, IBM is at pains to explain it must reduce margins in line with market demands.

According to IBM Personal Systems Group general manager Philip Bullock, the company is responding to market dynamics to remain competitive in the corporate reseller, retail and direct sales models.

"We have to make ourselves more competitive so the customers come in," Bullock said of the online strategy.

And, surprisingly enough, the channel has copped the new Web-based pricing model on the chin.

Unlike the furore created by Compaq's direct sales plans of 1999, few resellers in contact with ARN expressed outrage.

Vertex Technology's Iannuzzelli said he had expected the move for some time and has already adjusted his business model to rely on services.

"Any reseller who is dependent purely on box moving should see the writing on the wall," he said. "It's very difficult for IBM to make money from value added resellers when there is no value."

Mark Johnston, director of sales at IBM premier partner Synergy Plus, is also understanding of the company's new pricing model.

Given that the Special Bid option remains open for deal-specific pricing, he remains happy with the status quo.

"If it's a standard deal and there aren't huge quantities involved, the margin is 7 per cent and I don't have any problems with that."

In addition, he believes the approach has helped clear the air over the real estimated street price.

"It's nice to know where we are at because you never knew what the real street price was," he said.

And the real street price, or consumer understanding of pricing, is exactly what IDC believes the move is all about.

IDC market analyst Reuben Tan said consumers now know the advertised Web price will be consistent regardless of supply from IBM or reseller where Special Bids are not involved.

"We see this as a push towards the importance of the Web as a direct channel. IBM wants people to think of them as value for money," Tan said. "It's more of an attempt to change customer perception."

However, not everyone is impressed. One corporate reseller who asked not be named said the Web pricing scheme has put a halt to any proactive IBM selling on its part. "It's not impressive from our perspective," he said. "There will be no proactive selling."

With discounts for government business down to 5 per cent with an extra 2.5 per cent added for resellers, the reseller said the only good news was that there are other vendors to choose from.

Meanwhile, a non-IBM reseller described the 7 per cent margin as a "tactical error" at a time when other vendors still offer much higher incentives.

According to an independent report into comparative reseller and distributor margins at Compaq, HP and Toshiba, the margin game is still looking healthy if you pick the right vendor.

But according to IBM's Bullock, comparing margins is a moot point when 80 per cent of its enterprise channel partners -- from which it derives the majority of sales -- still use its Special Bid program.

In addition, he claims the majority of customers use the Web for research purposes only and use IBM's Teleweb call centre to actually conduct the transaction. What's more, 70 per cent of calls to IBM are referred to resellers, he says.

"Most resellers add value to the technology," he said. "Let's not argue over margin."

Have your say. Send a comment and vote in our online survey to tell us how IBM's new flat 7 per cent margin effects you.


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