And the brand played on

The market for white-box servers dried up at least six months ago, and one year from now, or possibly sooner, there will be little point in trying to sell so-called vanilla desktop systems either. This is the view of Philip Mitchell, managing director of IntraLAN, a relatively small reseller based in New Malden.

"A year ago it was easy to justify clones, because they were very much cheaper. A year from now it probably won't be worth making them up ourselves. We already refuse to do servers; that happened about a year ago," says Mitchell.

Resellers have, until relatively recently, made more money out of assembling their own simple, unlabelled boxes, than selling a standard Compaq, IBM or Hewlett Packard (HP) PC or server.

However, increasing competition and consolidation, and a concerted drive to reduce costs in the channel, have driven the prices of brand-name boxes so low that the additional cost of building the box is seldom worth the effort.

The predominantly western and Japanese brand-name producers have triumphed over the Far-Eastern components makers and the army of UK importers. It is time to say goodbye to the white box on the desktop. But what will this leave us with? A set of dominant brand-name vendors that will slowly but surely be whittled down to just two or three that will dictate the pace of the market?

In a sense we already have this situation, with Compaq and Dell clearly leading the way in the server and desktop space as far as industry-standard architectures are concerned. To some degree the market and the channel for PC products is at their mercy. Or at least, at their mercy and Intel's.

This does not mean that the pace of development will necessarily slow down. Competition between Compaq and Dell alone is intense. Also, it hardly matters for the reseller community how fast the technology moves on hardware, because margins have already been squeezed to the bare minimum. All that really matters is that demand for computer products continues, providing the potential for the sale of profitable services.

Boxing clever
For many resellers, much of their turnover still comes from box sales, and machines will continue to provide, at the very least, a catalyst for the support and services that third-party organisations offer their customers. It matters very little - or not at all now - whether the box itself is from Compaq or from an assembler on an industrial estate in South Croydon.

The burning issue for resellers is which grade of brand provides the most potential for profit and the least risk in terms of support and customer-card overheads. There is also the question of whether or not, by opening the door for the vendor to provide backup technical services direct to the customer, the reseller is not admitting entry to a wolf in sheep's clothing.

Mitchell is already making these calculations, and it will not be long before other resellers are compelled to do the same. "We are seeing quite a lot of kit come out now that is very cheap, as well as a lot of 'grey' branded product," says Mitchell. By grey, he means what the analysts would label tier-two vendors such as Tiny, Time and even Toshiba and Gateway.

The availability of these very low-cost systems with brand names that are recognised by the customer, if not as well trusted as tier-one vendor brands, causes an immediate problem for resellers that have become very used to building their own systems, because they are so inexpensive.

However, the maths is not that simple. As Mitchell points out, Compaq provides, on most of its range, more than just a box. It includes a lot of extras such as manageability tools and the CarePaq offering on most lines, which gives customers a guaranteed response within a certain period when a machine crashes.

The Compaq ranges cost more as a result, as do service products from IBM, Dell, HP, Fujitsu Siemens or any other vendor's product where service is on offer.

So is it worth building the machine if the customer is happy with a tier-two brand? This is a simple financial matter and, generally, the difference between the two is shrinking. However, there are still reasons for many resellers to build their own desktop units.

"The second-division brands are coming so close to us on cost that we are quite seriously wondering if it is worth it. The problem is when you get one vendor blaming the other for failures," Mitchell explains.

He is referring to the constant problem of neither vendor taking responsibility for the whole system. At least with a self-built white box, there is no doubt as to where the buck stops. IntraLAN still tries to build workstations or lower-end PCs for this reason.

But there is a further argument for trying to persuade the customer to drop the white box and go for a tier-one brand. "We can make between £100 and £150 on our own workstations, and that involves quite a lot of hassle," Mitchell says. "But when you make only £60 on a Compaq EP, one call and it's not worth it any more. Sell an EN and you don't get the hassle, but they cost about £300 more than the clones."

The EP range is very basic, and CarePaq is not available for that machine. So if there are problems, the reseller is shouldered with them. With the EN line, and other Compaq ranges that come with CarePaq, there is no issue with on-site maintenance support, provided the machines can be sold on that basis. Users do not complain as much, or at all, if a Compaq engineer turns up within four hours of a machine failing, says Mitchell.

Selling a machine that is as hassle-free as possible seems to have an increasing appeal to resellers that have been starved of margin on hardware sales. Jane Dennis, sales and marketing director at reseller 1-2-1 Euro Technology, says that with the pricing policies being adopted by the major manufacturers, it is not worth resisting the tide.

"It helps us if we have warranty repair through the manufacturer. Also, we tend to select brands so that we can offer a consistent package: servers, desktops, laptops and handhelds. Many clients want consistency across the board," she said.

Even so, the appeal of the white-box PC is still strong for the small and medium-sized enterprise (SME) market in particular. A reseller such as IntraLAN can still assemble and offer an unbranded box for a significantly lower price than it can offer a good brand-name box. As Mitchell points out, the difference could be as much as £300 per unit. A company installing 10 machines would save £3000.

Disappearing act
So while the decision is still not an easy one, and there is still room for white-box assembly, the opportunity to make money is disappearing, and Mitchell expects it to be gone completely within a year. With servers it has already gone, as assembling and taking responsibility for high-capacity storage arrays and business-critical servers at the margins offered is simply no longer worth the risk.

