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Sir Winston
Churchill once said, "A pessimist sees the difficulty in every opportunity;
an optimist sees the opportunity in every difficulty." Churchill would have
known. Heading into the Battle of Britain, nearly all of the world,
including the U.S., thought that the U.K. was on the verge of military and
economic collapse under the weight of Hitler's seemingly unbeatable war
machine.
The situation is not entirely unlike today's battle between system builders
and the tier-one OEMs. Analyst after analyst is quick to proclaim the
channel's shrinking market share, the price and scale advantages of tier-one
manufacturing, on and on and on. Doom is everywhere. And yet...
Churchill applied the term "the darkest hour" to the period between the fall
of France and the official entry of the U.S. into the war and specifically
to the day of May 10, 1941, when over 1,500 people died in London alone
under Nazi bombing. In most if not all wars, there is a turning point when
directions change and the outcome, in hindsight, becomes inevitable. Perhaps
we are at that point now in the fight for the survival of the system builder
channel. Perhaps 2005 will be the year we look back on and say, "Right
there, that's when the channel got its balance and started kicking some
major OEM butt."
You can see the signs. Let's start with the channel's #1 villain, Dell. Only
days ago, Dell stock took a huge pounding as the company's relentless
emphasis on margin-sapping, sub-$600 desktops and notebooks finally took a
toll on earnings. Dell sales for Q2 were 2% under analyst expectations.
According to Forbes, the company is on track to post its worst performance
since September 2001. In comparison, Apple is up 43% so far in 2005, and
that's before the Intel CPU transition. I point this out not to laud Apple
but to show that the market is still amply willing to reward manufacturers
who emphasize value-adds over price points.
Next in line, HP recently announced that it will slice away 14,500
jobs—nearly 10% of its entire workforce—with some groups getting axed in
half. In a bad news video to employees, CEO Mark Hurd called his company
"structurally inefficient."
IBM, of course, announced late last year that it would sell its fabled PC
business to Chinese giant Lenovo Group in a joint venture, making Lenovo the
world's third-largest PC manufacturer. IBM's PC unit had been bleeding for
years. With the IBM name in its pocket, Lenovo can finally move beyond China
while IBM will finally have a way to sell dirt cheap systems, just like
Dell. In the end, the deal is likely to demonstrate to buyers not already in
the know that the value inherent in a big OEM name is little but smoke and
mirrors.
At #4, Gateway is finally starting to gain sales, but it took paring down
its product offerings and leveraging the price drops that came with
acquiring eMachines, which may have had the single worst OEM reputation with
consumers during the ‘90s. Apple fills the #5 slot among OEMs, but it's
worth noting that the gain in Apple's stock price is based largely on iPod
hysteria. Earlier this year, Apple execs admitted that they did not have
data supporting a rise in PC business following from the iPod's success.
In short, the big names have big problems. Dell still doesn't have AMD. The
tier-ones do have tech support--in India. A 2004 Consumer Reports study
showed that Dell scored only 62 points out of 100 for customer satisfaction;
HP scored 54. Dell scored 74 back in 2001 and has been sliding ever since. A
similar study by Technology Business Research found similar slippage in the
business PC sector.
Big budget advertising can only take a company so far. Some customers will
be OK with a $600 PC experience, but an increasing number won't. Despite
historic prejudices to the contrary, average users are getting more savvy
and expecting a richer computing experience, and they're wanting that
experience deployed in ways that Dell and Circuit City cannot effectively
deliver.
The big OEMs have stumbled. Are they likely to get up again? Of course. But
you can kick them while they're down and use this window of opportunity to
seize some business from them. Ultimately, we may look back and see that the
reason the OEMs stumbled in 2004/2005 is because they charged and charged
against the value-add system builder channel and found they could advance no
further. Now is the time for the channel to push back. |