The big boys are hurting. IBM, Compaq, Dell and HP have been talking about the slimming margins on PCs for months and now, quite suddenly, something new has occurred. Growth has simply stopped. The industry is not at a complete standstill, but it has slowed enough to leave many in the industry desperately looking for new markets or looking for new ways to approach and revive old markets.
The once-guaranteed annual global growth of 20 per cent (and more) is somewhere closer to the 10 to 15 per cent range, while US growth is struggling to increase at all and could very well continue to decline according to analysts.
At times like this, the "depressed state of the economy" tag gets dragged out of its pigeonhole to be touted as the root of all evil. But the industry seems worried about something greater: saturation, consumer confusion as competing technologies arrive on the market. There is a decided lack of something, anything, to drive turnover.
"IT market reception is driven by a couple of big vendors bringing new, exciting products to the market," says Jeff Li, product manager for white-box manufacturer and services firm Pioneer. "The transition from Windows 3.0 to Windows 95 was a big jump and everyone had a good time. But vendors have delayed a couple of big projects, including Microsoft and its Windows XP special function operating system [due in October] which promises something new."
Microsoft denies delaying the launch of WinXP, saying it was always slated for the second half of 2001, but one could hardly blame the developer if it had. The truth is that the channel is finding it hard to top the value propositions of the Windows 2000 and Pentium III combination. Consumers are realising that they use fractions of a systems total functionality and are refusing to buy technology for technology's sake without a compelling driver. It has become a delicate balance of pricepoint versus attractive features, a battle that the Pentium IV is losing dismally.
However, many in the industry believe performance remains a key differentiator if the price is right. Frank Hsu, managing director of white-box vendor and integrator Synnex, says commercial notebook sales are far stronger than entry-level sales because below the $3000 mark every vendor uses the same components. "Technology still has to differentiate," he says.
Always one to shamelessly drive progress, Microsoft will do its best to kick-start the market with WinXP, having built demanding specifications into the new operating system including 1.5GB of available disk space and a recommended 128MB of RAM. "We are looking at the best WinXP experience being on a new PC," says Paul Roworth, product marketing manager of desktop Windows for Microsoft Australia. He fully expects XP to act as a leverage for PCs, computing components and peripherals sales.
IDC analyst Logan Ringland also remains optimistic, particularly in light of the three-year replacement cycle due to kick in again in 2002.
A return to the channel
Many of the high-end vendors are looking to wireless as the next killer application for computing which promises to bring about an era of renewed dependence on the channel, spurred on by the competitive efforts of Dell.
"Pricing is low, and will go even lower over the next six months," says Ringland. "Margins are at incredibly low levels at the moment, putting indirect vendors under more strain than direct. It is important that indirect vendors identify ways of adding value to their systems that effectively don't cost them any money."
In response to the price challenge by Dell, Ringland says IBM has set up direct PC sales over the Web that it then flicks to its partners for integration.
One may find it rather ironic to hear Compaq condemning the success of Dell's direct model, but then it would know. Compaq's corporate line this month is a "re-embracing of the channel" to feed the pending wireless boom.
"The PC is becoming an access device rather than a stand-alone tool," says Tony Bill, director of the access business group for Compaq Australia. "Users want to be connected to the home, office or business network anytime, anywhere. The way to achieve that is through Wide Area Wireless Networks."
While the PC will continue to have a place on the network it will be a decreased one. It will jostle with other technologies like personal digital assistants (PDAs), notebooks and mobile phones. Compaq is in the process of transforming its old tools for this new world approach, placing multiple ports on the back of its notebook screens to accept peripheral devices.
"The obvious opportunity for resellers [lies in] skilling in the wireless area," says Bill. "The opportunities to on-sell and up-sell around wireless are huge because customers don't have that skill in-house. They don't have the wireless capabilities and understanding yet. Where there's mystery there's money." Bill believes this window will last for 12 to 15 months, by which time the next wave of roaming mobility will have rolled around.
Already white-box manufacturer and services firm Protac is selling more notebooks than desktops, according to managing director Gary Jeny.
"Thirty per cent of the [Australian] market is going mobile," he says. "Overseas it's at 50 per cent. In Japan it's very hard to find a desktop, it's all Palms."
While everyone agrees the time is ripe for wireless, Li feels market practicalities will see it held off for a good six months while vendors invest in educational marketing and build up a frenzy of demand. "The last thing you want when releasing a new product is slow uptake," agrees Bill. "You've invested the huge dollars in getting it to the market and you want strong sales to recoup that."
In addition, Hsu feels consumers have to work through their confusion of multiple access devices. "People are still not sure how to synchronise their devices," he says. "They're confused as to which is the primary device. When this kind of insecurity occurs, people stop buying because they're scared of purchasing an obsolete technology."
The channel is changing
While alien wireless technology and vendor price wars boost the services game, the traditional relationship flow of the channel is undergoing a dramatic change. Customers are demanding a more tangible, closer relationship to vendors which, in turn, is forcing vendors to reinvent their relationship with partners.
Vendor partnerships will be based less on a rote model and more on "whatever it takes to get the job done", according to Novell Australia's managing director, Ashley Wearne.
Wearne says many pundits are incorrectly blaming this alteration on vendors going direct. "Vendors don't want to go direct," Wearne asserts. "It puts too much pressure on their resources."
He believes vendors are looking to sell solutions to the customer but lean on partners to fulfill those solutions.
This convolution of the channel may well spell the demise of shop-front resellers that are unable to offer any tangible value-add to the customer or the vendor. At the same time, it represents a healthy environment for networkers, integrators, consultants and specialist/niche resellers.
It is also seeing increased communication throughout the channel and involvement at all levels. Vendors are more open to letting dealers in on long-term strategies to ensure they have the surrounding support and skills set when they get there.
"There is a very conscious decision this year to achieve consistency and predictability in our strategy and involve the channel so that nothing comes as a surprise," says Bill.
To this end, Compaq has introduced tier-two reseller forums in addition to its existing tier-one forums to gather feedback and increase awareness of any changes so reseller's businesses don't stall.
While the current climate is probably one of the toughest in the last decade, it is one of the rare times when the big boys are hurting more than the little guys. It also solves the burning question, "Can you make money selling PCs?"
"If a commodity product is one where no-one can establish a differential advantage, then it would follow that a commodity business is one where no participant can obtain a differentiated business advantage," says industry commentator Bill Gurley in his article Above the Crowd. While the PC is indisputably a commodity product, the PC market is by no means a commodity business.
What's happening in white-box land?
- Last year's shortage of processors and hard drives, which crippled white-box manufacturers, has abated, allowing them to catch up on inventory.
- The pricepoint war between branded vendors is quickly eroding the advantage of the white-box market and threatens to continue unabated.
- The local white-box market accounted for 33 per cent of total PC sales in Q1 2001, or 158,000 units out of a total 475,000.
- White-box vendors typically sell less than 1000 units per quarter.
Leading branded PC vendors, Q1 2001
Leading white-box brands, Q1 2001
3. Total Peripherals.
4. Annabel Bits.