A group of executives will gather today in a nondescript office more than likely in London. They will be discussing debt, return on investment, stock, assets, the integrator and the system builder sector. Most, according to sources, are likely to come away unhappy.
Today sees the creditors meeting for now defunct Watford Electronics, as revealed by CRN (Watford facing creditors gap).The firm owes about £5m to trade creditors and one distributor told CRN last week that he a doubtful of seeing any return.
Usually the subject of the system builder, integrator or white box builder market is generally avoided by some channel players, almost for fear of catching an ailment.
Over the past few years the sector has been more turbulent than others, culminating recently in the demise of what was seen previously as a giant in the industry: Watford Electronics.
However, the problems started long before this and many in the sector have struggled, as seen by the successive failures of Time, Tiny and Watford. Watford has subsequently been acquired by a firm called Globally Ltd following its administration (Watford Electronics is acquired by Globally). Watford acquired many well known system builder brands that had been struggling, including Demonite, Carrerra and Tiny before succumbing itself.
Time acquired Tiny Computers in January 2002 (Time buys Tiny assets) after the firm entered administration. Tiny’s sales had been falling 40 per cent year on year at the time of its demise. One immediate effect of the Time purchase was that Tiny’s stores and concessions were rubbed out – 80 concessions and 60 shops were dispensed with, leaving 150 Time stores.
At the time Andrew Hosking, a representative of Tiny’s administrator Grant Thornton, said in a statement: “Competition in the sector has been savage and consolidation inevitable. Tiny did not adjust overhead base in response to sales down some 40 per cent. In current market conditions we are delighted to have achieved a sale of the business as a going concern. This protects the interests of customers, staff and creditors.”
However, this delight was not to be fulfilled, because in July 2005, Granville Technology Group, Time’s parent company, went into administration with an £8m debt. In fact, between January 2005 and July that year, the company had been losing between £1m and £2m a month after posting a profit of £2.5m in its last reported year to June 2005 (Time out for Granville Technology Group).
The company had tried to grow in size, hoping that scale and geographical spread would make it more likely to survive. The Tiny purchase helped grow the size of the company, but a failed attempt to enter the European market certainly did not help, price deflation was another nail in the coffin and maintaining 80 retail outlets did not help either. After a six week hiatus, Watford stepped in and bought the assets and brands of Time and Tiny. (Watford makes Tiny announcement).
But once again, the market pressure then forced what had been seen as the saviour, Watford, into administration after 35 years in business. The firm currently owes £9.2m to creditors, including about £5m to the trade and although a creditors meeting has been set for today, creditors believed they are unlikely to see much return. Watford was bought almost immediately by Globally Ltd, a firm registered in the same building.
Watford’s strategy was risky; it relied on the brands that it bought having enough equity to keep sales up. Arguably, the brand value of the likes of Time and Tiny had already taken a few dents when the firms got into trouble in the first place.
A second problem, certainly for Watford, was that the company tried to add extra bits and pieces of business to its core product – PCs. By offering TVs and internet access, Watford appeared to be doing the right thing – slowly adding business that worked with what it already did – but in fact it was diluting what it did best.
When Watford first launched Redten, its internet service, it was aimed at filling a gap left by the axing of the governments Home Computing Initiative. The scheme centred on a broadband service created by Watford that was offered to end-users for £19.99 a month over a three-year period, with a free LG PC thrown in. It was marketed at companies that could then offer the broadband/PC package to their employees and Watford claimed that 100,000 people would join the scheme in the first year.
Other sources have suggested that the firm hoped Redten would save the company. Martin Prescott, managing director of VAR Red PC Services, said: “Redten was intended to be Watford’s lifeboat. The fact that redten didn’t take off as anticipated meant that Watford’s lifeboat didn’t save it.”
Jason Harcourt, senior research analyst at Context, said Watford’s demise was simply a sign of the way the industry was headed.
“There’s been a fair amount of consolidation in the industry and Watford was a bit of collateral damage,” he said. “There is some rationalisation going on at the moment and partnerships are being struck up. Channel players are reorg anising – for example, PC World Business’ reorganisation at the beginning of this year.”
But it is not that straightforward. Watford’s failure was also symptomatic of a deeper malaise.
Alistair Edwards, senior analyst at Canalys, said: “Watford was more than a one-off. We have seen what has happened to most of the big players in the UK for the past few years. The market is moving towards notebooks and local system builders can not compete. The big guys can use their volume purchasing power to give local players a headache.
“Watford ultimately ended up in a situation that local or national system builders hit. It was trying to be a system builder in a market that does not support the strategy. The economics of the business caught up with it. It was an established company, but not an A brand.”
This is echoed by the analysts’ statistics. According to Context, desktop and notebook PC sales are up year-on-year. In January alone, sales grew 12.7 per cent year on year when compared with January 2006 (see graph, bottom right).
The lion’s share of the market appears to belong to the A brands – Hewlett-Packard (HP), for example, held 30 per cent of desktop sales in January, after what Context described as a ‘freak’ land grab by unbranded and small vendors that took 60 per cent of the market in January. The notebook sector is very similar, with big brands dominating the market (see graph, bottom left).
