White Boxes Have Bright Future In SMB Market

White-box systems in this market include self-built ones, in which the solution provider buys components, assembles them and sells integrated systems. Also included are prebuilt systems, in which the solution provider buys generic units and resells them with minimal additional integration, such as software or customization.

A rise in the population of solution-provider organizations selling white-box systems is driving the projected increase in unit sales. RoperNOP estimates that nearly 30,000 solution providers sell white-box systems in North America, an increase of approximately 4,000 from last year.

Why are more solution providers selling white-box systems? Profitability is one factor. Prices of components, such as processors, displays and storage, have fallen dramatically in 18 months, giving solution providers a slightly higher gross margin selling white-box systems than selling branded systems.

Another factor is account control, which nearly three-quarters of solution providers identify as a primary reason they sell white-box systems. These account-control issues include flexibility of configuration and choice of components in white-box systems. When the solution provider determines the system configuration and selects the internal components, it increases his role in the end customer's technology-purchasing process and strengthens the overall relationship.

Postsales Considerations

In the postsales period, the white-box solution provider's role also increases. In fact, one of the reasons why component selection and flexibility of configuration are so important to white-box solution providers is because they make postsales support more efficient. When the solution provider knows what components are inside the PC, time-consuming guesswork and troubleshooting are reduced.

The ability to provide efficient, on-site service also tightens the bond between solution provider and customer. The solution provider's on-site technicians often are able to build relationships at customer sites and learn more about customers' overall technology needs, generating additional sales opportunities.

For solution providers, these customer-relationship and account-control issues, coupled with a slightly better gross-margin proposition, are making white-box systems more attractive. RoperNOP Technology finds that among solution-provider organizations that sell white-box and brand-name systems, the sales mix is tilting toward white boxes. Data collected in the first half of this year shows white boxes account for four out of five systems sold by solution providers that sell both white-box and brand-name units. In 2000, white-box systems accounted for three out of five systems sold. Thus, in less than two years, sales of brand-name systems among solution providers that also sell white-box systems have been cut in half.

In addition, the merged Hewlett-Packard and Compaq management team could accelerate white-box sales among solution providers. Shortly after the merger was final, HP-Compaq's management indicated to securities analysts that the percentage of PCs sold through HP-Compaq's direct response channel would increase. This means fewer sales through solution providers, leaving some believing that the new HP-Compaq is more foe than friend.

If solution providers continue to favor white boxes over HP-Compaq,the most prominent brand name still available for resale among solution providers,the impact will be most evident in the small-business market, where Dell is also active. RoperNOP Technology finds that small businesses, those with 100 or fewer employees, purchase more than half of white-box systems sold by solution providers. Additionally, those computer-buyers tend to purchase most of their systems either from solution providers or direct via phone or Internet site. Given these purchasing patterns, white-box systems and those from Dell will likely account for the majority of PCs sold into small businesses within two years.

Richard March ([email protected]) is senior vice president for RoperNOP Technology, a joint business unit of RoperASW and NOP Research.