Another reason why the gate is shutting on white-box PCs is the growing importance of retail. In retail it is vital to have a brand name, says Gary Fowle, general manager of PC systems at Computer 2000. "There has been a seismic shift in the market. The space for the white box was in the systems-builder market, but they have been really struggling. Resellers predominantly stick to the branded product now."

He points to recent high-profile failures as clear examples of the cancer now creeping into the systems-builder sector. The recent closure of PC builder Sight and Sound last month was one of a string of failures over the summer, and more are expected.

Fowle expects a relentless attack on this market by the brand-name vendors. He is one of many in UK trade circles expecting a repeat of IBM's Aptiva-type strategy in the next few months. In the early 1990s, IBM launched a low-end brand that attempted to open up a market for inexpensive IBM-made kit that did not carry - and therefore did not devalue - the IBM brand.

Now Compaq and others are expected to try a similar ploy to kill off the white boxes and undermine the second-tier brands. With Compaq selling the very capable Notebook 100 line for just £699 (trade price), there is already stern brand-name competition for the vanilla vendors.

Retail is also a target area for the brand names, and it has become more important recently, says Fowle. "If you look at where the brand names compete, with the price of desktops continuing to fall, the professional market is declining and the home market is booming. Lots of vendors are now moving into that space and competing," he says.

In retail, he points out, unbranded product simply does not sell, although retailers have been trying. Dixons, with its Advent range, is perhaps one of the few to get anywhere, and white boxes including the Trigem Emachine are still being touted through retail. But sales of these machines will do little to revive the flagging market for white-box supplies in the UK.

Tough times
Component wholesalers and importers face some real problems now. Jon Atherton, general manager of Enta Technologies - a company that has built its entire business on importing low-cost, mostly unbranded or unknown label products from the Far East and selling them to systems builders - has seen a distinctly tougher market this year.

"A lot of dealers are buying brand now because they want peace of mind on RMAs [return material authorisations] and on technical support. It's a sell-and-forget scenario for them, and we are doing much more branded product now," he says.

The situation has been worsened by the down-scaling of production by Far-Eastern chip and component producers, he adds. "There is a CPU and Simm [single in-line memory module] problem in particular. The OEMs are getting full allocation, and distribution is not getting nearly as much."

Enta has also been building machines for its reseller customers, but even this is becoming difficult to justify in anything but the largest quantities, says Atherton. "We are only doing quantity deals - 10, 15, 20 or 100 with a roll-off period. There are simply too many people in the business and so many smaller businesses playing the game. Just in our locality there are five or six, and they can buy at almost the same prices as us," he says.

Charles Bows, strategy and communications manager at Fujitsu Siemens, says that systems builders and components traders can only expect the situation to get even harder as the major brands continue to apply pressure on the unbranded lines.

In addition, he says that we can expect to see further consolidation of the branded market as the major vendors continue to work on their cost structures and economies of scale. While value-conscious small firms may still buy white boxes for some time, ultimately, Bows predicts, there will be no hiding place in any market niche.

"Corporate companies will always require the security of buying from a well-known brand name that they can trust to stay around, while at the consumer end of the market it will follow brown goods where brand is king. The SME market will be the main lifeblood of the local assemblers for the time being, although they will become swallowed up by the larger companies or forced out of business as prices and margins become tighter," says Bows.

Con Mallon, assistant general marketing manager at Toshiba UK, says that the brand war is over and that in the IT markets of the future, it will still hold sway. "In the PC market the top five brands are winning. In 1994, 36 per cent of the market was accounted for by the top five brands. In 1999 it had risen to 45 per cent. The brands are winning and the rate of share acquisition has, if anything, gathered pace in the past few years in favour of the brands."

He may be right, but one could equally point out that 55 per cent of the PC market is not commanded by the top five brands. There is a myriad of other less well-known and localised brands among the 55 per cent, and the rate at which the top five have increased their share has slowed in recent years. It may have even reached its zenith.

When we do have new devices, Bows adds, the brand names will have the advantage. "Looking about five years ahead, we'll begin to see a move away from intrusive computing devices [such as PCs] to appliance computing devices. The major brands will again have the advantage because of their investment in R&D. This will enable them to be first to market with new products and leave the local and smaller vendors waiting to license the products," he says.

Brand will also be of central importance in the new and developing markets, says Mallon. With unfamiliar technologies such as wireless and mobile ecommerce, both corporate and domestic users will look for names that they trust. Large global-reach vendors will start to punch their weight in design, manufacturing and economy of scale.

He says: "To keep technology and innovation moving forward, companies need to build brands to help their business models to be viable, ie recover and recoup the cost of R&D. Where will innovation and change come from if price is the only consideration?"

Price may not be the sole consideration for many users, but the cost of selling and supporting unbranded products is going to influence the future of the white-box product as much as consumer-led pricing. With trade barriers slowly breaking down, and four or five global brands now dominating the mass PC market, there seems to be only one way that the market can go.

Conclusions:

• Brand-name PC producers are eroding white-box market share with competitive pricing and benefits, such as on-site maintenance.
• Second-tier brands have been established, putting downward pressure on white-box prices and forcing top vendors to become more competitive.
• As brand-name costs come down, systems builders are finding it harder to make money from white-box assembly and sales.
• Resellers are turning towards brands more and more, looking to cut out the cost of supporting the hardware break/fix warranty.
• Lower production runs on chips, memory and other components is making it harder for white-box builders to build systems cheaply.
• Major brand names are expected to launch a renewed assault on the lowest levels of the market with new names that do not carry the prestige and cost of their own established brand.