Annual Guide To The Systems-Builder Market

First, the bad news--growth in white-box systems revenue is poised to peak next year by a mere 3 percent. From there, it's expected to go downhill. At the same time, branded systems vendors--notably Dell and Hewlett-Packard--will continue to put the squeeze on you as they push pricing and margins down to near-unsustainable levels.

Now for the good news. Growth in whitebooks--custom notebook PCs--should more than make up for the preceding shortfall both in terms of revenue and margin growth. In addition, custom systems will maintain about 30 percent of sales of all PC clients.

According to preliminary figures from IDC, portables will grow 18 percent this year to almost 2.7 million units, and 31 percent next year to 3.5 million. By 2008, systems builders will ship 6.9 million whitebooks, compared with 2.2 million units shipped last year. Systems builders are also pushing their efforts more into offering servers--including towers and rackmountable systems.

What's more, new channel programs from the likes of Intel, Maxtor and Seagate, as well as Taiwanese OEM suppliers, are helping systems builders compete. Johnny Choi, CEO of Flushing, N.Y.-based PC Available, says Intel has been reaching out to him more lately by offering seminars and providing more responsive support.

"They've put in a lot of marketing funds for us as a reseller," says Choi, adding that he has definitely seen demand for white boxes, whitebooks and custom servers increase in recent months. Much of that demand has come from schools, where he is able to offer systems up to 20 percent less than Dell, while providing more memory, larger drives and other competitive differentiators.

The Heat Is On
But all of that goes only so far because branded PC vendors are keeping the heat on systems builders and, to a large degree, putting pricing pressures on them. "From a market-share standpoint, their growth is not as fast as some of their bigger competitors--particularly Dell," says IDC analyst David Daoud.

Systems builders are quite frustrated by the marketing practices of Dell and HP, which are placing pricing pressures on them. But they blame Intel for those woes, not their OEM counterparts. That's because Intel foots much of the bill for the OEM vendors' ads that promote the "Intel Inside" logo program, and many of those ads promote PCs as low as $399. While John Samborski, president of Arlington Heights, Ill.-based Ace Computers, doesn't have any qualms with Intel engaging in co-marketing activities with OEMs, per se, he wishes Intel would attach some strings that would make it less attractive for Dell and HP to advertise low-cost systems.

From Intel's standpoint, while systems builders represent a huge percentage of its revenue, the major OEMs account for the majority.

"All of those guys are our customers at the end of the day," says Shirley Turner, Intel's director of channel marketing. "And that's the balancing act we go through. We do co-marketing activities with those companies; we cannot tell them necessarily how to spend that money."

Turner points out, however, that Intel has recently begun making co-marketing dollars available to Premier Providers like Ace. "We cannot tell people what to do with these funds, but we can make it more accessible to other providers," she says. "That's one of our big thrusts this year."

Still, custom builders have many reasons to look over their shoulders. In addition to pushing pricing down for its branded systems, Dell has its own white-box effort under way in which it builds unbranded systems for solution providers. By most accounts, that 2-year-old program has not gained noteworthy traction, primarily due to systems builders' distrust of Dell.

HP Wants a Piece of the Pie
HP has also begun cozying up to systems builders. Why? Because the company would love to have systems builders bundle in its line of Procurve networking products, printers, scanners and cameras, among other peripherals.

"We understand the challenges of those types of manufacturers, trying to manage all of the different component sources that they have as opposed to coming to HP where they can get the total kit along with some customization capability," says Mike Bortnowski, HP's director of OEM development.

Although they will be offered as custom systems, they will, in all but a few cases, carry the HP brand on it, he says. Only in very large-volume deals will HP consider removing the HP label, though Bortnowski declined to give specific parameters for doing so.

In addition, HP will begin a lead-generation campaign for its systems in the second half of this year. The key value proposition, Bortnowski says, is consistent components, which in many cases are a key requirement, particularly in the medical field, where even the slightest change sometimes has to go through months of recertification to meet regulatory requirements.

HP also has begun offering rebates of up to 5 percent for those systems builders that attach printers, scanners, cameras and wireless equipment. In addition, HP rolled out a Promotion Engine on its partner site that provides program information and sales promotions for systems builders.

Nevertheless, these efforts are not resonating well with some systems builders. At best, Ace Computer's Samborski says he can make about four points on a $1,500 monochrome laser printer. The 5 percent rebate still doesn't make it worth the effort.

"We can't live in a 9 percent world," Samborski says. "For a systems builder to survive, we can't be in single-digit margins unless we get free money or a tremendous amount of volume."

Systems builders may be more likely to turn to OEMs where there is less conflict, such as Cisco, Netgear, SMC and 3Com on the networking side, and Lexmark, Samsung, ViewSonic and Xerox on the peripherals side. Samsung, for example, built a program last year to more formally reach out to systems builders. That included offering special SKUs available only through that channel, special pricing and free shipping for exchanges of defective products. The result is that systems builders are offering new types of peripherals to their customers, such as LCD monitors, notes Rey Roque, vice president of marketing for Samsung's IT division.

Says Roque: "All we did was recognize that systems builders have different needs." Also looking to further address the custom systems-builder market are the major distributors. Some, such as Tech Data, are trying to take the burden off white-box builders by adding new levels of support and adding better component configurators to their Web-based systems.

Tech Data is also promoting its assembly facility in New Jersey that systems builders can use to perform the assembly themselves. Or they can off-load everything from assembly to system imaging and software installation and shipping, while making it appear to the customer that it came from the systems builder, notes Roy Applebaum, Tech Data's vice president of marketing for components, supply and media. "It enables the reseller to get the deal done without using its valuable resources for the assembly and shipping," Applebaum says.