ONCE UPON A TIME, I SAT UPON A
a gold mine containing untold riches, and my manager, employer, and I spent three or four years sitting around thinking, “My, what a lovely place for a picnic.”

See, I had sold a personal PC to this guy, and the two of us hit it off quite well. Turns out he was the key technology purchaser for a fairly large company that handled all the back-end processing work for major credit card companies. As you might expect, this company had a formidable number of PCs, most of which were replaced during my tenure as supplier.

So I sold this guy a ton of PCs, and most of that was 10% margin business. Know how much money I made off our maintenance agreement? Nothing. Know why? Because there was no agreement. Extended warranty? Didn’t have one. Networking installation or upgrade? There wasn’t even a CNE on our staff. Did I sell anything at all beyond the basic hardware that might hold some sort of value-rich residual income for my employer? Absolutely not. This wasn’t intentional, of course. We simply just stuck to our core business model and never thought to broaden beyond it. This applied to all of my accounts, both corporate and consumer, as well as every other salesperson’s in our operation.

Perhaps predictably, my old employer folded sometime in the late ‘90s. It had been a lovely picnic. A few people had told us along the way that there was gold in those hills, but none of us had brought a pickaxe and shovel.

We could derive a lot of comfort from thinking that this was an isolated event, one clueless reseller operation surrounded by blissful opportunism. Alas, the trends and numbers show otherwise. I spoke recently with IDC analyst David Daoud about the white box market, and what he told me shocked even my jaded ears. These numbers for annual white box market share across the entire U.S. market for x86-based notebooks, desktops, and servers tell the story:

The numbers for 2004 were not in yet as of our conversation, but you get the idea.

“There are numerous reasons for this decline,” said Daoud, “but the most important one is that the white box market was more visible in the pre-Y2K/Internet era. There were a tremendous amount of people out there building desktops, and the market was soaking up those units for Y2K and Internet use. As 2000 hit, you passed the Internet frenzy. You were through Y2K. Then you had an economic downturn. So the big organizations with big marketing dollars and the ability to drive prices down have been the ones to do quite well. Particularly Dell.”

Economic slump or no, PC sales are doing well. IDC numbers show that the 2002 market accounted for 47.5 million units shipped. In 2003, the market jumped by 10.8% to 52.7 million units, and that encompasses everyone from Dell on down to mom-and-pop white box resellers. The bad news is that the PC channel did not grow equally across its segments.

“When you separate the top 10 vendors, the branded companies—Dell, HP, Gateway, IBM, Apple, Toshiba, Sony, Acer, Micron, and perhaps Macs—they are the ones who benefitted from the growth. Combined, the top 10 vendors grew 14.3 percent in unit sales. The white box guys combined grew 1.9 percent. I think the reason behind this difference is that the main growth happening now is coming from the portable PC market, where the white box guys have fairly limited presence. Also, what really drove growth in the last two years was the consumer market, where white box resellers have limited penetration.”

Having sold just as many consumer boxes as commercial in my time, I wondered at this. White boxes not doing well in consumer circles? I never had trouble selling to consumers in the ‘90s. But then I thought about every friend or relative I know who has purchased a new PC over the last five years. (I’m constantly amazed at how people close to me who are familiar with my profession don’t seek my advice on computer buying decisions—or ignore the advice when I give it....OK, maybe I’m used to that part.) In each case, the box was either a Dell or HP/Compaq. Why? Reputation for service, pricing, and visibility in stores. At least they listen to me when I tell them not to buy eMachines (now owned by Gateway).

How about white box marketing to consumers? Not that long ago, most white box shops in town did their primary public marketing in the business section of the Sunday newspaper. Now, in looking at today’s Sunday Oregonian, I don’t see a single white box ad. Most worthwhile TV and radio spots are too expensive. Daoud is right. The crunch has caught white box system builders in its vice, and most shops are unable to keep themselves visible.

One more bit of bad news was laying in wait in my IDC interview, and it came as no surprise. The problem of desktop PC saturation is becoming felt, and most of the growth in system sales is coming from notebooks. New desktop sales are predominantly going to the enterprise, which has long been the bastion of tier-one suppliers thanks to their aggressive pricing and sweeping support resources. (This is one reason why we continue to like AMD as a system builder partner, because nearly all tier-one business still shuns AMD, and although recent buzz about Dell adopting Opteron may change this.) Consumers and small businesses are snapping up notebooks left and right, but the whitebook market is still in its infancy.

