Stayin' Alive? Intel's Plan To Resuscitate The PC System Builder Channel


At the 2013 Intel Solutions Summit in March, top executives at the world's largest chip maker took the stage in Los Angeles to give their best Mark Twain impression. Reports of the PC's death have been greatly exaggerated, they told the audience of solution providers and system builders.

They tossed out positive figures and forecasts and did their level best to infuse the crowd with optimism about a coming PC refresh and even modest growth for desktop PC shipments. With calm resolve and infectious enthusiasm, Intel officials repeated the same message over the course of the event: Times will be tough in the first half of this year, but the PC market will bounce back in the second half -- and so will Intel partners.

But behind the scenes and underneath that confidence and resolve was anxiety about the future of Intel's system builder channel. Even Steve Dallman, general manager of Intel's Worldwide Reseller Channel Organization and one of the biggest champions of the PC and the custom-system channel, confessed his trepidation.

"I'm ravenously concerned. Ravenously concerned," Dallman told CRN. "I don't think the desktop PC market is going away, but I'm worried about the channel's involvement in that space."

Despite Intel's upbeat predictions for PCs, almost all other industry reports about the market are dismal. A few weeks after the Intel Solutions Summit, research firm IDC reported a 13.9 percent drop in worldwide PC shipments for the first quarter -- the steepest decline the firm has ever reported. That gloomy report was followed by a similar forecast from Gartner.

To be sure, lots of PCs are still shipping -- more than 300 million units worldwide this year, according to IDC estimates. They also carry a substantially higher price point than tablets, of which 190 million units will ship, according to IDC forecasts. But while tablets are growing at a rapid clip, the PC market is shrinking. At the same time, the white-box PC market is dwindling; at one point, CRN research estimated that white-box PCs made up roughly one-third of the North American computer market 10 years ago, but that figure has fallen over the past decade. In its first-quarter report, IDC said the white-box market experienced a "surprising and worrisome" level of consolidation, according to David Daoud, IDC research director for personal computing.

Stocks for major PC manufacturers took big hits following the Gartner and IDC first-quarter PC shipment reports, and talk of the "post-PC era" accelerated. When Intel reported its first-quarter earnings in April, the company's PC Client Group reported a 6 percent drop in revenue year over year. While that figure was far less than the steep PC declines reported by IDC and Gartner, it still wasn't good.

Nonetheless, Intel is as defiant as ever. The chip maker this year is rolling out a plan of attack to get its PC business, particularly in the desktop space, moving again. Some system builders, however, are wondering if anything can be done to postpone the inevitable.

"Every year I see fewer and fewer guys in the custom PC business," said Glen Coffield, president of Smart Guys Computers, a Lake Mary, Fla.-based system builder. "There's just no money to be made in hardware now."

KEEPING THE FAITH

Intel used its Intel Solutions Summit event as a full-court press to restore partners' faith in both the PC market and Intel's ability to help its system builder channel.

C.J. Bruno, vice president of Intel Americas, told the audience of Intel partners that despite all the rhetoric about the death of the PC, the market was poised for a major refresh. Specifically, Bruno said Intel has identified more than 106 million PCs in North America alone that are at least four years old, many of which are running Windows XP. Bruno said the market is ripe for new kinds of PCs, from all-in-one desktops with touch-screen support to Ultrabooks with voice- and facial-recognition features.

"We have to wake up the buyers and make them aware of all this innovation," he said.

Kirk Skaugen, corporate vice president and general manager of Intel's PC Client Group, also told conference attendees that desktop PCs weren't going away anytime soon. "Even a category that's seen as dead is alive and well," Skaugen said.

As far as tablets go, Skaugen said they have only delayed new notebook purchases. In other words, tablets haven't cannibalized PCs but they have pushed new purchases back. According to Intel's internal research, the majority of PC users it interviewed that purchased tablets recently said they are still planning to refresh their PCs.

Intel also outlined its game plan for Ultrabooks, which will soon be based on the company's fourth-generation Core or Haswell CPUs and will ship with touch-screen displays. For system builders in the desktop market, Intel's plan is fairly simple: all-in-one (AIO) desktops with touch screens. The company is pushing its thin mini-ITX motherboards for AIO systems in the hopes that system builders will embrace the form factor and help convince customers to upgrade to the more attractive touch-capable systems.

Skaugen told conference attendees that demand for AIOs is skyrocketing , and Intel's own data backs up that claim. According to the Santa Clara., Calif., company, shipments of its thin mini-ITX motherboards in 2012 increased 10 times over the previous year's shipments. Intel first introduced the boards at Computex 2011, and since that time OEM component makers such as Gigabyte and ASRock also have embraced the motherboard design and released their own variations.

Jeff Davis, D&H Distributing's vice president of sales, said the Harrisburg, Pa., distributor has seen major growth around AIO desktops and expects more component options, from cases and chassis to motherboards, to hit the market this year. "I think you'll see a lot more choices soon," Davis said. "It's a very hot area."

