White Box a Slow Go For Distributors; Why Should OEMs Partner?

The white box market is going gangbusters, but distributors have yet to figure out how to capture a significant piece of the business.

At least one distributor believes getting support from OEMs would go a long way to helping it break into the market. PC makers, however, aren't convinced that's in their best interest.

Last November, Doug Antone, executive vice president of Ingram Micro Inc., predicted that a major PC maker would attack the white box market by the end of last year or beginning of this year, adding that the Santa Ana, Calif.-based distributor "is a very strong and viable partner to help it get there."

Discussions ensued between Ingram and the likes of Compaq Computer Corp., Hewlett-Packard Co., IBM Corp. and Toshiba America Inc., but none of those players has stepped up.

"There's still dialogue that's occurring as it relates to how those guys could go after this unbranded space, and some of them are considering sub-brands, some of them are considering different things, but to date there's nothing to announce," Antone says.

Some question how IBM could strike a deal to sell components to direct PC vendor Dell Computer Corp., and not offer a similar deal to a major distribution partner such as Ingram. But others say it isn't a clear-cut situation. "I don't see any reason for IBM to do it unless Ingram is going to give them the same economics, market coverage and advantages as Dell," says Mike Dubrall, principal of the Technology Channels Group, Pleasanton, Calif. "These are business people."

Even Tony Ibarg%FCen, president of Tech Data Corp., Clearwater, Fla., says he doesn't see anything wrong with the deal on the face of it. "I see no problem with IBM selling technology to Dell, but I am unfamiliar with the pricing structure," he says. "I am sure that if we committed to similar volumes and time frames, we would get similar terms and conditions."

IBM's personal systems group has no plans to get into white boxes,itself or with a partner,because there is very little margin left between its branded systems and white boxes, a spokeswoman says.

Compaq, on the other hand, hasn't ruled it out. "It's something that we're looking at, but it's nothing we'll act on until at least the third quarter," says spokeswoman Jean Alexander.

OEMs still aren't sure what they gain by getting into white boxes, Ibarg%FCen says. "On a white board it sounds interesting," he notes. "They have supply chains and purchasing agreements they can leverage to sell the same components without the brand,that is, without the cost of marketing. But in practice, in a world where you need to strengthen your brand and not weaken it, it's difficult to pull the trigger on that."

Antone agrees, "The single point in the way of most of the branded players is the fact that they all believe in promoting their brand."

Other distributors believe they don't need extra support from OEMs to be successful with white boxes. Pinacor can "absolutely" be competitive in the white box space without special deals from OEMs, says Anthony Cyplik, director of solutions assembly for the Tempe, Ariz.-based distributor.

Ibarg%FCen adds that "incremental brand manufacturer volume would help [Tech Data] to achieve lower costs, but it is not clear at this stage if it is essential for success."

Just how prosperous distributors can be in the white box market is still up for debate. Execs at all the distributors say they're doing well, but they decline to give unit or sales figures. "I think numbers are still fairly small, and that's why they're not being open with them," says Charles Smulders, senior industry analyst of distributor channels for market research firm Dataquest Inc., San Jose.

The white box market, as a whole, continues to outpace the regular PC market, based on the volumes of components being consumed by white box makers, Smulders notes.

NECX, a major seller of components and peripherals to white box makers, hasn't noticed big distributors making a dent in what is becoming an increasingly "bigger and bigger market," says Larry Marshall, COO of the $420 million company.

The distributors "definitely have the tools to have a significant impact, but they're going to need to balance that with their branded approach," adds Frank Cavallaro, vice president of sales for NECX, Peabody, Mass.

Larger issues that distributors must overcome include the conflict between their production of white boxes and their customers' production of white boxes. All of the major players claim that VARs have asked them to get into the business because they can do it more efficiently, but many VARs say they can do it better themselves.

"By moving into the white box market, [distributors] are competing with some of their own customers," Smulders says. "The question is whether the opportunity is great enough to warrant engaging in that sort of conflict. %85 Their cautious approach to this market is a wise strategy, because it is by no means clear they will succeed."

Distributors dismiss claims that they aren't in the white box market for the long haul,that they're only trying to pressure branded vendors to give them better deals.

"We remain very focused on working with key brand products, but to the extent that white box is 35 percent of market, we have to assume that it will continue to play a key role with customers, so we assume it will play a significant role in Tech Data's product line for the long term," Ibarg%FCen says.

"It is a very important segment of the business for us," agrees Pinacor's Cyplik. "Is it ever going to overtake branded systems? Probably not, but it does give resellers choice, and that's what's important."

Pinacor is so bullish about the segment that on April 19 it started building white box servers. "It's an Intel-based white box," Cyplik says. "Intel does the initial design, manufacturing and testing of the systems, and that [along with improvements and additional testing by Pinacor] puts it on par with Dell, Gateway and other branded systems." Pinacor's goal is to offer the boxes at 10 to 15 percent below direct vendors' prices, he says.

If Pinacor is successful with servers,and the distributors as a whole find a way to capture a significant share of the white box market,it might not be long before indirect PC vendors get worried enough to call Antone and others to find out how they can work together.

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