Intel squeezing the white box makers
Interesting article providing a look into the pricing schemes of both intel and AMD. Looks like the price war is taking a toll on the little guys as much as, if not more than, the big boys.
Wonder how much a cpu really costs a large oem after all marketing incentives and grey market profits are accounted for? $85 for P4 1.4GHz?
Casualties Of Price War
By Edward F. Moltzen
crn.com
As the PC price war reaches full throttle, Intel is widening the pricing delta between its "preferred" customers and its channel customers. As a result, white-box system builders are taking a hit.
Intel is selling 1.4GHz Pentium 4 processors to Compaq Computer, Dell Computer and Hewlett-Packard for $100 vs. $200 or more for white-box makers, say solution providers and industry analysts. And on the notebook front, Intel is selling some processors to big OEMs for $350, while smaller, unbranded manufacturers pay $700 for the same processors.
White-box makers say they're wounded by Intel's moves to sweeten processor deals for major PC vendors
White-box executives say price breaks for high-volume vendors are nothing new and remain a fact of life in the PC business. What does bother them, however, is the growing price disparity between big and small players.
"We're not asking [that Intel] lower our price to the same as the volume-quantity guys," says one white-box executive who asked not to be identified. "But the difference is so great, they are slowly killing off one channel. And the result is they are going to have one channel with a small number of very large companies."
In the fourth quarter of 2000, when the price war began, 44 percent of solution providers polled in CRN's Monthly Solution Provider Survey said their top-selling desktops were unbranded systems. But by second-quarter 2001, only 33 percent said so. Similarly, 27 percent of solution providers polled in the second quarter of 2001 said white boxes were their best-selling PC servers, down from 32 percent in fourth-quarter 2000.
The price gulf comes less than a year after Intel kicked off an initiative to build its share in the white-box space, which accounted for more than 20 percent of U.S. PC volume in first-quarter 2001, according to research firm Gartner. The effort included a new logo program for solution providers that packaged all-Intel systems, as well as $10 million in marketing funds.
Intel spokespeople declined to compare the discounts they offer OEMs that buy chips in quantities of 10,000 or greater with those that buy in 1,000-unit batches or less. But they describe the company's current pricing for large OEMs and the white-box channel as business as usual,and as a strategy the chip giant has employed for years.
Yet white-box makers aren't the only ones noticing the fatter-than-usual price breaks being offered to the likes of Compaq, Dell and HP.
In a report issued last week, Merrill Lynch analyst Joe Osha said that while it has been the norm for Intel and rival Advanced Micro Devices (AMD) to offer bigger discounts to higher-volume OEMs, they are stepping up price breaks for large customers even more.
"We note that with both companies willing to offer steep discounts to volume customers, the gap between list and actual prices should be even wider than usual," Osha said.
Spot checks indicate that large OEMs are getting 1.4GHz Pentium 4 desktop processors for $100 a pop in some cases, Osha said in the report. Several white-box builders said last week that, in a best-case scenario, they pay about $200 for the same processors. In addition, Intel is providing discounts of 5 percent to 35 percent to the major manufacturers across its Pentium III, Celeron and Pentium 4 lines, according to Merrill Lynch.
"What we have seen in the last year is that tier-one [OEMs] are now able to offer pricing comparable to what we're able to offer," says Bob Schafer, president of white-box maker Channel Micro, Somerset, N.J. "It's putting a squeeze on the reseller."
Though manufacturers like Dell, Gateway and Compaq don't disclose the discounts they receive, Schafer says name-brand competitors are increasingly underpricing Channel Micro systems to move product. "They are, right now, overstocked," he says of the big vendors. "And they are discounting [systems] like crazy on all levels. It's making it harder and harder for the white-box people to survive."
Intel, however, is focusing on solidifying its market dominance. In an interview earlier this year, Intel CEO Craig Barrett made it clear that the company wouldn't allow rival AMD to steal market share, and that Intel would work to be price-competitive along the way.
For example, the chip giant recently acted to keep Dell out of the AMD court, says Eric Ross, a financial analyst at Thomas Wiesel Partners.
Last month, Ross says he was certain that Dell,the last of the major manufacturers to shun AMD and offer only Intel-based systems,would do an about-face. His sources told him that within a month, Dell would announce a decision to begin installing AMD Athlon 4 processors into its notebooks, ending its exclusive arrangement with Intel. But then Intel slashed the price of its 1.4GHz Pentium 4 processors to $100 for its preferred OEMs. A month has since come and gone, and Dell has announced no such deal for AMD processors, Ross says.
