Systems Builder Guide: Up the Value Chain

Life sure isn't getting any easier for systems builders. Resellers who assemble and market desktops and servers made from standard components are facing their toughest competition in years. Consider that low-cost Chinese vendor Lenovo Group has snapped up IBM's PC division, presaging continued downward pricing pressure in the PC market. Over at Hewlett-Packard, the ousting of Carly Fiorina could result in the world's No. 2 computer company responding more aggressively to down-market, direct-sales powerhouse Dell. And, at its PartnerWorld conference in February, IBM announced plans to make a concerted effort to snap up more business in the SMB arena served by white-box vendors.

The result is the perception among builders that the low-hanging fruit can't sustain a viable business. At Terian Solutions, a Houston-based systems builder and integrator, president Don Young says the company no longer chases low-margin business. "The generic PC business is a lost market, I believe, for most systems builders," Young adds. "If you're not adding value of some sort, you're destined to lose."

For Young, the answer has been to move up-market, away from client-side white boxes. "We've gone up the food chain," he explains. "We retooled our entire channel to focus exclusively on the small- and medium-sized marketplace with business servers. We [also] take care of the business workstation space, which has different needs than your $400 PC."

At Honor International, a Miami-based systems builder, president Ray Rueda has experienced a remarkably similar stimulus-response effect. "On basic desktops, we're seeing fierce competition from brands like Dell and HP," Rueda says. "Margins are going down to 5 [or] 6 percent, which is extremely low for a systems builder."

Rueda's reaction has been to aim the systems he builds into more lucrative market segments. "Gaming and security are the two big niches; point-of-sale is another," he says.

Program Assistance

Fortunately, according to figures released last year, IDC predicts ample opportunities for systems builders of all stripes. Market research forecasts that 3.5 million white boxes and 11.9 million non-OEM portables will ship in 2005.

To enable systems builders to meet that demand, several vendors offer programs aimed specifically at supporting builders and facilitating the creation of differentiated products. For example, Intel offers training to systems builders and VARs as part of its Tech Solutions road show and Channel Conference.

"That's absolutely what they're going to have to do," says Shirley Turner, Intel's director of North American channel marketing, of the need to build systems with capabilities that exceed generic boxes. "If you asked systems builders four years ago what their biggest problem was, they'd probably say the same thing. Most of the systems builders and VARs that survived through the downturn had to figure out how to go out and differentiate."

This fall, software giant Microsoft will launch a new OEM Hardware Solutions Competency program, that will recognize builders' expertise in putting together PCs and servers, as well as preinstalling Microsoft operating systems and applications. Membership in the program, which will enable VARs to rapidly rise to Redmond's Certified and Gold-Certified partner levels, could prove to be a valuable marketing tool, enabling builders and VARs to showcase their abilities through custom logos and other premium marketing-support tools from Microsoft.

"It provides system builders an opportunity to brand and differentiate themselves," says Kurt Kolb, general manager of Microsoft's worldwide systems-builder channel.

Microsoft is well aware that mining business opportunities requires going up-market. However, unlike some of the builders, Kolb doesn't think they'll have to look too far upstream.

"There's opportunities now for systems builders to become more small-business-specific around the Microsoft small-business stack," he says. Microsoft offers a full complement of solutions beyond its Office Suite, such as the Small Business Server, an operating system specifically tailored to SMB server requirements, and SMB apps like Microsoft CRM.

New Technology

A year ago, systems builders relied on the PC refresh cycle to give customers the impetus to replace worn-out systems. Today, new technology inspires consumers to upgrade. Leading the charge are 64-bit processors, such as AMD's Athlon 64 and Opteron, and a new version of Intel's Xeon (see "Systems Builders Aim At 64 Bits," page 38). And, expected later this year are multicore processors, which will bring enterprise-class computing capabilities to client-side systems (see "Multicore On the Verge," this page).

"I think customers are ready for something new in that respect," says Bill Hook, president of Keystone Computers, a systems builder in Dubois, Pa., of 64-bit computing. "I hope it'll be a driver for business; something needs to be."

"I think 64 bits and multicore together will be very powerful down the road," Intel's Turner adds.

One major trend builders will want to keep an eye on is the PC value chain's moving away from its longtime focus on processor clock-speed. Here, Intel is leading the charge with its "platformization" strategy, which emphasizes nonprocessor technologies such as faster memories and I/O interconnects. Such features drive overall increases in system performance beyond what can be accomplished simply by boosting processor speed.

