October 30, 2007 4:00 AM PDT
Trouble on horizon for 'white box' PC makers
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The discount that top PC vendors like Dell get on Windows from Microsoft was the biggest factor in his decision to stop selling white-box PCs, he said. The direct-sales models of big companies like Gateway and Dell forced him to shutter both of his brick-and-mortar stores two years ago and take his business to the Web to compete. Now, he only sells Dell computers.
"They're easiest to sell because of the name recognition," Klammer said. "Are they any better than other computers? No. But brand names sell."
There is something working in white-box desktop manufacturers' favor: the consolidation taking place in the worldwide PC market. In recent years, Lenovo took over IBM's notebook business, Acer swallowed up Gateway and soon possibly Packard Bell, and even Dell and HP brought boutique custom gaming outfits Alienware and Voodoo, respectively, into their folds.
Fewer major players can mean more power when it comes time to negotiate with component makers, like Intel, Advanced Micro Devices, Seagate, Western Digital, and others. So, for those component manufacturers looking to have some bargaining power with the big PC makers, "part of the defense is to keep a healthy white-box market," Kay noted.
Dell actually tried to horn in on the white-box market back in 2002, but didn't stick around long. The idea was to offer unbranded machines to smaller distributors at lower prices back when the white-box market was white-hot. At the time, the idea was that small PC assemblers would jump at the chance to work with Dell and still not hurt their own profits. At the same time, it was also another way for Dell to expand its share of the PC market.
But after a little over two years, Dell called the white-box program quits. Dell's experiment is an instructive glimpse at how the white-box PC market works, Kay said (namely, that it's constantly in flux). What may work for a couple of months may not work for the next few, since it all comes down to what kinds of products the smaller manufacturers can get at the merchant level.
Though the white-box market as a whole accounts for more than any one single vendor, including market leaders HP and Dell, it likely will continue to decline even further--particularly because the economics of participating in the PC market heavily favor the big companies. When ordering large quantities of products from Intel or AMD, the discounts are generous for companies that place hefty orders. Small-scale assemblers have no hope of striking similar deals.
"They have to be extremely nimble. They keep morphing their business model almost on a daily basis to stay in business," Kay said. "It's a tough game."
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