New World Order

A tier-two revolution is taking hold in the notebook and desktop markets with Gateway, Acer and Apple among the beneficiaries, according to CRN research.

"A significant and growing portion of our business is with tier-two manufacturers," said Rick Bolduc, CEO of Red River Computer, a Lebanon, N.H., solution provider. "They are more of the creative [companies], much more high-tech, with their newest products. They are the ones you really want to be focused on." Bolduc, in fact, considers Gateway one of his tier-one vendors. "They have been an outstanding vendor for us," he said.

The percentage of solution providers in the small- and midsize-company notebook market citing Gateway, Acer and Apple notebooks combined as their best-sellers has nearly tripled over the past year, according to the CRN Monthly Solution Provider Survey. At the same time, the percentage of solution providers in the small- and midsize-company desktop market citing Gateway, Acer and Apple desktops combined as their best-sellers has nearly doubled over the same period.

The numbers are striking. Specifically, the combined percentage of solution providers citing notebooks from Gateway, Acer and Apple as their best-sellers increased to 12.5 percent in May 2005, up from 4.9 percent in May 2004, according to CRN research. In addition, the percentage of solution providers citing the vendors' desktops as their best-sellers increased to 6.3 percent in May 2005, up from from 3.4 percent in May 2004.

The gains come with the old-guard tier-one players—Dell, Hewlett-Packard and IBM (now Lenovo)—seeing their PC market share in the United States decline slightly, according to research firm IDC. Between the first quarter of 2004 and the first quarter of 2005, Dell, HP and IBM saw their combined share of the U.S. PC market drop to 56.5 percent of the number of PCs shipped from 56.6 percent, according to IDC.

Solution providers say they are turning to tier-two vendors for a number of reasons, including higher margins and innovative channel programs. What's more, some of these solution providers say channel conflict from some tier-one players has played a role in the decision.

Jay Tipton, vice president at Technology Specialists, a 22-year-old Fort Wayne, Ind., solution provider, is now signing up with both Gateway and Apple because of his discontent with HP and Lenovo.

Tipton said he has experienced channel conflict with Palo Alto, Calif.-based HP and that Lenovo, New York, has been difficult to deal with in terms of getting configuration quotes. What's more, Tipton said, he has had to reduce his margin on HP PCs because HP's own Web site advertises the price of the systems at a lower level than the price he pays to buy them from distribution.

Gateway, meanwhile, also has recently courted Technology Specialists, said Tipton. "The tier-one vendors are out of touch with us," he said. "They don't go out in the sales trenches and see what is going on. There are too many muckety-muck layers of management. They have lost focus on what is important, which is closing the sale."

Gateway, after merging with eMachines and rebuilding virtually its entire upper management ranks—including the retirement of founder Ted Waitt last month—has emerged as a solid alternative in the channel. The percentage of solution providers citing Gateway notebooks as their best-sellers over the past year rose to 3.5 percent in May 2005 compared with 1.4 percent in May 2004, according to the CRN Monthly Solution Provider Survey.

John Marks, CEO of JDM Infrastructure, a Rosemont, Ill., solution provider that recently signed up with Gateway, said tier-two makers such as Gateway are poised to do some damage. "Some of the top-tier manufacturers have some challenges in terms of perception, channel conflict and margin," he said. "Gateway is showing a huge commitment to the channel with margin opportunity and support. It seemed like an easy decision to make to add them." One of the most attractive aspects of the Gateway program is the strong channel commitment with clear rules of engagement, said Marks.

Tiffani Bova, senior director of indirect sales and channel programs for Gateway's Professional series, said Gateway, Poway, Calif., has signed up 75 new solution providers in the past four months, bringing the total number of partners to about 1,400. Bova, though, objects to Gateway being called a tier-two vendor, citing what she calls the company's No. 3 status in the North American market. She says VARs are attracted to Gateway because of its higher margins, strong rules of engagement, channel commitment and solid products, and because Gateway is much easier to do business with than some of its bigger competitors.

"VARs are looking for an alternative," Bova said. "Sure, they want to make higher margins. But they don't want to be competed against. They are looking for protection in their accounts, and more often than not what I hear is they really want an ease of doing business that many other tier-one manufacturers don't have."

One of the more innovative aspects of the Gateway channel program is annual market alignment funds that can be used by the solution provider any way it sees fit, said Bova. Gateway has established an annual $1 million in sales threshold to qualify for those funds, which are typically only available to channel giants such as CDW. "This is aimed at solution providers that are not generally focused on by the tier-one vendors," said Bova. "These are the ones screaming for an alternative. They feel like no one is paying attention to them, and they move a lot of product."

