Analysis: Panasonic Ready To Fight For Competitors' Turf

In the past year, Panasonic Computer Solutions managed to surpass Hewlett-Packard in notebook revenue sold through the channel, leaving it in second place only behind Lenovo, according to market research firm The NPD Group.

And the vendor's not stopping there.

"Our goal is to be at $1 billion in revenue by 2010," says Sheila O'Neil, director of channel sales for Panasonic Computer Solutions.

But even more interesting is how Panasonic plans to grow revenue. Instead of relying on sales of its traditional ruggedized notebooks--which at the top of the line are designed for use in environments as harsh as military tanks and can carry prices as steep as $6,000 when fully souped-up--Panasonic is now aiming to target more of the territory dominated by HP, Lenovo and Dell (in addition to Toshiba), with its newer lines of semirugged and business-rugged Toughbook models.

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Panasonic currently generates about 60 percent of its sales from its traditional rugged line, 30 percent from its semirugged line (designed to serve as a desktop replacement product) and 10 percent from its business-rugged models (which are thin-and-light laptops), but the vendor wants to even out that ratio. However, while its newer, less rugged models are still pricier than standard consumer and commercial notebooks, they're not costly enough to propel the vendor to reach its goal of growing to $1 billion by 2010. To get there, Panasonic will have to drive up unit shipments as well, an area where Panasonic pales in comparison to other notebook vendors.

Panasonic's move comes as Dell recently rolled out its own semirugged models, and some analysts predict the whole notion of "ruggedness" is poised to become the new marketing buzz-phrase among vendors looking to differentiate themselves in a commoditized market. In many ways, the trend toward selling more durable notebooks into mainstream markets makes sense, as anyone who has ever spilled a cup of coffee onto their laptop or dropped their notebook on a hardwood floor can attest.

"As notebooks become a larger percentage of systems being sold, both in business and in consumer markets, it's inevitable you'll see more and more usage and more and more accidents," says Bob O'Donnell, analyst with market-research firm IDC in Framingham, Mass. "People are now putting more and more stuff on PCs, and the amount of time people are moving [from] place to place is also growing, so you put those together and very logically you decide you need something a little more rugged."

"The notebook is now mission-critical--you can't afford to have it break when you're going into a presentation," agrees Paul Zoz, president of Bizco Technologies, a solution provider in Lincoln, Neb.

Having vendors with brand awareness like Dell jump into the market will likely help legitimize the need for rugged features and increase sales for the market overall, O'Donnell contends. "Everyone will benefit from the bigger players getting into this space."

Another potential buoy for the ruggedized market is the growing interest in Flash-based hard drives for notebooks. Because the drives don't have any moving parts and are, therefore, harder for users to damage, they could help bolster the promise of semi-rugged laptops.

"Now ruggedized machines can withstand a three-foot drop in terms of the data being protected with Flash-based drives," O'Donnell says. "With hard drives, even with all the motion sensing things they do, you can still do some damage to a drive because of the moving parts."

NEXT: That's nice, but what about price?

Panasonic, however, knows it can't win on price in the notebook market, with its cheapest ToughBook model priced at $1,600. "We're not going to be the cheapest notebook, and we have no plans to come out with something sub-$1,000," O'Neil says.

But where Panasonic does differ from the vendors it aims to compete against is that it sells its notebooks entirely through the channel--a factor it's hoping will win over resellers and bring it the volume it needs. The vendor is restructuring its entire channel management team and partner program to get there.

In the past six months, Panasonic folded together under one umbrella all of its management for both the federal and commercial resellers, which were previously separate from one another. It also created a new partner sales manager position and appointed a half-dozen managers around the country and plans to add more going forward, O'Neil says.

The company is also altering its investments in partners, so that partners have more flexibility to spend marketing development funds in other areas, such as leasing programs, financing, demo units, and training and certification.

"We'll work with them in how they want to spend monies available to them as MDFs only, but can now be used as business development funds," O'Neil says. "I've been seeing that a lot of companies are not necessarily wanting to do a lot of marketing, per se, but are really wanting to use the funds available. In the past, we haven't looked at the budget that way, and we didn't have the funding for what they were asking."

