The Real Reason Microsoft Is Ignoring Custom-System Manufacturers

Margo Day, the recently promoted vice president of U.S. Partners, took a drubbing at Intel's custom-system builder event earlier this year when attendees raised the issue of the disparity between their pricing and Dell Computer's.

As CRN reported then and again last week, Dell is getting a very sweet deal from Microsoft when it comes to Office XP pricing,a deal that looks to be at least $160 less than the retail price custom-system builders are forced to fork over. One would think Microsoft would welcome an opportunity to give better volume pricing to system builders, given that the total sales of custom systems is much larger than Dell's total shipments.

But the issue for Microsoft is much more complicated, and when you sit back and really think about it, you realize why Day and every other Microsoft executive remotely connected with this issue wants to run for cover whenever a CRN reporter starts asking questions. It's also a result of the fact that monopolies like the one Microsoft holds offer special privileges that allow them to ignore customers' wishes.

There are also other dynamics at play, including the consolidation of PC manufacturers. For all intents and purposes the PC business is coming down to three major players: Dell, Hewlett-Packard and the custom-system makers. IBM is still a significant player, but it is unlikely the company will ever break into the top three again.

The problem for custom-system builders, also known as white-box makers, is they are unorganized and are represented in the market by a few very lame associations that have no real power to negotiate a reasonable solution on their behalf. Dell, on the other hand, wields a great deal of negotiating power with its suppliers, and that includes Microsoft.

To me, Microsoft's decision to ignore this issue by saying it is looking into it but never really addressing it is a short-sighted one. There would be nothing better for Microsoft and Intel than a healthy custom-system alternative to Dell and HP.

The last thing Dell wants to see is an alternative white-box market that has the ability to garner even remotely similar pricing from one of its major suppliers. This is, of course, a more dangerous situation for Intel than it is for Microsoft. Microsoft has other outlets for its software, including solution providers that do not play in the custom-system market. Intel, however, is an OEM-play only.

Nonetheless, too much consolidation in the PC system space isn't good for Microsoft. It is likely that going forward we will see more failed PC system makers whose market share will transfer to the remaining players. As that happens, Dell and HP will gain more negotiating power with Microsoft and Intel while custom-system makers will continue to operate on a non-level playing field.

The only thing that is really going to change this is the creation of a viable alternative to Microsoft Office.

Linux and a comparable application suite for the Windows/Office environment is part of the answer. But we won't reach a tipping point until Linux has captured a large enough market share to make it truly a widespread consideration for the masses.

When that happens, Microsoft is going to regret the choices it is making today. In the meantime, I'm afraid all you custom-system manufacturers in the channel are going to have to live with Microsoft's conscious decision to ignore this issue.

Make something happen. I can be reached at (516) 562-7812 or via e-mail at [email protected].