CRN Interview: Intel's Steve Dallman

At the Intel Channel Alliance Summit IV meeting held Tuesday in Portland, Ore., Steve Dallman, Intel's director of North American distribution and channel marketing, sat down with Joseph F. Kovar, senior editor at CRN, to discuss gray market--Intel calls it "open market"--distribution, and pricing issues in the channel.

CRN: I was wondering if you could update us on the gray market for Intel's processors or other products? How big an issue is the gray market?

Dallman: We've taken a pretty strong stand on it because it's our belief it ends up hurting the smaller reseller more than what some people believe.

Some people would say it actually helps them because they get a lower price. [Yet] when you look at the drivers behind the open market, what you actually see is a vendor or supplier who suddenly at the end of the quarter will cut a price in order to make a number. ... That same supplier will then delay a price move that it could have provided to its customers rather than to [the broker].

The other thing that happens is inconsistency. You [may have a] solution provider who is trying to plan a business, sell into a school district, having to quote 12 to 16 weeks ahead of time. And with this constant whipsawing of the price, he isn't going to know what to quote. ...

The other thing that it hurts is the resources that companies put in place to support the channel. There are several suppliers today that have cut back dramatically on their sales forces in North America because they found that 80 percent of their sales are going to 10 or 12 guys. And they decided to make that their channel. Well, those 10 or 12 guys aren't integrating anything. ...

[But we see some] good news to an open market. So when companies overbuy, it gives them a place to move some excess product, so they don't have to write down things. It does, for very, very small countries or suppliers, maybe make parts available they otherwise can't get.

CRN: What is the level of open-market sales Intel is seeing right now?

Dallman: I wish I knew. It's really hard to say how much business is in the open market. ... My opinion is, from Q4 of last year, it's dropped substantially.

CRN: Because . . .

Dallman: We've tried to call the customers and talk to them. The IPD [Intel Product Dealer] program pays a lot of benefits to our customers. ... We tell them that when they're in the program, they buy a CPU, it goes through one of our authorized channels, they get a rebate, a percentage that varies from processor to processor, to help balance out what they could buy it for and what one of the larger accounts could buy it for.

A lot of customers complain the larger guys get better pricing, or the larger guys have better availability. But with our program, we're better able to level the playing field in availability and make the pricing much less of an issue.

In addition, we give them Intel Inside benefits when we buy through our authorized channels. ...

CRN: Going forward, do you see the amount of open-market sales growing or decreasing, and at what rate?

Dallman: I think it'll get to a balance. My general feeling is that there is a 10 percent plus or minus open-market flow that will always be there. ...

CRN: And Intel doesn't mind that?

Dallman: It's not that you mind or don't mind. In some countries, the open market is considered something that you really, really want to have and do. So you really don't take steps to preclude it or make it so it doesn't happen. What you really do is take steps to prevent fraud from driving it. ...

It's my opinion that a natural state of things is there is a 10 percent ebb and flow that's needed just for inventory balancing for people who buy too little or buy too much.

CRN: How many distributors has Intel cut over the last year or so because of open-market business?

Dallman: We've never cut anybody because of them selling into the open market. We have nearly all the same distributors that we had a year ago. Some of the distributors have elected to focus in different segments, like some focus on a high value-added segment.

CRN: Rather than cutting, has Intel changed the terms of the agreement with any of the distributors because of open-market activities?

Dallman: No. They've always made us very aware of the open market. One of the biggest things we've done that's really helped is we have worked really hard with the distributors to both educate and understand what this customer base is looking for. And in some cases, they weren't always providing that [information]. Now I would say that the vast majority have been providing it.

CRN: What kind of shortages are there now?

Dallman: We have six or eight distributors. Two of them may be out [of a product], and the rest are OK. But the customers like to call any distributor and be able to get it and not have to make multiple calls--despite their making multiple calls as part of their business practices. And I noticed a couple of motherboards that were a little short. I looked at that and said, 'Well, we screwed up on that one.' We expected a transition to one product, and customers stayed with another one. It takes us a couple, three weeks to correct that.

Technology transitions really makes forecasting a lot harder. Not only do you have [questions like] is the market going up, is the market going down, is it staying the same, you also have how quickly will [customers] move from one product line to another, from one chipset to another chipset.

We keep a good supply of CPUs. With the investment we made in capital expenditures in our fabs, we've been able to reduce the reset time in a fab. [Years ago], if you were short of something, it took six to nine months to fix. Now we have our fab reset times for CPUs, I think we're pushing about four weeks. There's a goal to get down to one or two weeks by the end of the year. And that's a phenomenal change.

CRN: What is Intel going to do in terms of getting vendors to get more build-to-order white-box notebook PCs into the market?

Dallman: I wish we were big enough to be able to fix that instantly. ... I can remember long ago, when the first motherboards came out, all of them were different configurations and standards and patterns and things like that. Every chassis was different. But over time, as the volumes grew, the natural order of things was to become more standardized, more modularized.

We can certainly influence the size of the CPU or the module space that needs to be there. But we can't influence the rest of it.

My opinion is that as more and more whitebooks are built, more and more vendors are going to look at what modules and standards are needed, and we'll see an overall growth in standards across the industry, which I think will make everybody more flexible and more competitive.

CRN: Is Intel looking a ways to level the pricing between the large OEMs and smaller integrators?

Dallman: We've tried to make those two price points as competitive relative to each other to the point where they're probably not swinging the cost of the PC one way or the other.

One of the ways we've done that is by including the fan with the CPU--it takes out assembly steps. [Also] by providing a three-year warranty to customers, by expanding the three-year warranty to the motherboards, by putting the ICR--the Intel Channel Rebate--in place, by extending the Intel Inside program potentially to thousands and thousands of customers, and changing some of the things in [such programs] so that it was more compatible with the kind of advertising that [partners] have done. The additional training that we do, the Channel Caucus we do twice a year where we actually have 10,000 people that came.

CRN: Have changes in the way AMD is competing with Intel made it easier for Intel to make sure prices don't fall as quickly as before?

Dallman: You know, I don't think we pay attention to that. I don't. We try to move our prices at set periods of times, and we tell the world when we're going to go do that. It has absolutely nothing to do with the competition or any competitor on any product line.

There are some suppliers that do that, and they just get into a reactive mode. The feedback that we've gotten from the resellers, the product dealers and the integrators is that it destroys them. They lose all predictability of when they can price, when they can quote, [and] their inventory suddenly becomes obsolete.