Intel's thin mini-ITX motherboards aren't just being used for AIO desktops; partners such as Sherlock Systems in Buffalo Grove, Ill., are using the new boards for point-of-sale (POS) systems and digital signage solutions. "Digital signage has been a very strong area for us," said Joe Firoita, director of sales and business development at Sherlock Systems.

But can AIOs alone turn the tide for system builders in the desktop space? Bruno said at the Intel Solutions Summit that he sees a big opportunity for a PC refresh because older PCs don't deliver the same kind of experience to customers as slimmer, faster touch-based systems. Build it, Intel believes, and they will come.

However, to be successful in resurrecting the PC, Intel will have to convince people like Pat Taylor.

'THE PC MARKET IS GOING DOWN'

Pat Taylor is president of NASBA, or The Association of Channel Resellers. If you're wondering why the acronym doesn't match the words, it's because Taylor changed the name of the organization -- NASBA used to be the North American System Builder Association. The organization is a for-profit association that acts as a buying group for its reseller partners and negotiates pricing deals with vendor and distributor partners.

Taylor bought NASBA, which has around 3,000 members, about four years ago. Prior to that, he owned his own solution provider business, Proactive Technologies, for 10 years. As president of Intel's North American Channel Board of Advisors from 2007 to 2010, Taylor had a bird's-eye view of Intel's business and where its biggest market was headed.

He didn't like what he saw: PC prices were falling, and margins were falling even further, yet too many VARs stubbornly refused to change their business models and move away from hardware reselling to more lucrative areas such as managed services or cloud computing. Taylor said partners simply expected Intel to make everything all right, as if the chip maker could suddenly reverse market transitions on its own.

"You can't sit around and wait for vendors to give you things and fix your problems," Taylor said. "The PC market is going down and it's going down hard."

So Taylor decided to take action. After buying NASBA, he changed the name and the direction of the organization; instead of focusing on system building, he widened the focus to include managed services, cloud, virtualization and even mobile device management in an effort to help VARs change their business models and move away from PCs. Much of NASBA's member base has at least started the transition out of the PC market, Taylor said.

"We've known the PC desktop business has been shrinking for years now," he said. "But a lot of companies out there aren't nimble enough to move away from desktops."

Exhibit A of this trend, Taylor said, is Intel's decision to stop making desktop motherboards. The chip maker took partners by surprise in January when it said it would phase out its traditional desktop PC motherboard manufacturing business over the next three years (Intel OEM partners such as Gigabyte and Asus will continue to make Intel-based desktop motherboards from the chip maker's reference design). The move indicates that Intel doesn't see a future in the desktop business, Taylor said, yet partners are literally begging the chip maker to stay in the market and keep making boards.

Some partners believe Intel's desktop motherboard exit is only accelerating the death of the custom PC channel. Glen Coffield, president of Smart Guys Computers, a Lake Mary, Fla.-based system builder, said Intel provided superior service, including overnight shipping for warranty replacement boards, and that third-party motherboard manufacturers don't offer the same level of support for system builders.

Without that next-day guarantee for customers, Coffield said, his business will suffer. Smart Guys Computers already has seen its custom PC business decline from around 10,000 annual systems built a decade ago to just 1,200 a year currently. "The one thing we had to pitch to customers was taken away from us," Coffield said. For its part, Intel says it's leaving desktop system builders in good hands with OEM partners such as Gigabyte and Asus, which will supply the channel with quality products and customer service. "We believe there's a good ecosystem out there now that's already meeting the needs of the desktop enthusiast and gaming markets," Skaugen told partners at the Intel Solutions Summit.

Dallman shakes off any suggestions that Intel's decision to exit the traditional motherboard business means the chip maker doesn't care about the custom PC channel. "If we didn't care," Dallman said, "we wouldn't have gone out and redesigned new form factors and introduced new AIO boards."

'IT'S NOT DYING -- IT'S GROWING'

Dallman has been with Intel before the PC era even began. He joined the chip maker in 1979 as a field sales engineer and, over the course of nearly 35 years, he's held a number of North American channel roles, including director of channel sales and marketing and head of distribution sales. In 2006, Dallman became Intel's worldwide channel chief, and what he's seen in recent years across the globe has surprised him.

"I thought the PC business was dying and exiting gracefully," Dallman said. "But it's not dying. It's growing."

Intel is working with partners to make sure Windows XP systems are upgraded, he said. Training -- both presales and technical -- will be a crucial part of that refresh opportunity.

According to Intel, the chip maker trained 7,500 partners (roughly one-third of its total North American partner base) in live, face-to-face training for Ultrabook sales and support in 2012, and those partners, said Bruno, outsold nontrained partners by more than three to one. Intel believes it can replicate that success with a sizable investment in partner training this year around Haswell-based Ultrabooks, AIO desktops, and other thin mini-ITX based systems.

