Refresh Cycle Drives Market As Builders Broaden Offerings

But there's some good news, too. Sales are rising thanks to a PC replacement cycle that's coming due as the 3- to 5-year-old systems on customers' desktops get tossed aside. "I think the refresh cycle, as proclaimed by Intel, has finally begun," says Ann Fried, chairman of Microway, a Plymouth, Mass.-based systems builder. "Business is very good."

"Things are improving," agrees Ray Rueda, president of Honor International, a Miami-based systems builder. "In September, we've done double what we normally do per month."

Such impressions jibe with the most recent market research figures. According to Gartner, worldwide PC shipments totaled 43 million units in the second quarter of 2004, with replacement purchases as the key industry driver. That figure marks a 13.3 percent increase over the same period in 2003. In the United States, second-quarter PC shipments totaled 14 million units, up 11.4 percent from the year-earlier period. After branded systems from the likes of Dell, Hewlett-Packard, Gateway and IBM are excluded from that U.S. total, shipments were 5.4 million, or 37.2 percent of the market, proving there's still a hefty enough opportunity for makers of custom boxes.

However, it's also clear that the mix of customers is adjusting itself to the realities of a still-tough economy. At Polywell Computers, a San Francisco-based systems builder, CEO Sam Chu sees some buyers as more ready to spend than others.

"Small businesses are continuing to spend money in anticipation of growth," he says. However, the corporate market isn't seeing as much movement, Chu says, with a number of companies pushing back planned purchases this fall so they can stay within their budget numbers.

And margins remain too tight for the comfort of many VARs. Accordingly, some resellers are strategizing to make the best of a difficult situation.

"You have to differentiate yourself, whether you're doing it through your product mix, your service or your support," says Robert Schaffer, president of Source Micro, a Randolph, N.J.-based systems builder. "If you're competing on cutthroat margins, you're pretty much toast."

But Schaffer does have a prescription. "A long-run strategy is to mix low-margin products—they become a service item to your customer—with higher-profit products," he recommends.

Microway's Fried advises discretion as to what a VAR sells. "We're very selective," she says. "I don't take orders where I don't make money." Microway might be better able to do that, though, because its business focuses on higher-margin, two-way and four-way servers.

Standing Out
Many VARs would agree with Fried that resellers might be better off ceding the low end of the commodity space in favor of focusing on a more differentiated product. "People who are selling things that don't have anything special have tremendous pressure on margins because the customers know they can buy for less from any other vendor," she says. "The advantage we have is we have a large customer base that appreciates the technical competence of both the sales and the support staff."

So just how does a VAR make his custom-built box stand out? For Honor International's Rueda, the watchword is flexibility, referring to configuration of subsystems, such as mass storage and memory. Preinstalled software is also a key method of tuning one's white box for a specific customer, he notes. For example, some customers don't want an optical or floppy drive if it's going to be a networked workstation.

Another solution to the differentiation challenge is coming from component-level vendors, which make processors and motherboards. For example, Intel assists custom builders with a wealth of technical help in the form of specifications and reference designs. Posted on the Intel Web site, these designs—many of which incorporate advanced chipsets and cutting-edge features like PCI Express—can be accessed without cost and used as the basis for white-box desktops and servers.

Motherboard makers are appealing to white-box makers in new ways as well (see "Mobos Add 'Convenience' Features," below). "Some of the folks in Taiwan are extending their reach beyond the motherboard to thermal design and chassis design," says Jerry Braun, product line manager for Intel's Xeon processors. "They're trying to offer a more competitive solution."

Platform changes are also significant, he adds, pointing to the emergence of 64-bit processors in the white-box space. "When that happens, it energizes the market overall," he says.

As for AMD, it has focused efforts on helping resellers ensure their white boxes cut the technical mustard. "We have a whole testing and certification process for our systems builders," says Pat Patla, AMD's director of server and workstation marketing.

Indeed, solutions that reach beyond chips and boards to encompass cooling solutions are high on the list at AMD. Thermals are an increasingly important area in an era where processor power dissipation is rising, and where multicore CPUs are due to hit the market in force by mid-2005. In this area, for example, AMD has added an innovative "lidded" heat-spreader into the packaging of its new 64-bit Opteron.

Don't Forget Software
Finally, software is also a significant part of the white-box equation. Microsoft, which devotes $1.7 billion worth of its annual budget resources to its overall partner base of 775,000 VARs, has a lesser-known but nonetheless heavy focus aimed at supporting the white-box arena.

"We've made a fairly significant investment in the systems builder channel," says Kurt Kolb, Microsoft's general manager for worldwide systems builders. "We've scaled up the organization that focuses on systems builders to well over 200 employees."

For many white-box makers, the biggest software worry is the chunk of cash they have to shell out for each copy of Windows. That cost eats heavily into any competitive advantage they may have vs. major PC OEMs. They also know that's something they can't do much about.

"Systems builders understand that it's natural for larger OEMs to get a better price," Kolb admits. "We're continuing to look for ways to provide unique offers, training and business-development assistance so [white-box makers] can compete."

Some of Microsoft's help takes the form of rebates; for example, there's a program involving Office that's for systems builders only. And toward the end of this year, Microsoft is launching a new logo program under which builders can qualify for an "OEM competency" certification. Getting the sticker will require revenue targets, tests and customer references, but builders who qualify will have a valuable seal of approval that will position their companies as customer-builder players.

Finally, Microsoft has unleashed a new spin of its software—dubbed Windows XP Media Center Edition—to help white-box builders pull together entertainment-class PCs that can deliver digital media content. The OS release, announced this summer at the company's worldwide partner conference in Toronto, is specifically aimed beyond the OEM market toward white-box makers. In addition, hardware vendors such as Nvidia and ATI are offering graphics cards bundled with the software to enable builders to quickly pull together the graphics-capable boxes.