Here you go gentlemen.
January 19, 1999
Web Seller Asks: How Low Can
Personal-Computer Prices Go?
By GEORGE ANDERS
Staff Reporter of THE WALL STREET JOURNAL
Will the Internet squeeze every nickel of profit out of selling computers? A
major test case is about to take shape.
Tuesday, OnSale Inc., Menlo Park, Calif., is expected to start selling new
personal computers and accessories to the public -- at the same wholesale
price it pays for them. OnSale says it is gambling that revenue from
advertising on its Web site (www.onsale.com), fees for service contracts
and leases, plus a nominal handling fee per order, will leave it with a small
operating margin. The company says it doesn't expect to make a profit
from marking up prices to consumers.
The move is the latest sign that PC makers and distributors are smashing
their industry's time-honored sales channels. In the past six months, PC
makers such as Compaq Computer Corp. and Hewlett-Packard Co. have
begun using the Internet to sell directly to consumers. In doing so, they are
following the successful strategy of Dell Computer Corp., which for years
has bypassed store-front retailers and the PC distributors who traditionally
keep them stocked, going instead straight to the consumer with catalogs,
an 800 number and Web sites.
Meanwhile, aggressive distributors such as Ingram Micro Inc. have bought
minority stakes in online merchants and are helping them sell directly to the
public. In Ingram's case, its online ally, Buy.com Inc., also is sidestepping
traditional retailers and other resellers to reach the consumer directly, at
prices that are sometimes above cost and sometimes below.
'Inherently More Efficient'
OnSale's initiative, though, may be the nerviest attempt yet to rewrite the
rules of PC selling. "We're not going to put stores out of business," says
Jerry Kaplan, OnSale's president and chief executive officer. "But we think
the Internet creates a new form of retailing that is inherently more efficient.
We want to take that to its logical extreme."
To get merchandise, OnSale has signed a one-year supply agreement with
Tech Data Corp., a Clearwater, Fla., PC distributor with about $12 billion
in revenue. OnSale will take orders on its Web site and arrange billing by
credit card. Tech Data will ship goods from warehouses in at least four
states. Consumers will pay OnSale's wholesale cost as well as standard
shipping charges, a 2.6% credit-card processing fee and a nominal
handling charge to cover certain operating expenses -- say, $5 to $10 per
order.
For traditional resellers who buy from distributors and mark up prices
without offering much in the way of special service, OnSale's willingness to
do business at cost "is clearly a challenge," says Anthony Ibarguen,
president of Tech Data. Those resellers could lose business to cheaper
online rivals, he notes. Tech Data has dealt only with the computer trade,
never directly with the public-and says that is still the case.
Mr. Ibarguen says he is bullish enough about the future of Internet
commerce that he wanted to do the OnSale transaction even if it jolts
some of his existing customers. Resellers who want to charge premium
prices will need to offer special services, he says. Besides, he suggests,
maybe his company's alliance with OnSale "will encourage others to
automate their order process with the Internet."
Until now, almost all of OnSale's business has come from auctioning
refurbished computer equipment and close-out models of PCs, consumer
electronics and sporting goods. But the company last year began looking
for a bigger product line, concerned that growth in its original market was
reaching its limit.
"We found that we had only 5% to 10% of what people wanted," Mr.
Kaplan said. "We've been running a Russian store for three years. It grew
into a $250 million-a-year business, but we kept saying, 'Imagine how
much we could sell if we had everything in stock.' "
In fact, for the fourth quarter, OnSale's revenue was essentially flat, ending
a string of quarters with rapid sales growth. Company officials said they
simply weren't able to buy enough refurbished and close-out computer
models to meet customer demand.
With its Tech Data contract, OnSale plans to sell 31,000 new products at
sizable discounts from the manufacturers' list prices. For example, it will
offer 3Com Corp.'s Palm III hand-held computer at $269.47 and a
Hewlett-Packard OfficeJet Pro 1170C color inkjet printer for $685.90.
By contrast, 3Com on its Web site sells the Palm III for $369. H-P sells a
slightly upgraded version of the same printer for $799.
As of Monday afternoon, OnSale's prices beat any rival offers listed on
shopper.com (www.shopper.com), a comparison price-shopping service
run by Cnet Inc.
PC-industry manufacturers say they will watch OnSale's experiment with
keen interest. But they aren't likely to take sides in the ensuing tussle as
long as their own pricing doesn't suffer. "Our strategy is to sell wherever
our customers want to buy," says Shen Li, director of consumer channels
at Hewlett-Packard. "As long as they protect the H-P brand, we don't play
preferences for one sales channel over another."
Pricing Below Cost
At OnSale, officials acknowledge that even with their Tech Data contract,
they won't always be the vendor with the lowest price. Intensifying
competition over the Internet has led some vendors, like Buy.com, to price
products below cost at times in hopes of recouping losses on other orders
or ad revenue.
OnSale, for example, plans to sell a 17-inch color monitor made by Sony
Corp. for $331.79, while Buy.com offers the same model for $306.95.
OnSale also plans to sell a top-of-the-line ThinkPad laptop computer
made by International Business Machines Corp. for $4,490. The same
machine was available Monday from the Web site of LA Computer Center
Inc. (www.lacc.com) for $4,415.
OnSale's Mr. Kaplan says he hopes his company's consistently low prices
will attract steady customers, particularly at small businesses needing a
wide range of products. If other vendors try to undercut his prices
consistently, he asserts, "that won't be sustainable. No one can stake a
business on negative margins." |