“Today, the white box market isn’t ready for the mobility trend,” said Daoud, “although there are plenty of options coming. A lot of initiatives are working to make the whitebook market vibrant, but it’s going to take a little more time and a lot more money and leadership from a lot of companies. Right now, brand matters. Buying a laptop is a lot like buying a TV that way.”

In retrospect, Daoud and I didn’t even discuss the growing population of users who are now savvy enough to upgrade their own systems and buy their parts through online sources, such as Newegg.com or Outpost.com, the online arm of Fry’s. I don’t have figures to back the assumption up, but I’ve got a five spot that says component purchasing is slipping away from system builder resellers, as well.

So there’s all of the gloom and doom. Pretty depressing, I thought. You could just read the numbers, throw up your hands, and declare that the tier-one asteroid will obliterate the white box channel once and for all by 2014. Daoud was even quoting estimates to me of less than five years.

Now, let’s stop looking at numbers for a bit and engage our brains. The white box channel gone by 2008? I just don’t see this happening. Will 60-second setup routines for wireless networks eliminate the need for wired network installers? Not a chance. Wireless networking is a never-ending source of frustration in my house. The frequency congestion is so bad in my area that not only do I lose network connectivity, but also my wireless mouse and keyboard. Even my toddler’s remote controlled truck will occasionally blip into spontaneous, fleeting action like something from a Stephen King novel. Networking specialists are safe.

We recently devoted a lot of space to media center systems and large displays, so I won’t repeat all that here. Suffice it to say that Dell is not going to come out and perform custom MCE living room installations. System builders and home automation specialists will. The same story repeats itself with this month’s cover theme, security. How about graphic design? High-end storage? The list of niches in which system builders are far better qualified to make sales are legion. Moreover, Intel and others have several initiatives in the works to make competitive, attractive whitebooks increasingly feasible for the channel, although it will take another couple of years for these efforts to bear fruit.

You have the advantage of proximity to the customer. You often have access to more flexible financing options. But the other thing you’re likely to have, according to IDC’s Daoud, is reversed sales priorities. White box resellers historically have sought to make their money on the hardware and, as an incentive to buy, give away their services, such as maintenance. This is the opposite approach from what tier-ones employ. There, you give away the box and make all your money with the add-ons and services.

We’ve said it many, many times before in these pages, and we’ll continue to hammer home the message: You cannot survive on white boxes alone. If you don’t build additional revenue streams on top of this, you’re as good as dead. Real-world, application-ready knowledge is your leading advantage over the tier-ones, but it’s not enough to know the difference between chips or protocols so that you can make good hardware recommendations. You have to turn your knowledge into a recurring revenue stream, and this requires implementing solid contracts.

I recall that contracts came up in sales discussions in my old reseller job occasionally, but not one salesman ever implemented one. None of us had a grasp of legal matters, and the owner didn’t want to pay $150 an hour to a lawyer to draw something up, particularly when (we reasoned) a contract was likely to scare off the client.

This is fallacious. Corporate clients understand the need for contracts. A purchase order is a contract. Signing a Master Card slip is a contract. The object is to expand this contract to encompass a wide range of services that are mutually beneficial.

“The way you write contracts is critical,” said Daoud. “The top-tier guys have a sort of blanket agreement that covers a wide variety of product lines, services, maintenance, you name it. A contract might cover desktops, laptops, storage, maintenance, installation—everything goes into the contract, all the way to financing. That sort of expertise is what white box guys don’t have, because when you’re dealing with a small client, like a law office with 10 people, you tend not to look at the details. Maybe you charge to install the network. Maybe you set up a maintenance contract. But it could be much bigger than that—if you can engineer the contract such that it makes the customer feel he’s getting something for his money and you can derive a good revenue stream.”

Tier-ones will never have the face-to-face interpersonal relationships with clients that resellers enjoy. You’ve worked hard to establish and build this relationship, so it only makes sense to leverage all you can out of it. This isn’t “using” the client. You’re expanding your offerings to him so that he can run his business more efficiently and profitably. This relationship is the core of the entire white box channel, and it’s what we need to concentrate on expanding in the coming years. IDC’s numbers tell the cautionary tale. When it comes to this relationship, if you don’t use it, you’re going to lose it.