In addition, the company says, it can offer higher margins around its rugged and partially rugged notebooks, which are often sold as part of a solution. For example, it's putting together a program for resellers looking to sell solutions into the construction market, where the need for durability and embedded wireless functionality create a prime opportunity for its rugged lines.

New products are on the way as well: The vendor this summer will roll out a new semirugged notebook in its ToughBook line, which will be priced competitively, O'Neil says.

Panasonic now has about 300 resellers registered in its program and, in an average year, has about 1,600 resellers that buy and resell its products, but it's looking to go deeper and wider in the next several years, O'Neil says.

"A lot of our partners now have done very well and been successful selling rugged, and we want to teach them to sell other products as well," O'Neil says.

Partners Optimistic About Growth

Panasonic's traditional resellers say they've seen only modest growth, so far, of semirugged and business-rugged notebook sales, but they're still bullish on Panasonic's ability to grow in that market.

"I think they'll be able to compete," says Brian Solomon, co-founder of CDCE in Belinda, Calif., a VAR that specializes in selling rugged notebooks into government. "If you go back five years ago, nobody was getting into rugged, but if you jump ahead to today, they all are because people are coming to realize ToughBooks are not breaking as often [as other notebooks]."

Although it sells rugged devices for mounting in vehicles, the VAR also sells a few more business-rugged notebooks to white-collar personnel.

But Panasonic's not just targeting its existing reseller base. It's also looking to go after new resellers that have traditionally sold HP, Dell and Lenovo systems.

Bizco Technologies sells all of the major notebook lines, including HP and Lenovo. The VAR sells mainly into the SMB market, where its average orders consist of fewer than 10 units. Five years ago, Bizco didn't sell any Panasonic notebooks. Last year, it sold $10 million worth. To boot, about 40 percent of the Panasonic notebooks it's selling are semirugged models.

"Resellers are getting fed up with the Lenovos and HPs of the world. Half the time their direct Web sites are cheaper than your costs, and if a client hits the IBM Web site and sees a notebook $600 below what you just priced them you lose that relationship fast, and it's all about relationships with SMBs," Zoz says. "Panasonic is one of the manufacturers that has a true channel program; they don't sell direct at all."

NEXT: Other factors winning VARs over.

In addition to the lack of channel conflict inside Panasonic, other factors have won over the VAR. "You also get higher margins with Panasonic's product, and they have deal registration, so if you do the heavy lifting on a deal, they'll protect you," he adds.

Panasonic and the resellers that have gained its devotion also tout its status as a core manufacturer as one of its biggest differentiators in the market.

"As a core manufacturer, their ability to maintain very few configuration changes throughout the life cycle of the product is huge and is a great value, especially when you're dealing with other ancillary products, such as mounts, that go into a solution," says Darin White, vice president of sales at Paradigm System Solutions, headquartered in Minneapolis.

While its status as a core manufacturer may, in fact, benefit VARs and end users, it likely won't help VARs close deals any more easily, and Panasonic resellers acknowledge that selling the more expensive models takes extra work.

"You have to have the customer view it as a business decision, not as a PC-to-PC decision, and not every customer sees this," White says.

Panasonic's reputed lower product-failure rate is the key characteristic White focuses on when trying to convince buyers to pay more for ruggedness, he adds.

Going forward, one of the biggest barriers for all vendors and solution providers selling semirugged notebooks will likely be convincing customers they should pay a premium for a product that doesn't break, IDC's O'Donnell cautions.

And that's the tack that Lenovo and HP are already taking.

"We're going to focus on durability for everybody," says Howard Locker, director for new technology at Lenovo.

Both vendors say they're not planning to come out with a branded line of rugged or semirugged notebooks, but that they're working to improve the durability of their commercial notebooks.

HP, for example, says it's adding durability features to its notebooks all the time, such as a protective coating on the keyboard deck, says Sarah Bussell, senior manager of product marketing for HP's business notebooks. "Semirugged is a term that's used loosely; it can mean anything from standard protective features up to military spec-type testing," Bussell says. And that, too, will be a challenge for VARs trying to persuade customers to pay more.

But despite the challenges ahead, Panasonic has jumped into the ring with its fists raised. Whether it's tough enough, we'll just have to wait and see.