The Money’s In Mobile

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Remember the Y2K scare? All the PCs that were purchased to head off that potential crisis are now three years old. So, are government agencies preparing for an imminent round of desktop PC buying? Or are they hanging on to that equipment and ultimately replacing equipment with mobile devices, such as notebooks and PDAs?

Bread-and-butter desktop and notebook PC sales have translated into both good and bad news at the federal, and state and local levels. So what's going on? GovernmentVAR spoke to manufacturers, distributors and VARs to get a composite picture of this rapidly shifting market.

Notebooks In Demand

By all accounts, sales are up in the federal space, particularly in notebooks. That's despite the four-month delay in the passage of the federal omnibus appropriations bill, which "has caused confusion among federal agencies, impeding purchasing decisions," says Charles Prestia, business unit executive for IBM's PCD government sales group. The appropriations bill was signed by President George W. Bush on Feb. 20, but rumor has it that some civilian agencies, especially those not directly connected to the Department of Homeland Security, may not see money until this summer.

Nevertheless, IBM's overall desktop and notebook PC sales to nonmilitary federal agencies were up 10 percent last year, according to Prestia. That rosy number includes an interesting phenomenon.

"Almost all of the growth has been in notebooks," he says. "Desktop sales have been stable." Federal users are going mobile, and significant numbers are opting for notebooks instead of more limited handheld devices. IBM's strategy is to meet that need with products that are profitable for VARs.

"Customers are asking about mobile computing," Prestia says. "When we listened to users describe what they wanted in a mobile-computing device, it turned out that our ThinkPad X-series meets their requirements." Starting at 3.5 pounds and 1-inch thick, the X-series has a system battery life of five hours; a dockable external battery keeps users going for up to eight hours. Equipped with optional 802.11 wireless networking, it is designed for "extremely mobile workers."

HP/Compaq also reports notebook sales to federal civilian agencies were up 30 percent for 2002, while desktop sales "experienced some growth," says Dale Abbott, vice president of public-sector PC sales. "More users are moving to mobile devices," he says. "That trend is driven by both users and managers who want anywhere/anytime productivity." The IRS and Department of Veterans Affairs are examples of major agencies where HP has seen significant demand for mobility.

Some federal desktop PC owners are holding on to equipment longer, at least from HP's perspective. "The replacement cycle is moving out beyond the typical three years. Some agencies are requesting fourth-year warranties," Abbott says.

HP is also seeing significant demand for richer PC configurations. "The most common upgrades we see are in screen size, RAM and hard-drive capacity, mainly for power users," Abbott says. "We are also seeing huge interest in tablet PCs. Agencies are trying them out to see what they can do and what can be done with them," although to date, HP's tablet PCs are only in the tire-kicking phase among government buyers.

According to Dell, homeland-security component agencies and first-responder emergency services at the state and local levels have been growing faster than other nonmilitary agencies.

"Dell's new D-series Latitude notebook has been selling well," says Karen Bruett, director of marketing for Dell's public-sector business unit. "The Optiplex line is popular on government desktops. Desk space in government offices is at a premium, so flat-panel displays and ultra-slim PCs are in demand. These energy-saving devices are also healthier for workers and longer lasting."

State And Local Buyers' Dilemma

Compared with what's going on at the federal level, the state and local sectors' recent past and near-term future buying trends are dramatically worse.

"State and local revenue is down 15 percent [from 2001 to 2002]," IBM's Prestia says. "There have been severe budget cuts in all states, which trickles down to local levels. North Carolina, for instance, has absorbed double-digit budget cuts in each of the past two years."

Additionally, the Sept. 11 terror attacks and overall budget shortfalls have had an impact, placing states under pressure.

Still, many are looking to technology to produce cost savings and leverage their productivity. "[State/local] spending is flat to slightly improved," Abbott insists. "The next couple of months are the 'harvest period' for a year's worth of sales work, thanks to states' budget schedules." Like the annual autumn spending spree in Washington, states develop a "spend-it-or-lose-it" mentality as annual budget cycles near their ends.

The war in Iraq is also being felt at the state and local levels. "For the foreseeable future, state and local sales look relatively flat until we see how the international situation develops," Abbott says. In fact, the general consensus is that if war comes and goes quickly, the impact on government purchases won't be that big.

Of note, Washington promised some $3.5 billion a year ago to help states implement federally mandated homeland-security programs. But little of that money has been delivered as yet. California Gov. Gray Davis, for example, recently noted that his state alone is spending more than $500 million a year on increased security. In fact, during February's national "orange alert" upgrade, the California Highway Patrol spent an extra $1 million in just two weeks on additional patrols and precautionary measures. "For all the tough talk coming out of Washington these days, this administration and the Republican leadership in Congress have thus far stuck us with the bill," Davis said in a February Democratic Party weekly radio address.

In response to such mounting outcries from the states, the Department of Homeland Security has promised to make $566 million in grants available to help local law enforcement cover the costs of antiterrorism activities. President Bush has vowed to make more of the promised billions available faster. State and local technology purchases, including those of PCs, are expected to pick up when those promises are met.

Solution Providers Find Niches

Distributors Ingram Micro and D&H Distributing offer more of a VAR's perspective on government PC purchases.