On top of this, the market has changed inexorably. The recent and overwhelming popularity of notebook computers has had a huge effect on the desktop market. While whitebooks – system-builder-assembled laptops – have had a lot of support from both AMD and Intel, they are trickier to build and market than easily-assembled desktops.
Laptop builder Rock has managed to buck the commoditisation trend by aiming for the high-end of the notebook market, leaving cheap and cheerful laptops for the large manufacturers to make and sell. Rock customers on average spend about £1,400 per notebook, a far cry from the £300 notebooks sold by the likes of HP and Fujitsu Siemens.
Nick Boardman managing director at Rock, said: “You have to get niche or get out. Smaller system builders can’t afford to take a long term view of taking a hit on a product to keep customers. It undermines the market.”
While original design manufacturers and component vendors have worked hard to improve the supply chain and generally make life easier for whitebook integrators, the fact remains that it is the component makers who are pushing the market forward and not necessarily the channel or demand from the channel’s customers. A few companies, such as Rock, can carve out niches, but the fact remains that semi-bespoke products have great difficulty competing against mass-produced products.
“Local system builders have not moved into the whitebook market to the degree that players such as AMD and Intel had hoped they would,” Edwards said. “The only way many of them can survive is to focus on specific areas – I don’t want to say niches, but that’s what they need to do – go for verticals.
“Desktop has to be the way to differentiate – they have to offer things the big brands can’t. Look at verticals such as gaming and education. They need to do things that the big boys can’t do. They certainly shouldn’t compete in the low-end volume space – I just don’t see them being able to compete there.”
With increasing commoditisation and more price pressure from big brands, it makes sense to try other markets. Plasma screens, home entertainment, internet service provision and other consumer-friendly goodies looked like a good bet for system builders. In fact, they still do. The customers that system builders sell PCs to also like to buy these things, and system builders are in the right part of the channel to stock and sell these devices.
However, selling new lines can also dilute resources at a time when margins are being pushed lower and lower, and bigger players are encroaching. It seems that bigger system builders are stuck between a rock and a hard place. One way out is to enter new markets.
Boardman said Rock is already considering this. “Small form factor PCs are great products looking for a market,” he said. “We should be in a good position to go for Media Center products – it’s all about thermals and acoustics. But we’re scared of Sky turning us into the next Tivo.”
Harcourt said: “It depends on whom they are targeting with these new products. If the industry is going through transitional phases, perhaps it’s time to focus on core business rather than diversify too far into an area they might not have expertise in. Watford’s diversification possibly hindered its long term prospects.”
However, that is not to say that companies should sit still and wait to be steamrollered by big brands.
“System builders need to find a niche that is appealing to their core customer base,” Harcourt added. “They are trying to attract a new kind of customer. I would be very wary of diversifying into things such as TVs rather than IT equipment.”
While home entertainment would appear at first glance to be a great fit for the system builders, in reality many buyers go for recognised home entertainment brands.
However, it is worth remembering that it is not all doom and gloom. Harcourt believes there is still a good living to be made.
“There is still lots of headway to be made in traditional IT areas – multi-function devices, notebooks and the like,’ he said. “The lower end of the notebook market may be becoming commoditised. We are still seeing a lot of potential growth and it is not totally down in the low-end, either. There seems to be a fair amount of new business – laptop sales are not cannibalising desktop sales, but sitting on top of them.”
It seems that the component manufacturers are waking up to this as well. After all of the hoopla about whitebooks, it seems that small form factor PCs may be the next area that component makers push.
“One area that seems to be hopeful is small form factor PCs. Vendors such as AMD are looking to these as a way that system builders can differentiate,” Edwards said. “It’s a long way from the days when small players could compete with the A brands.”
Small form factor PCs have many of the benefits for system builders that notebooks offered on paper – they are more attractive than desktop systems and far more modular than notebooks, which typically break down into about seven different modules.
System builders have come a long way from the beginning of the PC industry. At present they are threatened like never before. Granville Technology Group’s attempt to get big failed. It seems that Watford tried to do the same and suffered the same fate. Only time will tell what the ‘new’ Watford will do.
System builders have also lost focus, concentrating on new areas of business when, hindsight shows, spending more time refining processes and ensuring that margins are maximised on business that the organisation has more experience in dealing with might have reaped better returns.
In the mean time, the consensus appears to be that system builders have to aim for small pockets of the market that large manufacturers cannot or will not go to, as well as specific vertical markets. Firms such as Rock, Zalman and others have made a successful business out of catering to more discerning tastes than the mass market. Generalists have suffered.
Finally, the upgrade cycle that used to push customers to buy new PCs when a new operating system (OS) launched seems to have ended. It is early days yet, but despite the marketing bluster claiming 20 million copies of Vista sold, the response to Microsoft’s OS appears – anecdotally – to have been underwhelming. It will be interesting to see what sales figures come out of the Vista launch period.
The system builder market is in a period of uncertainty. Trouble for another player – or further consolidation – would not be unexpected.
In an interview with CRN, Wendy Mars says Cisco and its partners are no longer having to arm-twist customers on the need for digital transformation
Vendor's announcements include AI-powered Microsoft Office, a move away from password verification and an alliance with Adobe and SAP
Vendor claims hackers are hijacking machines to mine for cryptocurrency
Nearly half of SMBs are planning to invest in digital workflows to reduce their paper-based processes by 2025, according to Quocirca