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Trouble on horizon for 'white box' PC makers

As more computer buyers turn to laptops, lesser-known companies that produce PCs will have a hard time keeping up with the big guys. Photos: White-box choices

Apple might be the flavor of the moment in the consumer PC world, but hundreds of thousands of customers every year continue to choose plain vanilla "white box" PCs.

Those purchases go on as Hewlett-Packard and Dell churn out millions of name-brand PCs every quarter, Acer enjoys double- and , and Apple continues to be .

At first glance, it would appear the white-box market hasn't changed so dramatically in the past several years. The share of white-box computers (which includes PCs without brand names and those from smaller manufacturers) has decreased from a 44 percent share of the worldwide market in 2003 to 37 percent as of 2006, according to market researcher IDC.

But the growing popularity of notebook PCs spells big trouble for the future of white-box manufacturing. The "white-book" market has dwindled from an already-small 8.5 percent share to a 5.6 percent share between 2003 and 2006. That comes while notebooks have, over the same period of time, become the dominant PC form factor for top vendors Hewlett-Packard, Dell, Lenovo, and Acer, accounting for two-thirds of consumer PC sales.

The smaller PC assemblers can't participate as easily in the notebook market. That's because their bread and butter--an oversupply of parts they can buy at a discount--are intended more and more for specific notebook models.

That fact is antithetical to what it means to do business as a white-box manufacturer. The key to the white-box market is opportunity. These smaller manufacturers make their money by taking advantage when major manufacturers make mistakes on orders, or by scooping up soon-to-be outdated parts when newer versions are about to become available.

"The thing about white-box vendors is they're opportunistic," observed analyst Roger Kay, president of Endpoint Technologies Associates. "They change their market model depending on market conditions."

That list of white-box manufacturers mostly reads like a who's-that list, rather than a who's-who. Companies like Systemax, ProStar, MicroPro, and CLT Computers put together custom PCs and offer them under a no-name brand or no brand at all. Sales are typically done on a direct basis, avoiding retail outlets, and often are bundled with services, software installation packages, printers, network cables, and warranties. Typical customers of white-box manufacturers are government agencies, educational institutes, small and medium businesses, and even individual consumers.

White-box makers thrive when the bigger guys mess up. Say HP over-orders hard drives: When HP tries to resell those hard drives to smaller players at a discount, white-box manufacturers will snap them up, throw them into some desktop boxes, and wait for sales. In that case, the assembler is making money on the PC with the name-brand hard drive that it got at a discount and put in a no-name box.

It's easy enough to do that with desktops or servers. But notebook form factors and their corresponding components present a challenge for manufacturers who want to mix and match. A motherboard created specifically for an HP Pavilion notebook, for example, can't be shoved into any old notebook, Kay points out.

"There's a great deal of integration and complexity, (which is why) there are hardly any white-box notebook vendors," he said. "The requirement (to be a white-box manufacturer) is a great degree of flexibility in the assembly process." That doesn't work when the parts for notebooks are specially made, and are designed to fit specific spaces inside a specific notebook, he added.

The mix-and-match model can work swimmingly for white-box desktop makers--and for the component makers and operating system makers.

Microsoft, for one, can benefit from having an alternative outlet to license its operating system. For example, HP computers account for just under 20 percent of the worldwide PC market, which affords the company a lot of negotiating power with Redmond. But Microsoft can try to regain the upper hand by having an option to license its products to smaller outfits that individually wield far less influence, said Kay.

Despite that, small and regional PC sellers still find it close to impossible to compete with the big guys. Ray Klammer, who has owned San Francisco computer seller Boxed CPU for a decade, has seen his business change with the PC market. He switched from building PCs to order to buying and reselling name-brand PCs seven years ago, after just three years in business.

"You can't sell computers for less than Dell," Klammer said. "Customers that need really specialized computers will (order white-box PCs), but otherwise, no one can build a computer cheaper by building with parts off the shelf."

The discount that top PC vendors like Dell get on Windows from Microsoft was the biggest factor in his decision to stop selling white-box PCs, he said. The direct-sales models of big companies like Gateway and Dell forced him to shutter both of his brick-and-mortar stores two years ago and take his business to the Web to compete. Now, he only sells Dell computers.

"They're easiest to sell because of the name recognition," Klammer said. "Are they any better than other computers? No. But brand names sell."

There is something working in white-box desktop manufacturers' favor: the consolidation taking place in the worldwide PC market. In recent years, Lenovo took over IBM's notebook business, Acer swallowed up Gateway and soon , and even Dell and HP brought boutique custom gaming outfits Alienware and Voodoo, respectively, into their folds.

Fewer major players can mean more power when it comes time to negotiate with component makers, like Intel, Advanced Micro Devices, Seagate, Western Digital, and others. So, for those component manufacturers looking to have some bargaining power with the big PC makers, "part of the defense is to keep a healthy white-box market," Kay noted.

Dell actually tried to horn in on the white-box market back in 2002, but didn't stick around long. The idea was to offer unbranded machines to smaller distributors at lower prices back when the white-box market was white-hot. At the time, the idea was that small PC assemblers would jump at the chance to work with Dell and still not hurt their own profits. At the same time, it was also another way for Dell to expand its share of the PC market.

But after a little over two years, Dell called the white-box program quits. Dell's experiment is an instructive glimpse at how the white-box PC market works, Kay said (namely, that it's constantly in flux). What may work for a couple of months may not work for the next few, since it all comes down to what kinds of products the smaller manufacturers can get at the merchant level.

Though the white-box market as a whole accounts for more than any one single vendor, including market leaders HP and Dell, it likely will continue to decline even further--particularly because the economics of participating in the PC market heavily favor the big companies. When ordering large quantities of products from Intel or AMD, the discounts are generous for companies that place hefty orders. Small-scale assemblers have no hope of striking similar deals.

"They have to be extremely nimble. They keep morphing their business model almost on a daily basis to stay in business," Kay said. "It's a tough game."