As Frank Spindler, vice president of Intel's corporate technology group, puts it: "If we were a processor-only vendor, we wouldn't be able to focus on all these other things," such as chipsets, communications components and graphics engines.

A big part of Intel's platformization plan is its three-pronged "T's" strategy. The "T," for technology, is supposed to point to Intel's tetrad of Hyper-Threading, LaGrande, Vanderpool and active-management features:

* Hyper-Threading, which enables one physical processor to behave like two or more virtual CPUs, is already with us and will grow in importance as multicore becomes ascendant.

* LaGrande will fold security protection directly into Intel's processor, chip-set and platform hardware. It will be available on desktop PCs once Microsoft releases its Longhorn operating system in 2006 or 2007, which will have software hooks to access LaGrande's features.

* Vanderpool is a hardware-assisted implementation of virtualization. Set to debut on Xeon and Pentium 4 in 2006, it will essentially update Hyper-Threading for the multicore age. (On the server side, Vanderpool will appear in Itanium in 2005.)

* Intel's active-management technology embeds hardware support for remote-systems management--a boon for the many ISVs jumping on the asset-management bandwagon, where monitoring and software updates for vast networks are handled from centralized locations.

For systems builders, Intel's efforts to enhance the broader platform will turn the PC from a still relatively immature client into a heavyweight computing system with many of the characteristics of an old-line enterprise box.

Services Angle

Platformization may also be a way to help seed the services side of the business. "The way they're selling the PC platform will change," Intel's Spindler says of the channel in general, though clearly this will apply most immediately to systems builders. Features like remote manageability will open up more consulting business, he believes. "There will be new support opportunities in terms of how to utilize this," Spindler adds.

Microsoft's Kolb agrees that services may be the wave of the future. "Most systems builders will tell you that they have a very high services component to their business," he says. "I think you'll see them move up the stack to provide more specialized services."

Intel's Turner, meanwhile, sees a big opportunity for systems builders to sell service and support contracts to their small-business customers. "You've got [small businesses], which want to put in place an IT infrastructure, but know nothing about support," she explains. "That's what they're relying on the systems builders for...the service and support aspect."

To help builders market to the SMB arena, Intel last fall released a software application called the Intel Small Business Technology Assessment and Resolution Tool. It enables builders to walk customers through their current IT configurations and assess potential needs. The program, which is Web-browser-based, takes a complete inventory of a potential customer's installation--including systems, storage and networking capabilities--and then returns specific suggestions for additional hardware to meet present or future needs. Systems builders can use the program's list of recommendations as a basis from which to sell upgrades and additional equipment.

Additionally, in tandem with its establishment earlier this year of a new Channel Products Group, Intel appears to be tuning its marketing efforts to benefit systems builders. It may also move to streamline its "Intel Inside" logo program.

Of course, while builders want to sell services to their customers, they also appreciate assistance from their suppliers, especially when it comes to keeping the supply chain running smoothly. During the past few years, both AMD and Intel have beefed up their channel programs in an effort to become better partners to the builder community.

"Where the difference comes in is not in the actual product anymore--everything has been commoditized and homogenized to the point where it's pretty similar," says Robert Schaffer, president of Source Micro, a Randolph, N.J.-based systems builder. "The difference is in how it's backed. If I get a bad processor from Intel, I can call them up and get a new one here the next day at no cost to me."

Schaffer similarly lauds Intel's backing of its motherboards. "I can sell a server, and I don't need to stock 40 million parts in my back room to support it if something goes down," he relates. "I can call Intel; they have the stock, and they'll drop-ship it to my reseller or end user, and it's done the next day at no charge to me. That's really where you see the value that's in a product. Intel has also put themselves in a position where they're not that much more in price than some of the Taiwanese board vendors. And when it comes to support, they blow them away," he adds.

Says Terian Solutions' Young: "The Intel channel program that they have for their premier partners is second to none, and that's what really helps drive us." Young also credits AMD for embracing systems builders with a valuable channel program of its own. "We're an AMD gold partner, and that adds quite a bit of value in that they create business relationships that allow you to bundle software and solutions to make your systems much more attractive," he explains.

With leading-edge processors remaining the lifeblood of any systems builder's business, both Intel and AMD are working hard to ensure builders get the parts they need in a timely fashion. As part of its recent corporate reorganization, Intel established a new group called Customer Fulfillment, Planning and Logistics (CFPL) in order to coordinate those who supply processors with marketing.

"This consolidates all our supply-and-demand engines in one group," Turner explains. "So the sales manager is going to be right on top of all our supply issues in the future."