The re-emergence of a tier two comes after an era of consolidation in the PC market, with a number of players either being swallowed up by bigger companies or just going away. For a couple of years following the merger of HP and Compaq, many solution providers said the consolidation left them with fewer alternatives and a notable loss of competition. But in the void, new companies have grown to become contenders for market-share growth and an embrace by the channel.

"I think our industry is a changing industry," said Maarten DeHaas, vice president of marketing and product management at Acer, San Jose, Calif., which has grown its reseller base to 7,000 in little more than a year, up from 1,200. "This is the dynamic which keeps it alive," DeHaas said. Acer has been mindful of the need for its channel partners to maintain a 10- to 12-point margin on hardware sales—even while aggressively dropping prices for much of the past year, he added. "That leaves only around 5 percent for Acer," DeHaas said. "Based on this, we have to make our operation work. At the moment, Acer is able to do this. This helps resellers to compete against direct vendors."

The percentage of solution providers citing Acer notebooks as their best-sellers over the past year has tripled, soaring to nearly 6 percent in May 2005, up from less than 2 percent in May 2004, according to the CRN Monthly Solution Provider Survey.

Pete Peterson, vice president of product marketing, systems and software, at distributor Tech Data, Clearwater, Fla., said Acer has done a good job of appealing to the sweet spot of the VAR market serving small- and midsize-business customers. "They have done a good job of expanding that customer base," he said. One of the more innovative aspects of the Acer channel program is what the company calls everyday low pricing, which eliminates the special pricing bids that slow down some other vendors, said Peterson. "Acer has done a good job of taking costs out of the business, focusing on the overall cost of delivery and in doing so they have eliminated a lot of redundancies, particularly around special pricing with distributors and resellers."

Acer has the benefit of several years of experience working with solution providers, one factor that has helped its acceptance, said Paul Giobbi, CEO of Zumasys, a Lake Forest, Calif.-based solution provider. "We've had a lot of experience and history with Acer, so we have a comfort level with them," Giobbi said. He said he believes the presence of a viable tier-two vendor in the IT space is "extremely" important to the channel because of the added competition, among other reasons.

Apple is another longtime PC competitor seeing a resurgence. The percentage of solution providers citing Apple as their best-selling desktop vendor stood at 3.2 percent in May 2005, up from less than 1 percent in May 2004, according to the CRN Monthly Solution Provider Survey.

Apple solution providers say the Macintosh platform is benefiting from a wave of viruses that have hit the tier-one PC vendors that use the Windows operating system. With Apple moving to Intel processors for all Macs by the end of 2007 (see story on page 10), Apple solution providers say they expect to see continued momentum.

"I've seen a surprising number of companies and people in the past nine months that are PC users and have approached us about switching over to Macs," said Michael Oh, president of Tech Superpowers, an Apple specialist in Boston. Cupertino, Calif.-based Apple's move to Intel processors also could give the vendor a big lift in market share, he added. "If Apple is able to add, in the next year, high performance and some sort of cool Windows compatibility, I think that's a formula for double digits [in market share]."

Another tier-two vendor that is moving to embrace solution providers is Toshiba, which launched the Preferred Partner channel program in April. Its challenge is the lack of a desktop line. "They only have notebooks," said David Florence, president of LA Tekkies, a West Lake Village, Calif.-based solution provider and Toshiba reseller. "That's very isolating. And their separation between the Tecra and business machines and their consumer products is blurring." He said Toshiba, Irvine, Calif., needs to offer higher margins on its notebooks. By contrast, Florence said, Acer's product margin for solution providers is much stronger.

It is not only Acer, Gateway and Apple that are benefiting from the tier-two resurgence. There are other players, including notebook upstart Averatec, Santa Ana, Calif., which is just several years into its business in North America. Averatec is on track to grow at more than 30 percent in unit shipments this year to 400,000 as it moves more of its business into the commercial solution provider channel.

At the end of the day, some solution providers say these tier-two vendors are doing a better job of helping them win in the marketplace with innovative programs and strong support.

The channel commitment from vendors such as Gateway is the winning formula, said Red River's Bolduc. Any vendor can enter the market, he said, but the key is realizing "the channel is absolutely critical for success."

STEVEN BURKE and RUSSELL REDMAN contributed to this story.