Branded PCs from the likes of Dell and Hewlett-Packard (HP) are so cheap now that it seems the white-box builder faces a struggle to compete. But the emergence of white-box notebooks and the continued willingness of SMEs to ignore branding suggests all is not lost for the box builder.
The key for the UK system builder industry is that the market is still fragmented. There are a wide number of options for SMEs in particular when it comes to sourcing kit, including retail, mail order and white-box resellers.
Companies such as Dell and HP are still gaining market share, and while the old adage that you never get fired for buying IBM is still true in corporates, the SME market remains an enigma to the large PC brands.
This does not necessarily mean SMEs are awash with cash for unbranded goods, but it does mean it is a more fertile sales ground for resellers with the skills to build desktops, servers and notebooks to order.
This 'fertility' has traditionally been put down to cost, but with the business community experiencing economic revival, there could be a fear that cost becomes less of an issue and therefore brands start to get a bigger look-in.
Distributors are not necessarily convinced. John Osborne, general manager of Computer 2000's (C2000's) PC components division claims that "system builders are doing well", and he bases this on that fact that he has seen the C2000 components business grow by more than 30 per cent in the past year.
"System builders today can offer the same quality and in some cases better support than the big brands," says Osborne. "Brand image counts in some customer segments, but certainly not all, hence the existence of white boxes."
Keith Humphreys, senior analyst at EuroLAN Research, is not convinced that white-box resellers have enough margin to play with to make it worth their while going head-to-head with branded desktops.
"Is it economic for white-box building? Notebooks are where it is at, and it's a surprise it has taken so long, but I'd still be nervous venturing into this territory," he says.
This is not an unusual stance given the roller-coaster ride that PC builders have faced over the past few years.
However, the figures from C2000 and the fact that there is a wide support network that involves motherboard and chip manufacturers, Microsoft and a host of specialist components distributors suggests this market still has legs.
It is not just about resellers not being able to compete in commodity markets either. Desktops were already a commodity in the mid- to late 1990s and system builders had to work hard to win business, even locally.
One of the saviours was the white-box server as demand for the internet and networking grew. Now it is the turn of the white-box notebook to offer system builders increased margin.
This opportunity has been exemplified by Ingram Micro's decision to launch a dedicated white-box notebook programme. The Build Your Own Notebook (BYON) channel initiative was launched in July as a response to what it claims is "the shifting trend within the white-box market from desktop to laptop PCs".
The initiative was unveiled to more than 70 resellers from across the UK with the sole purpose of introducing resellers to "an increased margin opportunity".
John Fitzgerald, general manager of Ingram's components division, claims the distributor is "a little ahead of the market" with white-box notebooks but that there is enough interest from system builders and resellers because "they make only single-digit margin on notebooks anyway".
He adds: "Unbranded is an opportunity to add value by custom-building notebooks to suit specific customer needs."
It is the same argument that resellers have been fed for white-box desktops, but, contrary to popular belief, notebooks are now much less complex because they have fewer components than desktops. The components themselves also are more robust, which will attract resellers previously fearful of failure rates.
"Two years ago building your own notebook was very expensive and would have to be done in a controlled factory environment to ensure low failure rates," says Fitzgerald. "Things have changed."
Ingram's BYON programme provides resellers with a notebook construction kit comprising a barebones AOpen notebook, including mainboard, thin film transistor display, touchpad and battery, and processor technology from Intel.
According to Fitzgerald, the programme also provides the platform for resellers to assemble notebooks from a pre-defined range of components from Ingram's numerous vendor partners, including Seagate, Kingston Technology and Microsoft OEMs.
There is also an online configuration tool, online training and instruction videos, dedicated sales support from the UK components division, warranty and online returns management.
"The message to resellers is flexibility and increased margin," says Fitzgerald. "SMEs are willing customers and there are opportunities in the government and education vertical sectors too."
This is a view supported by technology consultant Allan Shriver. "Branded PCs are only good for an SME if they add value," he says.
"Look in any high-street shop at the differences between HP, Dell and IBM. No one really seems to have a USP. It's the CPU maker and motherboard maker that make the difference to a PC. As a result, the white box does it for me every time; you can mix and match component parts to get the PC that you want.
"They are reliable and cheap enough to virtually throw away if they do go wrong, which is very rare."
Veteran white-box PC and notebook maker Centerprise International has been building kit for 22 years and notebooks for the past 12, so it is no stranger to the 'branded versus white box' argument, especially as it is also a Toshiba reseller and service centre.
Stuart Green, the company's strategic director, says the argument is simple. "A brand always comes at a cost. To establish and support a brand requires investment, and a large portion of the SME market is well aware of that," he says.
Centerprise is a great example of how a system builder can forge a market for its own branded goods while offering branded goods for customers that prefer to buy a known brand. Green sees the unbranded market as being as strong as ever, and Centerprise boasts an impressive client list that.
Naturally, you would expect the branded manufacturers to think differently, although Tony John, IBM's xSeries brand manager for the UK and Ireland, is well aware of the cost factor associated with the 'branded versus white box' argument.