A Dell spokesman declined to comment on the AMD scenario, and an Intel spokesman declined to comment on the specifics of the company's relationship with Dell. Dell executives have said they would be "ruthless" in their ongoing price war with rivals, although they insist on calling the rising competition a "cost" war.
David Chang, president of Agama Systems, a Houston-based white-box maker, says it's no coincidence that Intel is using price as a juicy carrot to lure major manufacturers. "Of the top five [PC vendors], four use AMD,not because they want to sell a lot of AMD systems, but they use AMD to push Intel [on price]," says Chang, who adds that he has good relationships with AMD and Intel. "Dell is the only exception. So Intel says, 'You want to play with me? I'll show you who's stronger.' "
And Intel stands to keep displaying that strength as it adjusts pricing on an almost monthly basis. After at least six price cuts already this year, Intel is gearing up to drop prices again next month, according to some financial analysts.
In a report issued last week, investment firm Salomon Smith Barney said it received an advance look at Intel's updated pricing strategy. The report said the chip maker is planning an Aug. 26 price cut that will slash the prices of its Pentium 4 line an average of 39 percent across the board. And more cuts,to the tune of another 23 percent,are slated to come in late October, the investment firm said.
The pricing situation is creating an expanded role for the gray market, says Agama Systems' Chang. "The big guy is going to promote a total solution. But if they cannot sell as many [CPUs] as they take, they'll move the CPU through the back door," he says.
Echoing the views of other white-box makers, Chang says it's in no one's best interest to squeeze makers of unbranded solutions out of the market. "I believe all the manufacturers need a white-box guy like me," he says.
Some solution providers,including Chang and Schafer,say they already see Pentium 4s starting to bleed through to the gray market, given the abundant supply of the chips and the continued weak sales of vendors like Compaq and HP. Chang says gray-market pricing has been so low that, on occasion, his company has acquired some processors via that route.
Others say Intel still provides them with enough incentives to stay loyal.
"I buy my processors in a retail box, so I have the three-year warranty," says JoAnn Evans, vice president at Net/Works, a Minneapolis-based white-box provider and Intel premium partner. For every Intel processor Net/Works buys, Intel gives the company money to purchase advertising, Evans says, adding that she buys Intel processors through distributor Ingram Micro.
Evans says she's happy with Net/Works' relationship with Intel, even though her best price on a Pentium 4 processor without a motherboard remains $199, while larger manufacturers get them for $100.
Agama Systems' Chang criticizes Intel's pricing moves this year not so much for the size of the cuts but for their frequency, which he believes has created confusion in the market.
But if the market isn't confused, it certainly has been shifting. According to CRN's monthly survey of 600 solution providers in the small- and midsize-business (SMB) sector, as Compaq and Dell have stepped up discounts and trimmed down prices, they've gained customer mind share at the expense of white-box providers.
From fourth-quarter 2000 to second-quarter 2001, the percentage of solution providers that said customers preferred white-box desktops dropped to 30 percent from 41 percent, according to the CRN survey. Over the same time period,during which Intel cut Pentium 4 prices at least three times,the portion of solution providers that said customers preferred branded desktops rose to 32 percent from 18 percent. The PC server segment exhibited a similar trend.
"It seems to have gotten worse within the past year because of the price wars," says another white-box provider who requested anonymity. Considering Intel's price cuts and the discounts that Microsoft occasionally provides via volume licenses, "that extra $400 difference on a system becomes the difference," he says.
But even though major vendors have been able to meet or beat white-box makers' pricing, they haven't done so without a cost.
Last week, for instance, HP CEO Carly Fiorina waved the white flag in the ongoing PC price war as part of a warning that the company wouldn't meet its projected earnings for the current quarter. "We're not going to price for market share in the PC space," Fiorina said. And in announcing plans to cut another 6,000 jobs, HP said its cost structure wasn't keeping pace with the receding global economy.
If Intel continues to give bigger discounts to large vendors and fuel the PC price war, white-box providers may be wounded but won't be the only casualties, industry executives say.
"The effect will be to push the bloodbath a little bit further. That will help Dell raise its profitability and push [overall] PC prices down," says Channel Micro's Schafer.
Large vendors and white-box providers that can't fight the tide will end up exiting the market, while those that can figure out how to fill the void will survive, Schafer adds. "Our business has been solid. We've been very fortunate," he says. "A lot of it has to do with the fact that we rely on the channel for our livelihood. We have customers who have changed their business model and say, 'Hey, I'm not selling PCs any more.' " |
