White is the new beige

White boxes have cleaned up their image and are now becoming a match for branded products.

The term 'white box' used to refer to the cheap-and-dirty end of the PC market. It suggested dribs and drabs of kit assembled in back rooms from second-rate components for the benefit of buyers who couldn't or wouldn't afford a 'proper' PC.

But times have changed. "Five to 10 years ago white boxes were significantly cheaper than the branded alternative, but what you didn't get were on-site service and other quality aspects," says Mark Walker, systems and enterprise director at distributor Ideal Enterprise Solutions.

"Now the price difference has narrowed significantly, and the fundamental quality of the products is very similar.

"White-box manufacturers such as Centerprise are achieving economies of scale and quality control procedures that pretty much match the brand vendors, while brands have outsourced much of their manufacturing to the Far East."

Centerprise, the UK's largest white-box manufacturer, can make 1,100 PCs a day, and later this year will be opening a second factory in Wales capable of building nearly five times that number.

The firm makes the full range of desktops, servers and notebooks, and says it can turn around a customer's order in about five days.

The tip of the white-box iceberg
This is just the tip of the iceberg, says Richard Peel, EMEA channel marketing manager at Intel.

"We reckon there are about 200,000 system builders and systems integrators in EMEA, making from one PC to tens of thousands of PCs a month," says Peel.

A third of Intel's global business last year was to white-box manufacturers, and since Intel is the dominant PC processor manufacturer as well as a leading white-box motherboard vendor, it is logical to guess that roughly a third of all PCs sold were white boxes.

Dell has been selling white boxes in the US since last August (it even calls the product the Whitebox), and confusion caused by the merger of Hewlett Packard (HP) and Compaq seems to have given white boxes a boost.

"The HP/Compaq merger did more for the white box market than people realise," states Andrew Kelly, chief executive of Anikti, a manufacturer of telecoms servers. "A lot of people with a Compaq allegiance were confused."

Speed and flexibility are two of the white-box vendor's main weapons, according to Centerprise's marketing manager, James Murdock. "We can be more nimble because we don't have to road-map our product range months in advance," he says.

"That means we can bring out new technology very quickly. It's available as soon as we can test it and get it out there. And we can attack new markets weeks earlier than tier-one vendors."

In a PC market where all vendors are increasingly moving towards build-to-order, this model gives the white box vendors an edge. "There's a large build-to-order element in the white-box market," adds Peel.

"The customer wants his own configuration and the small guys can provide it pretty quickly. Flexibility and speed give the advantage to the small player."

This flexibility not only allows white-box makers to steal a march on their competitors and launch the newest specs before heavier-footed brand names.

They can also guarantee to provide exactly the same spec - hardware components, software drivers - in each batch of PCs they supply to a customer, making support much easier.

And they can supply older technologies long after tier-one vendors have discontinued them, which can be a real boon to systems integrators keen to keep down the price of embedded systems and appliances.

"One thing I like about the white-box market is that you can specify exactly what you want, even if that's quite 'old' technology, so that you only pay for what you need," notes Kelly.

"That way you can sit down with the customer and decide the exact spec they need."

Some white-box servers are really well made, observes Kelly, with hot-swappable fans, redundant power supplies and the latest interfaces. "I think it's a reflection of the maturity of the white-box market," he says.

Walker maintains: "The value-add of the white-box vendor is the bespoke build. You never hear the word 'clone' anymore." Nor need you see a clone, in the sense of a squat beige box with panels and peripherals that don't quite match.

The value of the bespoke PC
Component manufacturers such as NEC are starting to offer a bespoke service to provide colour-matched products, such as disk-drive fascias in small quantities, allowing minor manufacturers to produce attractive and distinctive PC designs.

The PC vendor can order a thousand bezels (i.e. drive bay cover) for, say, DVD drives at a couple of pounds each, which are then stored at the disk-drive manufacturer's factory until the PC vendor orders some of the actual drives.

The bezels are then fitted to the drives and the units are shipped out. Thus neither the PC vendor nor the drive manufacturer makes a big investment in bespoke stock.

"As long as we've done the preparation work by making the bezels, we can put the units together within a week," claims Andrew Wyllie, commercial manager at NEC.

"It means no one is overly exposed, and a small company making small numbers of systems can offer a PC that looks more professional." Soon NEC will be offering custom-designed white-box versions of external drives.

The other main attraction of white boxes is, of course, price. Although the gap has narrowed in recent years, white-box vendors know they must continue to undercut tier-one prices to compete, and they can afford to because their advertising and marketing costs are lower.

In addition to lower unit costs, white-box pricing can be more flexible. Branded PCs may not have official resale prices any more, but canny buyers will know what a particular model is selling for, and this 'unofficial RRP' is difficult for the reseller to exceed.

Being a white box "adds a huge amount of flexibility to the margin, which is far better [than branded hardware] in most cases", enthuses Murdock. "A lot of resellers can make 15 per cent-plus, before they start adding extra services."

Walker says: "If you're in control of your own spec, that spec doesn't necessarily have a defined street value, so the small guy can retain more margin."

Margins can be even better if the PC is not priced separately but included in the overall cost of a larger system, because customers may never realise that the machine cost the reseller a lot less than a branded equivalent.

In this situation, resellers can make 25 per cent margin on a white-box server. It really depends how much margin you want, and how good a deal you want to give your customer: are they a new prospect whose business you want to win by keen pricing, or a loyal customer who will pay more for the good service they know you can provide?

