“AS A SOLUTION PROVIDER FOR SMALL
businesses, provisioning, configuring, and deploying hardware may compromise your ability to create and grow other, more profitable aspects of your customer relationships. Your customers and your bottom line rely on your ability to provide solutions that have much more to do with trust and availability than just a system on a desk.

“Outsourcing your desktop hardware assembly, software installation and delivery to Solution Provider Direct can help you reduce costs, save time on configuration and deployment, and exceed your customers’ expectations.”

Any guesses as to where this quotation comes from? Ingram or D&H? IDC or Gartner? No. I just pulled this from a page at solutionproviderdirect.com. In common parlance, that means Dell.

Over two years ago (issue 12), we ran a cover story titled “The Dell Dilemma.” It described Dell’s entry into the whitebox market with a low-end desktop box, the 510D, and its new Solution Provider Direct program for delivering unbranded machines to system builders for less money than they could build them in-house (after freight and labor). In over three years, this is the only RAM story I’ve written for which I received a vehement backlash from readers. What were we trying to do? Sell out the channel to Dell?

As it turns out, Dell’s efforts appear to have born little fruit. Today, the current model is the 610D, a 4X AGP, Pentium 4b (533 MHz FSB) configuration that appears to have been “current” for nearly a year. We haven’t heard a peep about this program since we ran the story. At the time, Dell told me that they planned to have multiple desktop SKUs as well as whitebooks. Apparently, the channel had other ideas.

And rightly so. The “why can’t we all get along” mentality doesn’t play well at a time when the tier-ones continue to gain market share and whitebox unit sales recede. And yet the Dell proposition wasn’t an entirely bad idea. The quotation above remains sound regardless of who said it. Building boxes efficiently and cost-effectively becomes increasingly difficult the smaller your operation gets. If you’re missing sales because you’re too busy building boxes—and that includes cutting back on sales staff in order to pay for techs—then perhaps your business model needs adjusting.

Perhaps you should outsource your builds.

X2: Dell, Take Two

I stumbled across X2 (www.x2usa.com) while snuffling for background on MSI’s MEGA View 561 audio/video player (see this month’s Easy Upsell Online). X2 is a marketing company with a twist. According to company president Rex Wong, the organization is comprised of well-connected veterans from the likes of NETGEAR, Cisco, D-Link, Vivendi, and Google. They understand the North American technology sales channel. They also know many of the prominent Asian electronics manufacturers.

These Asian companies tend not to fare well in our market. Someone will show up with a cheap DVD player, for example, sell gazillions of them for $29 through every mass merchant who will floor it in an attempt “to gain market share,” and go under a year later. These companies don’t understand the necessity and value of maintaining margin.

X2 says it does understand this, says it understands how to market quality technology products, and says it has hit upon a distribution model that will keep the products under its wing profitable for everyone. It’s not a new distribution model—just Dell’s. Kind of.

“Dell goes to a contract manufacturer and says, ‘OK, if you want my business, you’ve got to set up a hub right in Round Rock, and I want to give you a three-month forecast,’” says Wong. “So the parts Dell are using in their build-to-order can be three months old, just sitting and waiting in that contract manufacturer’s warehouse. Because our orders go directly to the original manufacturers in China and Taiwan, our parts are fresh, directly from the factory where the whole supply chain is, so our parts can not only be newer technology but lower cost than what Dell has.”

Let’s back up a step. Wong says that X2 has spent over a year developing and refining a software package that can drop into any retailer or system builder’s operation and establish a build-to-order configurator. Orders go straight to a distributor, and X2 is currently trying to finalize arrangements with D&H to fill this role. The distributor passes the order on to Asia for building. PCs and notebooks are built within five business days. The system is placed into a consolidation lot for export. UPS grabs the lot, passes it through customs while in mid-air, and when the plane lands, the hardware immediately goes into the hub processing center for delivery via ground or air.

“In a similar vein,” says Wong, “we knew that ECS builds the Apple iBook, and they ship it for $35 to $40. We looked at that about a year ago and said, well, we could probably do that on the PC side. We have access to the whole supply chain. We have access to the latest ATI or NVIDIA card that can go in a system. In retail, prices drop half a percent per week, and it can take product three to four months to cycle all the way through. We can bypass three or four different levels of hand holding and keep that margin in the sale.”