"IBM's view is that there is still differentiation and value for customers in our server and client products that address the majority of the cost of IT - which is the management and support - using Xtended Design Architecture in our servers, and ThinkVantage capabilities in our client systems," he says.
"While white-box systems may seem initially attractive [with their low] initial purchase price, what customers are telling us is that they value facilities that make the computers more reliable, provide more proactive alerts of possible problems and allow customers to manage and update their installed systems better."
The builders' argument is that inside the box the components are much the same. Then it comes down to whether or not the buyer wants to pay a premium for additional technologies and services offered. In the SME market businesses tend to sit on both sides of the fence, depending on their needs.
IBM's technology drive towards greater notebook security, for example, may sit better with a business that has a lot of sensitive data with workers in the field, but this does not necessarily exclude white-box resellers. It is difficult to give a blanket definition of unbranded customers because they may buy branded too.
From a reseller's point of view it is about covering as many bases as possible and using the unbranded systems to support a larger product solution, such as a network. That's been the case for the past few years, anyway; it's just that now, more than ever, resellers can throw notebooks into the deal too.
This is where they can either offer customers cheaper prices or glean more for themselves in terms of margin. The key is quality. If system builders were not offering comparable quality, how has this market survived in the face of stiff competition from branded goods?
Osborne says: "Meeting the same standards as branded systems has been key to the survival of the system builder, and this is something that has irked direct vendors. Two years ago Dell forged a strategy in the US to sell unbranded white boxes to SMEs through local resellers using the slogan 'Doing Business Direct'.
"It based the strategy on the fact that many small businesses in the US treat resellers as outsourced IT providers and want systems built to order. Dell decided it could not do the same in the UK because of the different make-up of what is a more fragmented market."
But the threat of Dell and other direct vendors, some of which have come and gone, has always been a dagger dangling above system builders' heads. And the system builder market has survived, seemingly against the odds.
Why? The main reason is small system builders' ability to identify quickly and fulfil local SME markets without compromising on quality of product and support.
The network of component distributors has done much to help the system builders keep moving forward and remain competitive, and much of this has been driven by the likes of Intel, AMD, aOpen and Microsoft. After all, it is in their interests.
So in many ways the white-box market has carved a niche that has been based on differentiation, not just in terms of price but also in immediacy, more localised service and flexibility.
As has already been mentioned, the level of customer interest is impressive and is not isolated to small, local businesses. The public sector is a big buyer of white-box goods too.
"SMEs, education and the government are still the strongest markets, and some of the bigger players are doing really well," says Osborne.
"I expect the Home Computing Initiative to provide increased sales by integrators in the next 12 to 24 months. Notebooks are growing quickly, if not as quickly as they were, and this is a sector system integrators are working hard to develop."
The real winners are, of course, the component manufacturers. Intel was no mug when it became the first vendor to embark on a brand advertising campaign for an electronic component.
What this and other component advertising has done is open the market up, because it has given the IT buyer confidence in the components inside the boxes, making the brand on the outside less relevant.
What this helps to do is limit the fear factor that some businesses may experience over after-sales support and technical issues. The failure-rate fears are less serious now than they were 10 years ago, but they are still issues. Overcoming these is key to the success of selling white-box products.
"Components have become so cheap and reliable that if one fails after a while then that's probably just down to bad luck," says Shriver.
"Throw the part away and buy another. Only if you have built a PC that is upgradeable can you do this. Most warranties/guarantees of shop-bought PCs are null and void once you take the back or side off the case. Then you can 'grow' your PC/IT systems with the business needs."
With the market showing signs of recovery and PC and notebook sales still growing, there is still an opportunity for resellers despite the general decline in branded notebook pricing.
The initial surge in notebook interest last year, no doubt fuelled by the successful Intel Centrino chip, has now slowed. Unfortunately for notebook vendors and builders, Intel, which initially earmarked the launch of Centrino2 for the autumn, has pushed it back to early next year.
For white-box resellers looking to boost their lines with a highly improved offering this is a bit of a bind. However, everyone is the same boat, branded or otherwise.
The upgrade market is essential for reseller and system builder survival, but this is not limited to new machines. Upgrading existing machines has always been an important service.
"Upgrades are driven by the amount and size of data that users are handling," says Osborne. "One of our most consistent growth vendors is Kingston Technology, whose main focus is on memory upgrades. Users are crunching bigger and bigger files, resulting in the continuing need for more memory and storage."
This is welcome news for any reseller that wants to maintain a relationship with its customers, to keep them happy and keep them interested. This, after all, is half the battle.
AMD (01276) 803 100
aOpen (00 31) 73 645 9516
Centerprise (01256) 378 000
Computer 2000 (0870) 0603 344
EuroLAN Research (01344) 291 080
Hewlett-Packard (0845) 270 4142
Home Computing Initiative
IBM (0870) 542 6426
Ingram Micro (0870) 1660 160
Intel (01793) 403 000
Kingston Technology (01932) 738 888
Microsoft (0870) 6010 100
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