"Overall government sales are up from a year ago," says Bob LaClede, vice president and general manager of sales for Ingram Micro. "Immediately after the Y2K upgrades, Year 2000 system sales dropped to single-digit percentages of Ingram's revenue; now they're back in the mid-teens," he says.

"State and local business is off almost 20 percent from last year, he adds, with the biggest cuts in the largest states. "California nearly shut down its IT budget. Texas didn't cut IT as hard. Some Midwest states have actually held the line on IT spending," LaClede says. "Notebooks have taken 5 percentage points out of desktops' market share. Desktops now represent roughly 60 percent of government PC sales at Ingram. In one-and-one-half to two years, we expect the ratio to be about 50-50. We're seeing fairly profitable high-end configurations ordered by VARs for government clients. Government users are buying what they need, not just the lowest price point. But margins are eroding very rapidly; it's very cutthroat these days," he says.

Margins are falling partly because of new federal purchasing rules that effectively eliminate guaranteed contracts. Instead, VARs often win the right only to compete on bids. Also, more bidders are competing for Uncle Sam's dollars.

Ingram has an active training and support program for VARs called the GovEd Alliance. "It includes a mix of financing options tailored for government payment plans, special pricing, leads, resources for running the business and bid support," LaClede says. "Our staff will take an RFP and give a reseller several proposals" based on government requirements.

"People who have never played in government before now want in," LaClede says. "The number of VARs we support on government business grew by 10 percent last year. Ingram's government-reseller sector has been growing every year. Also, there are a lot more catalog sellers in the government market now," he adds.

CDW-Government is one of those direct-selling government specialists. "We provide hardware, software and service solutions to small to medium state and local government agencies," says Chris Rother, vice president of education, and state and local government sales. "Overall, the business trend is upward for us. Price points are down, but volume is up on both desktop and notebook PCs."

One factor in CDW-Government's success has been new legislation that lets states purchase off GSA Schedule 70. This vehicle allows states to combine their purchasing power with that of the federal government to get even better prices. Previously, each state had to negotiate its own contract on an individual basis.

"We've seen two consecutive years of significant growth in government sales," says Anne Brennan, director of government sales for D&H Distributing. The privately held company does not report market-sector revenue, though "it's common knowledge that our total revenue is approaching $1 billion," Brennan says. All of D&H's government business is done via VARs,mainly those that cater to the SMB market.

"We partner with many smaller VARs who have relationships with local government IT managers," Brennan says. Often, such relationships are based on personal rapport, not just competitive bids. Profit margins can be higher in such circumstances.

For its government VARs, D&H provides "the right pricing on more than 150 manufacturers' products, including government prices with instant rebates and bid desk support, which gives VARs access to government opportunities, expert help in answering RFQs and leverage with manufacturers to get good pricing," Brennan says. We also offer financing appropriate to smaller VARs, such as assignment of funds with zero interest and no fees on government orders."

The company also helps novices learn how to sell to the government; for instance, D&H is currently paying the fees for registered VARs to attend seminars on selling to the Department of Homeland Security, presented by federal market analysts at

"Many VARs have questions about [Homeland Security] spending plans," Brennan notes. " can show them how to take advantage of recent changes in [Homeland Security] procurement rules, which make more small to medium business deals happen faster."

Kyle Yost, general manager of Frederick, Md.-based En-Net Services Computer Products, has been in the government VAR sector for 18 years. All of his revenue comes from the federal government. "We've seen large increases in nonmilitary federal purchases,so large that En-Net has had to increase sales and support staff by 30 percent," he says. But that business is less profitable than it used to be, especially in desktop PCs.

"As commercial business tightened during the past year, many commercial VARs have been coming in [to the government sector] and commoditizing basic products," Yost says. "They're driving down margins to the bare minimum." En-Net is responding by shifting into new, more profitable product lines, such as 16-hour notebook batteries.

"Less than 25 percent of our business is now desktops, and that's deliberate," he says. "It will probably be zero next year." Yost will likely drop commodity boxes unless they are part of more lucrative software and services package deals, he says.

So, You Want To Sell To the Government?

VARs seeking sanctuary from the devastated commercial sector can expect steady business, albeit razor-thin, margins on government PC business. They should also expect overwhelming red tape if they try to go it alone.

Take advantage of the training, pricing and paperwork-support options offered by leading vendors and distributors. D&H seems particularly well-attuned to the SMB VAR that does a few thousand dollars worth of government business at a time.

PCs are like Christmas trees. Their prices are highly competitive, but they can bear loads of high-profit ornaments. Flat-panel displays, biometric authentication devices, security software and other add-ons are in demand among government buyers. Notebooks and tablet PCs are not yet as commoditized as desktops. For mobile devices, much of the profit comes from add-ons.

The next year will see the money logjam break. D&H's Brennan notes that federal IT spending is up 15 percent this year and is slated to rise another 15 percent in 2004. States are finally about to get their share of Uncle Sam's IT budget. The Department of Homeland Security will sort itself out, and the IT needs of 180,000 federal workers will become pressing. Now is the time to prepare for all that pent-up demand.

David Hakala ( is a freelance writer based in Denver.

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