Laptop market leader Toshiba is already on its third cut this year, reducing prices in this latest round by up to 27 per cent. Coupled with the fact that the top five manufacturers have chopped their prices on MMXs since the launch of the Intel Pentium II for mobiles in mid April, there is a knock-on effect for the channel.
As Gary Kinzett, First Stop business development manager, says: 'It effects everyone. When the price drops and the dealer discount remains unchanged, margins shrink.' He adds that it forces resellers to look closely at their inventories and reduce costs.
Other resellers point to the fact that it effects their profits. Peter Crane, PSM marketing manager, says: 'The bottom line is that if you sell to a customer at, for example, cost plus six, the reseller makes more margin on hardware at #3,000 than #2,000.' He adds: 'Potentially, in the long run, if PC and laptop prices keep going down, dealers lose out.'
Simon Derrick, chairman of 2GL Computer Services Group, sees the price cuts as an inevitable response to the market and says resellers need to dramatically up turnover to take advantage. 'It's just reinforcing the need for resellers to realise considerable material year on year growth in turnover to maintain and increase profitability.'
Other resellers feel they are expected to cushion the blow by boosting the service side on orders. Andy Travers, managing director of Integrated Options, says: 'Manufacturers driving down the price of laptops will not create additional demand. It simply reduces the dealer margin, forcing us to explore alternative non-product revenue sources.'
Kinzett agrees, but says that, ultimately, the kit is only a lead into other areas - like value add. Channel players know it is pointless to reminisce about the good old days of 50 per cent margin on hardware, but there are those who can't help wishing they didn't have to rely on services so much. David De'Wessington, a consultant at Newcastle-based reseller Teklab, says: 'It's not so easy for resellers anymore. Teklab would like to do more hardware business, but due to things like price cuts, we're forced to go into other areas to survive - like services.'
It is more of a blow to companies with less service offerings to boost box sales. Of course, if it were only a couple of manufacturers, it would make their kit more competitive and resellers would sell more. But when it's across the board it does not do them any favours, only reduces margins in monetary terms. The continual reductions are not helped by the cost plus pricing method of doing business.
Although some of the larger resellers can get around the problem of price wars through the volume they sell, Eric Roth, manager of market information at TPLC, admits to hardware price cuts being 'quite a severe problem for us, especially regarding the cost plus basis sales are made on'. He says the constant downward price pressure is a problem and the way to get around it is through reducing holdings of obsolete stock and increasing value add. Roth comments: 'We have to aim to do more than provide hardware - services are important.'
Resellers understand that price cuts are a reaction to the market. With the launch of the Pentium II, manufacturers now need to get rid of excess MMX stock. Yet they still have to compete pricewise with build-to-order manufacturers like Dell, which do not have such an acute product backlog problem. As PSM's Crane puts it: 'One of the things in the PC market is that customers dictate price.' But manufacturers' assertions that they are doing resellers a favour by the cuts and they can make more margin on newly launched, top of the range products, is laughed at.
De'Wessington says: 'Customers don't want to buy expensive laptops because the technology goes out of date so quickly. If they want volume, they want bottom-end products because they are a cheaper replacement.'
Manufacturers blame Intel for driving down prices. Alex Pidgley, Toshiba marketing programmes manager, says: 'We've got a responsibility to provide the latest technology to resellers. But manufacturers also suffer and have to ship more volume to maintain profits.'
Katherine Sharp, business manager of IBM Thinkpad, admits resellers make less cash margin after hardware price reductions and have to rely on selling peripherals. She disagrees with De'Wessington, saying customers are more interested in buying the higher-end, latest technology products. She says: 'I don't think customers expect to keep up with technology for more than a year or 18 months .'
Howard Seabrook, research director at the Gartner Group, says the power lies with the manufacturers. 'There is a concentration of so much of the market in the hands of so few manufacturers. It is clear they have the power in the relationship.'
According to the Gartner Group, in 1996, 59 per cent of the mobile PC market in Europe was controlled by the top five manufacturers and in 1997 this had grown to 69 per cent. Seabrook adds: '1998 will be a year of price aggression in the laptop area.'
Price wars mean that to achieve the same profit levels, resellers have to increase unit sales or add more services. Either way it consolidates the market, with smaller hardware and software-led businesses suffering first. As Kinzett says: 'We're having to run faster to stay in the same position.'
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