But that strategy will only work if the expected PC refresh comes to fruition. Some partners say it's already happening. "We're starting to see a refresh of Windows XP machines in the last few months," said Marty Lantz, chief technical officer at MapleTronics, an Intel partner based in Goshen, Ind.

Others say it's a mirage. While Smart Guys Computers has seen an uptick in sales this year, Coffield said it's a bit misleading. "We're ahead of where we were last year, thanks to Windows 8," he said. "'But we're not selling Windows 8 systems -- we're selling Windows 7 systems."

Coffield said while many retailers are only selling Windows 8 PCs, system builders like his company can still sell Windows 7 licenses. So his company's custom Windows 7 PCs are in higher demand because of the dissatisfaction and trepidation over Windows 8.

The Windows upgrade path is a complicating factor for Intel's vision of the great refresh. For one, Windows 8 isn't seen a desirable destination. And secondly, clients can't upgrade directly from Windows XP to Windows 8.

That, however, may be a big opportunity for partners. "Windows XP support is coming to a close, so it'll be up to the channel to get them transitioned," said Todd Swank, director of product marketing at Equus, a system builder based in Minnetonka, Minn. " We're flexible -- we can respond to challenges and adopt new form factors and designs faster than the OEMs."

But will the new form factor of touch-screen-based AIO desktops be the right fit for businesses? And will the commercial market flock to new innovations such as gesture controls and facial/voice recognition the way Intel expects consumers to?

Partners are unsure. "Motion controls and facial recognition might be great for consumers, but there isn't a lot of interest in those things from businesses," Swank said. "But there could be opportunities down the road for specific applications."

EXODUS TO CUSTOM SERVERS

If there's been one bright spot for Intel recently, it's been the chip maker's server growth. Intel's Data Center Group saw its revenue jump 7.5 percent in the first quarter of this year after growing 6 percent in 2012.

Dallman said Intel's global server growth in the channel is running close to 30 percent, which is a far cry from the relatively flat numbers for PCs. Even more impressive, according to Dallman, is that most of that growth is coming from white-box servers. "Custom servers are particularly strong in North America and Latin America," he said.
But for Intel, that blessing has also been a curse as many system builders are migrating from the low-margin, low-demand PC market to the more lucrative data center.

Virtual Technologies Group (VTG), Toledo, Ohio, is one such solution provider that has left the custom PC business behind for greener pastures in the data center. Mike Curtis, vice president and partner at VTG, said his company decided to exit the PC system builder business about three years ago. Now, VTG builds custom servers and provides integration and managed services for data centers.

"We had a strong regional white-box presence," Curtis said. "But a few years ago, the margins started to fall and they became close enough to the OEM systems we were selling that it no longer made sense to spend the time and resources building custom systems. And it was a pretty easy decision for us."

But the company didn't leave the PC market completely. Along with its managed services practice and data center business, VTG is focused on reselling PCs from top partners Lenovo and Dell -- and business is good, particularly around VTG's primary vertical of education. "We're not seeing the PC decline at all," Curtis said. "We're seeing very strong PC sales this quarter."

While consumers are flocking to tablets and smartphones, solution providers such as VTG say the commercial market is a much different space. Companies still need functional desktops and notebooks with keyboards, full-size displays and the ability to run a variety of business applications. And that's a message Intel is working hard to spread.

"I just don't see tablets replacing a desktop," Dallman said. "In North America, you just have to put some sex appeal back in the desktop, and I think all-in-ones with touch screens is a way to do that."

Like VTG, MapleTronics still sees solid sales of desktop and notebook PCs and hasn't yet seen the effects of the post-PC era. "We haven't see big adoption of tablets or slates with our clients," said Lantz. "They're still buying ultrathin laptops and Ultrabooks."

But that doesn't mean MapleTronics thinks tablets won't eat into its PC business at some point. "Do we think it will happen? Yes, we do," Lantz said. "Pretty much everyone I talked to at [the Intel Solutions Summit] is preparing for life after the desktop. They're all in that mode."

For MapleTronics, that after-desktop life will be custom servers, a business that's already thriving for the system builder. Intel wants to keep the custom server business growing in the channel, but it also wants to make sure those system builders don't completely abandon the custom PC market, either.

So what can Intel do to further help system builder partners beyond presales and technical training? Lantz said differentiating white boxes from OEM PCs doesn't always have to come down to pricing and components. For example, he said, business customers may care more about having extended warranties and enhanced technical support rather than faster chips or flashy touch screens.

"We've asked Intel to consider these things," Lantz said, "and Intel usually delivers."

In the meantime, Intel will try to rally partners around the coming release of its new Haswell Core processors and help partners identify pockets of growth around desktops, including application-specific systems and high-performance computing workstations in the commercial space and tech enthusiast machines and gaming systems in the consumer space. Dallman is convinced those pockets will keep the PC market afloat in the coming years.

"Is it going to grow at 20 [percent] or 30 percent like tablets?" he said. "No, but the PC market can grow a few percentage points, and we can really drive growth in segments like all-in-ones."

PUBLISHED MAY 20, 2013