Q&A: eMachines Founder Touts Thin Clients For Education, Emerging Markets

Stephen Dukker, chairman and CEO of nComputing, and the founder of eMachines, is at it again. This time, he's hoping to reach one of the most elusive markets in hardware: those who still haven't invested in a PC because of the cost.

The company's multi-user access terminal technology is fast finding a following in education, where the company has scored upward of 10,000 seats in North Carolina alone and emerging markets such as Brazil, China and India. Dukker spoke recently with CRN Editor Heather Clancy about his company's business proposition for the channel.

CRN: Where do you position yourself, competitively speaking?

DUKKER: In our current space, we don't have any competitors yet, which is the ultra light-weight, ultra low-cost PC access terminal device. ...

I guess the best way to describe our position is that our marketplace is those people who need a PC but can't afford it. Their needs are exactly the same as those of the PC user, the difference is they don't have the dollars to be able to afford it. Our technology, essentially as it is today at full retail price, basically allows our customer to get anywhere from high 3- to 4-to-1 on the same expenditure dollar seats or access for multiple people vs. the old way. The way we kind of like to describe it is that our technology has to be at least good enough for 50 percent of the people who use PCs today to be able to get our job done with our technology as opposed to using a PC.

In essence today, our primary target markets are the developing world and education, which basically has the most crying need for Internet access, computer availability, but the least available dollars to pay for it.

Inherently, our technology is also applicable to the enterprise and SMB space, but we recognize those markets take a long time to develop. They need to become familiar with both the hardware architecture and the software infrastructure. For us, those customers are also well-represented with alternatives in the marketplace. We really haven't focused on them as our principal marketplace right now. They will come into play within a few years as our organization builds the depth, as we have partners who have the depth to support the enterprise and commercial users.

CRN: How do you make the business case for a VAR or a systems integrator to carry your product?

DUKKER: The hallmark of a disruptive technology like ours is the scenario that I'm about to describe to you. ...

Let's say we talk about our $200 Ethernet-based device, and we talk to a potential VAR who says, 'Oh my God, I've just barely figured out how to sell $400 PCs, and now you want me to sell devices at $200 a seat? I'll go broke.' We walk them through a very simple mathematical exercise, which is what profit do you make on your $400 PC? Typically, they'll say their gross margin is $40 to $50, which is pretty abysmally typical of the low end of the PC space. So we say, on our $200 box, you actually make $50 to $60 of margin. So, then, the next question. What does it take to install a PC? Typically, a couple of hours, if everything goes smoothly. They've got to build the image, they've got to install the monitor, get the network all figured out. Our devices have no local intelligence. You set up your server once, and this thing takes about 10 minutes to install because all you do is plug a monitor, keyboard, mouse and speakers into it and plug it into the network. There's nothing to configure on the device. So they say, 'OK, that's even better.'

Then we ask the third question: What does your customer do with the $200 that they saved? Well, if it's a school, schools are not really looking to save money, they're looking to get more student seats of technology for the money they've been budgeted. So they can spend it on 20 student seats using conventional technology, or they can spend it on 80 or 90 seats using our technology. So the answer to the question of what does the school do with the $200 [they saved], is they buy a second one. So now the VAR has made $120. This is where we like to say that our business kind of lives at the intersection of commercial opportunity and social responsibility. The beauty is that the markets that need our technology the most get both to save money and, at the same time, because the real cost of goods of our technology is so low, we can create a business model at this very low end of the economic spectrum, which actually restores the ability of our VAR partners to make money.

NEXT: The software licensing implications

CRN : What are the software licensing implications? How is that handled?

DUKKER: The software licensing is handled directly between the customer and whoever they are buying the computers from. In the education space, we don't really know all the licensing scenarios that are out there. We have zillions of e-mails that have been sent to us by partners showing licensing deals anywhere from $1 to $2 per station up to $20 per station. So, whatever the end users negotiate, whether it's the large software firm in Seattle, or whether it's through their VARs, they seem to be able to do it.

Published pricing on the Microsoft open education desktop licenses show that they could be as low as $6 to $7 per seat. We don't know the exact numbers, but we know that our partners have successfully negotiated to the point where in North Carolina, we have over 10,000 seats installed in the last six months in 500 schools in 20 districts, and this is all done bottom-up. No state program, certifying our solution. [It's] all done as a result of our telemarketers calling and selling to a number of small rural districts, then their next-door neighbors saw it and you got viral spread. In fact, we have multiple copies of e-mails from our partners in North Carolina who had asked Microsoft what will it cost and got very responsible pricing. ...

In the commercial space, the licensing scenarios look like they do with traditional thin clients. It's a space that requires an advanced degree in license-ology to figure out.

CRN: To what extent do you work with non-Windows clients as the host?

DUKKER: We support, I think, nine different ports of Linux. Ubuntu, Fedora, SUSE, Red Hat, there's a zillion of them. It's a substantial portion of our sales. But one of the challenges is that since we exclusively sell through channel partners, we're not connected directly to the customers. So it's not possible for us to give you a split on what percent go one way, what percent go another way. What I can tell you is that about 70 percent of our product right now is sold to developing geographies, and the other 30 percent is sold to America and Europe, particularly to education users.

CRN: You mentioned that the Brazil, Russia, India and China region is big for you. Can you elaborate?

DUKKER: Yes. In fact, China is our second-largest market. India is our third-largest market. Brazil is actually tied with China as our second-largest market. We sell in the neighborhood of 5,000 seats a month of our technology into Brazil. In fact, the story of our channel partner in Brazil is a spectacular story.

When we first engaged with them about a year-and-a-half ago, they were a four-employee, low-end, white-box integrator in Sao Paulo, Brazil. They made the very gutsy decision to refocus their entire business around our technology. One year later, they have 65 employees, and they are buying about $300,000 per month at cost of our product. In fact, about eight months ago, we set them up to be able to assemble the product in-country. If you open up one of our boxes, you'll find that there's only like three chips in it. It's our system on a chip, one 8-megabyte memory module and one flash that stores our own microcode.

Because Brazil is legendary for having a high import duty on technology products not manufactured in-country, we set them up to manufacture in-country. They created 20 jobs, out of the 65, who are assemblers, and reduced their import duty by 50 percent. This is the model for the developing world.