Falling hardware margins have become the main nemesis for builders of affordable, non-branded computing systems known as white boxes, according to industry conclusions released at the recent System Builders Summit, a white-box manufacturer trade show.
"The bottom-end margin of hardware is the biggest concern to system builders right now," said Jim Niekamp, the director of channel Web sites at Cohesion, a Washington-based research company that presented the detailed findings.
"It's true, we're buying IDE connected drives from overseas because the price point of many of the stripped down systems we manufacture can't take the impact of the more expensive SCSI connected drives . . . in the States," said Vernon Weiss, chief technologist at CompUSA-PC.
Niekamp said: "So what's happening more and more in today's market is that system builders are finding themselves forced to up-sell integrated components that add a greater margin to the overall purchase of the computer."
The key peripherals in the up-sale effort include, in order of their profitability, network and communication products such as routers, hubs and switches, storage and memory products, monitors, sounds cards, and printers, according to Niekamp.
In support of the up-sale effort, representatives from Hewlett-Packard announced a hardware integrator program that will provide discounts and cash incentives for their smaller resellers to purchase HP DAT drives and include them in their white-box offerings.
"It's like the old fast-food trick where they sell you a hamburger, ask you if you want fries with that, then make their real profit margin off the French fries," explained Richard. O'Connell, at HP's storage sales.
"With this new integrator program, you still get the DAT direct from your distributor; HP offers you additional rebates, and you get a dedicated support phone number that connects right to a live engineer, just like the larger OEMs have. It costs nothing. All we ask is that you install the DAT into the box and not resell it separately," O'Connell said.
But in an industry that sells more than four million units a year, Niekamp's advice to white-box system builders is to follow the path of the Web.
"The most successful system builders out here have moved to the Web model for additional revenue. The Web has changed business to the point that the profitability trend for end-user system builders is really in network equipment, and that's only if the system builder can sell an entire solution to their customers. There's no money in individual components," Niekamp said.