Reach of direct PC sellers expands

Although largely known as PC manufacturers today, the three companies are rapidly transforming themselves into multi-vendor storefronts, where customers can purchase a variety of hardware, software, networking equipment, and services from a variety of different companies. In other words, these companies are becoming more like the computer dealers the three have been squeezing for the past few years.

This trend comes at a time when more customers are buying computer equipment directly from PC makers, and more of these manufacturers are scrambling to create new sales strategies to reduce the cost of assembling and selling computers. This could be even more important next year if PC sales drop, due to Y2K and other worries.

"We are a marketing company," said Joel Kocher, chief executive of Micron Electronics. "I want to give them [customers] everything. You want financing? We will do it, and not just for leasing PCs."

"It would not surprise me in the future if the No. 1 distributor for HP printers is Dell," said Joe Marengi, senior vice president and group general manager at Dell. Dell, he added, is already the third largest reseller of enterprise software licenses for Microsoft.

The metamorphoses of the three direct vendors from PC manufacturers to generic computer dealers largely seems to be born out of opportunity and need.

On one hand, the companies are pursuing a revenue stream that has arisen because of their direct buying links with customers. Customers are already going to their respective Web sites; this has allowed all three to expand their offerings to products that relate to PCs but aren't necessarily made, or even branded, by Dell, Gateway or Micron.

And while many of these third-party products are incorporated into the PC, a growing number aren't. All three, for instance, sell printers from other manufacturers.

On the other hand, there is an element of necessity to it, admitted Jim Collas, senior vice president of product development and management at Gateway. With the tight margins and competitive environment facing hardware makers, computer vendors have to dig out supplemental sources of revenue.

All three companies, moreover, are relatively conservative in terms of technology. Neither Dell nor Gateway makes a palm-sized PC, and neither likely will until a single standard emerges.

Kocher analogizes the trend to running a movie theater. Micron doesn't own the film, just the place where it can be seen as well as the concession stand. "The direct PC vendors are in a unique space of owning the relationship. What the marketing game is all about is owning the customer relationship."

Being the pipeline to the customer is currently allowing Micron to expand into the educational market. Through its Micron University, the company offers Web-based video training. While free for a year, the company charges $59 per customer thereafter. Micron, like Gateway, also offers ISP services.

Compaq and other traditional vendors are now beginning to offer such services, but in the past they were provided mostly by local dealers and resellers.

"Computer companies have to become much more than hardware companies," Collas said.

Gateway's response so far has been the YourWare program, which offers lending options, ISP connectivity, and third-party software to customers. In 1999, the company will expand the YourWare program as well as begin to offer a wider variety of third-party products on their Web site. Complete solutions--PC product bundles attuned for digital photography or gaming-- will also start to come out.

"This [business] model is going to be very different," Collas said. "Ongoing service is only one part of it."

Of the three, Dell seems to be taking the most conservative approach. "We will continue [lateral] growth but not very far from the boundaries," said Marengi. "What Dell does is bring processes and efficiencies to markets based on standard technologies."

Although selling third party-products opens up new revenue streams for these vendors, executives at the traditional PC vendors say they couldn't be happier.

"The day Dell becomes a computer marketer, I am happy," said Jacques Clay, vice president and general manager of the extended desktop business unit at Hewlett-Packard.

Clay's enthusiasm largely lay in what could occur to the public perception of the three direct vendors once customers think of them as storefronts. If customers begin to think of these companies in terms of procurement, they may no longer consider them as technology companies. Dell's brand name as a result could fade, he speculated.

"It becomes a channel of distribution," he said. The shift, he added, also makes sense from a business standpoint. Dell in particular has developed relatively efficient logistical systems.