System builder sorrow

Published: October 2nd, 2008

Once upon a time, building PCs was a mainstay for many resellers, who could create machines faster, more cheaply, and frequently with better components than proprietary systems, and still make a profit.

Those days, sadly, are gone. Today, instead of calling their friendly neighbourhood VAR for systems built to their exact specs, consumers and corporations alike are more apt to pick up the phone and order commodity systems from Dell or HP.

That leaves the would-be system builder in an awkward position, wondering if there is still a place for white boxes in today’s environment or if, like the Maytag repairman, he’s doomed to a lonely future if he decides to continue.

According to Partner Research’s Canadian Assembler PC Market report for the first quarter of this year, shipments of Canadian assembled PCs were down nine per cent compared to the same quarter last year, and accounted for only 13 per cent of the PC market. The overall market was only two per cent larger than that in the first quarter of 2007.

Partner predicts similar modest growth for the rest of the year, primarily driven, it says, by the desire of desktop users to switch to laptops.

IDC Canada’s director of SMB and channel strategy research, Paul Edwards, also sees a static desktop market, with laptops on the rise. He thinks that over the next five years, desktops will be overtaken by notebooks, which means that a lot of channel partners will be looking at a direction shift. “The market for white boxes is shrinking,” he says. “I can’t see being a system builder as a viable core business model.”

Carmi Levy, senior vice-president, strategic consulting at AR Communications, adds, “There’s no question that the world is changing in a massive and permanent way for independent system builders. Their original raison d’être – namely undercutting tier one hardware vendors and using that price advantage to make margin – has been erased in recent years thanks to ongoing price erosion.”

However Len Motuzas, president of London, Ont.-based Bolen Distributing Inc., doesn’t believe that this means the demise of the system builder. As well as partnering with HP, Lenovo and LG, his company produces its own line of servers, desktops and laptops, and he’s convinced that there’s still a place for system builders in today’s market.

“While margins have shrunk in this industry over the past few years, there is still great opportunity for good margins in custom built systems,” he says, adding that the key is in choosing the right systems. “While we do not look to compete in the $300 to $600 PC market, we are still able to provide our customers with custom configurations that meet their needs.”

Doug Cooper, country manager at Intel Canada, also believes that the death of the independent system builder has been prematurely announced. “On the global scene, the system builder plays a vital part in the development of IT infrastructure,” he says, noting that the roles differ depending on the maturity of the market; in developing markets in particular, system builders play a huge role.

Of course, in more developed markets, things aren’t all sunshine and roses, as most system builders have discovered. Andy Szego, president of Premiere System Solutions in Richmond Hill, Ont., says that many of his customers are now choosing to go to Future Shop or Dell to purchase their systems.

But there’s a bright side even to that depressing development – Szego says that he’s now finding upgrade opportunities instead, since the retail systems his customers buy are not necessarily configured to their needs. RAM, hard disks, operating system upgrades and configuration services revenue come out of the apparently unfortunate situation, all of which likely provide higher margins than the system sale itself would have.

Motuzas has noticed similar system buying patterns, but with a twist – customers have indeed gone to Future Shop or Dell and bought on price, but then they returned to Bolen. Why? “The quality and support that they need is just not available through these sources,” he says. “They have come to realize that quality and excellent service are far more important than initially saving a few dollars.” The strategy works: his Bolen-branded systems currently account for 60 per cent of his sales.

It also aligns with Levy’s observations of successful independent system builders. He notes, “Uniquely tailored solutions that rely on one-to-one relationship building – skills which have always been system builders’ strengths – will allow clients to get the kind of hand-holding that even the most service-focused global vendor often has difficulty delivering.”

A change in direction may be what it takes for a system builder to stay in the game, Cooper says. With the desktop market flat, and mobile growing, the traditional white box is being supplanted by the laptop, so Intel is trying to make the mobile platform more accessible to system builders. After all, he points out, “A small piece of a declining market is not a good business plan!”

Both Bolen and Premiere leverage Intel’s vPro technology in the systems they build to give themselves another revenue stream: remote management and support. Says Intel’s Cooper, “As you take products with management built in and lay on services, there is less of a focus on hardware margins.” With vPro technology, system builders can even remotely manage machines that aren’t powered on, saving them the cost of a site visit while still offering prompt service to the customer.

Edwards agrees. “A lot of channel partners are looking at a direction shift,” he says. “From a business strategy perspective, they de-emphasize resale, and emphasize services. The white box piece may be a customer satisfaction piece – it keeps the customer in the fold.”However, Levy argues, smaller vendors are better positioned to offer customized solutions to customers in specific verticals that major vendors may have difficulty filling, or may just choose not to bother with. For example, he suggests, medical offices can benefit from turnkey solutions including hardware, software, installation and training, and the low hardware margins are offset by the revenue from value-added services.

System builders still dominate in many niches, Motuzas adds. A prime example: universities. An engineering department’s labs require systems with powerful video capabilities and a lot of memory. They want the newest processors available so they can run demanding software, and may also have space restrictions that influence the size and shape of the system’s case. In situations like that, independent system builders who can work with them to put together a system that fulfills all of their requirements shine.

System builders enjoy another advantage over large OEMs, Szego points out: they can build systems with the newest motherboards six months before the boards make their way into OEM machines, allowing them to create cutting edge systems for customers looking for the latest and greatest technology.

“We can move faster than the big guys and can address the needs of individual customers,” he says. “That’s where the system builder has the advantage because we know the customer. The relationship with the customer is more valuable than the technology.”

Cooper agrees. “There’s no reason why local providers can’t compete. They know the local ecosystem. There will always be places in Canada where multinationals won’t go. It’s a question of finding spaces where you have local market intelligence that can’t be duplicated by multinationals.”

However, he adds, in major metropolitan areas system builders will have a tougher time because of the presence of the multinational vendors. There, the independents tend to provide systems in vertical markets where they can personalize the offering to local conditions; that’s hard for multinationals to do.So, is the system builder market dead?

Szego and Motuzas agree: not likely. Says Motuzas, “We are getting smarter, better educated and are offering more service to customers than we ever have. The old saying “we’ll service the customer better than anyone else” is even more relevant today. It hasn’t been an easy transition, but it has made our business stronger.”


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