Wong figures that by replicating the Dell model, X2 can recoup 8% to 15% of the money usually lost to the supply chain. This will enable resellers to sell the product at a higher price point with greater margin.

“Does the system builder make any money selling hardware? System builders make money on the warranties, service, and training. There’s no money in hardware.”

Currently, X2’s first and only manufacturing partner is MSI. Obviously, MSI has no trouble selling their motherboards and graphics cards through distribution. This is the company’s bread and butter in North America. But MSI is trying to become a main player in the convergence space with products such as the MEGA cube PC, MP3 players, and the View 561. (If you’re curious, I’ve tried a couple of the MEGA MP3 players with OLED displays, and I thought they were quite good—far better than the toys I sampled from the likes of consumer electronics giants Panasonic and Philips.) To date, MSI has found very little traction with these lines. The market perceives MSI as a PC components company, not a consumer electronics company. That’s where X2 steps in and uses its marketing strengths to get MSI the exposure it needs in the right places. The product label will likely say “an X2 product by MSI.” As it turns out, the MEGA View is only a sidebar to the real X2 story. Build-to-order is the heart of the company’s value proposition, and the more complex a device, the more likely it will be to benefit from X2’s processes. Wong indicates that X2 will focus most of its initial efforts on MSI-made whitebooks.

“We’re not going after the $599 price points. We’ll have media center and gamer models, high-end lightweights. But we’ll have 10 to 12 notebooks we offer. We’ll also do desktops, of course, but notebooks have higher margins and cost less to ship, both because of overall weight and the fact that you have one box instead of the monitor making two.”

So the order goes to Asia and, in seven to ten business days, the buyer has his custom-built hardware. When we’ve discussed D&H and whitebooks in the past, the distributor’s key value was building the unit and providing support. The whitebook road hasn’t been easy for D&H, though. The company has changed its primary whitebook supplier from FIC to Acer, and now, according to Wong, to MSI. Aside from MSI’s quality hardware and manufacturing capacity, the company’s whitebook line has the additional benefit of including both Intel and AMD platforms. Most competitors only offer Centrino-based systems. MSI will be offering three models based on the Athlon 64, an increasingly hot commodity in the performance computing crowd.

And service? Wong says that X2, like Dell and the other top OEMs, will work with an array of national service companies to offer a one- or three-year on-site plan with multiple extension options. As you would expect, the more involved the warranty coverage, the more money goes to the reseller, and not once does the seller have to perform a truck roll or field a tech call.

On all of its systems, X2 will offer system builders whatever flexibility they want. If you want your sticker on the box, they can put it there. If you only want to receive a barebones configuration so that you can add your own processor, memory, and hard drive in order to keep more hands-on involvement in the build process, that’s fine, too.

Why is D&H or some similar intermediary in the food chain? Because, as Wong puts it, “we didn’t want to have to go collect money from 10,000 system builders around the country.”

I took all this in, thought about it, and finally asked Wong, “So if all I’m doing is inputting an order that speeds through D&H, builds in China, drops to the customer, and is supported by an outside third party, am I now little more than a Dell order entry clerk? I’ve stopped being a system builder.”

Wong’s reply was persuasive and recalled Dell’s reasoning from long ago: “Does the system builder make any money selling hardware? System builders make money on the warranties, service, and training. There’s no money in hardware. A lot of system builders want out of the hardware business, but they feel they have to have it. If you want to make money, you sell extended contracts. But again, if you want to still finish building the system with us, you can do that.”

Is this the way of the future? Are we headed down a road where the only way to make money on boxes is to co-opt them? Perhaps we’re there already and X2 is simply the first to offer a feasible solution to the problem. Unlike Dell, X2 will offer a broad selection of components and base designs, some of which will be even more cutting edge than what the tier-ones offer.

On the other hand, perhaps the truth is that outsourcing whitebox builds runs too much counter to the system builder’s business model. Maybe we’re destined to sell boxes at cost just to have a foot in the client’s door we can crack open to follow with more profitable services.

Dell’s program didn’t work, and I’m not ready to place my bet on X2’s plan yet. But as we discussed last month in this column, the tier-one model is working and gaining share from the whitebox market. If it turns out that you have to be a Dell to beat a Dell, X2 may be your path to prosperity.