There are plenty of opportunities for resellers to add value to white-box kit, including bundling software and peripherals, servicing and repairs (often using components from the manufacturer), warranties and even installing extra hardware.

While many resellers buy their white boxes ready-made, the easy availability of commoditised PC components means it is possible to build your own.

"Anyone with original equipment manufacturer-qualified staff can build PCs," explains Kelly. "Instead of buying built-to-order kit, why not build to order yourself?"

White box recipes for resellers
The secret, Kelly adds, is to know the "recipes", that is, which chassis, motherboards, processors and Ram modules are fully compatible, and the correct sequence in which to assemble them.

Once these components are working in harmony, adding the remaining elements is easy. Component vendors such as Intel run comprehensive training courses covering hardware assembly.

You will also need an anti-static environment to do the work in. If there is no brand name on the front of the box, it is all the more necessary to make sure there are brand names inside it.

So white box assemblers should ensure they use high-quality branded components, and avoid cheap clones and grey imports which can prove less reliable and add to the cost of providing support.

It is advisable to ensure that components can be upgraded later, as replacement cycles lengthen (to four to five years rather than three) and customers want to prolong the life of their kit.

Kelly also recommends that assemblers barcode and log all of the components, to prevent unscrupulous customers swapping parts around and pretending they have failed.

Branded software can also lend authority to a white box. "Working with credible software vendors is a good way to sell your own servers," advises Kelly.

The most enthusiastic buyers of white boxes are small and medium-sized enterprises (SMEs), followed by government organisations and the education sector.

The obvious factor is cost, coupled perhaps with the reluctance of canny managers to part with their hard-earned cash to pay for some big manufacturer's brand advertising.

But SMEs in particular are often keen to deal with other SMEs, especially if they are local.

"In the SME space, there's the opportunity to provide a tailored solution that's just as reliable and effective as a branded system, and will be built and supported by a local supplier," explains Rob Epstein, former general manager of the PC components business unit at Computer 2000, now senior OEM account manager at Microsoft.

"For many smaller businesses that's more comforting than having to depend on the call centre and support network of a massive multinational headquartered thousands of miles away."

Independent advisors to SMEs are not shy of recommending white boxes.

"I've seen own-brand PCs as good as or better than big-name machines," observes Stan Tatko, ICT and e-commerce advisor at government-sponsored consultancy Business Link for Northumberland.

"If a reseller's prepared to support a system, he must have faith in it."

Corporate customers remain more attached to brands. The old adage that "you'll never be sacked for buying IBM" (or, these days, Dell or Compaq) still carries weight, and many firms feel that a brand-name PC on the receptionist's desk gives them more kudos.

But some corporates buy white boxes to rebrand with their own name. What bigger compliment could a white-box vendor have than to see a multinational's own logo reverently applied to its kit?

"Corporates buy white boxes so they can control not only the cost but also the specification," observes Epstein.

"It's not always easy to adapt the options available - even from the biggest brand-name vendors - to meet the particular needs of a technical, research or development requirement, for example."

Most of today's buyers have had a string of previous PCs, and are well aware that most desktop and server machines are assembled from a standard set of chips, disk drives, graphics cards etc.

"We've had no problem using own-brand servers," Kelly maintains. "Eighty per cent of customers tell us they don't really care about the make of the server as long as it has the right spec."

According to research for vnunet.com's sister publication CRN by analytical direct marketing firm SpikesCavell, in April 44 per cent of SMEs had no preference when it came to buying desktop PCs, a figure which had grown slightly since the start of the year.

Among the smallest firms, the number was 66 per cent. SMEs are not much more choosy about laptops or servers, where the 'no preference' figures were 37 per cent and 35 per cent respectively.

When it came to monitors, brand indifference was huge, with 61 per cent of SMEs saying they didn't care. Across the whole indirect PC market, research firm GfK found the share of the top five brand vendors had fallen from 49 per cent to 44 per cent from January 2002 to January 2003.

This is not to say that selling white boxes is easy. "You have to work a bit harder because you don't have the brand name behind you, and you can't sit back on your laurels because you don't have any," says Murdock.

"You have to ask yourself, 'Can I market this product effectively, or is it easier for me to sell a brand that has spent $2m promoting itself?'"

For a reseller dealing in white boxes, own-brand means just that, because the reseller's own good name is on the line. "A brand tends to get a reputation very quickly, whether good or bad," states Murdock. "It encourages you to focus."

If you are really keen, Murdock adds, you can promote your own brand like a real brand, getting it reviewed in PC magazines and so on. He says it is common for resellers to give their sales people higher incentives to sell white-box kit because of the better margins.

Walker is sceptical about the build-it-yourself route, arguing that back-of-the-shop PC assembly in small volumes can hardly be cost-effective when both white boxes and branded PCs are now so cheap.

Margins are so thin that many resellers do not rely on hardware sales to make their profits anyway, Walker suggests. "They should conserve their real energy and sales effort to do something more profitable," he says.

White-box vendors are here to stay, however. "Everyone predicted that as the A-brands fell in price, the white-box community would wither and die, but that hasn't happened," says Walker.

"The successful ones have become bigger and better, and are virtually indistinguishable from branded PC companies."

CONTACTS

Anikti (01444) 872 500
www.anikti.com

Centerprise (01256) 378 000
www.centerprise.co.uk

Computer 2000 (0870) 060 3344
www.computer2000.co.uk

Ideal Enterprise Solutions
www.ideal.co.uk

Intel (01793) 403 000
www.intel.com

NEC (020) 8993 8111
www.nec.co.uk