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Is the white box the right box for Dell?

Dell Computer has conquered servers and workstations, moved into printers and even sells its own PDA. But its foray into making "white-box" PCs isn't exactly going smoothly.

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Dell Computer has conquered servers and workstations, moved into printers and even sells its own personal digital assistant, the Axim.

But so far the Round Rock, Texas, company's forays into making "white-box" PCs for computer dealers has gotten off to a slow start, according to dealers and analysts.

White-box PCs and servers are computers that usually get built and sold by dealers or small, regional manufacturers. They often cost less than PCs from multinational manufacturers and can come with specialized software bundles. Although the Dell white-box machines now come with a company brand attached, they generally fit the other characteristics.

Dealers contacted say they like the idea of carrying Dell-built and Dell-branded white-boxes alongside the ones they manufacture in-house. But many dealers complain that Dell's prices are too high, and they're wary of contractual terms that require them to divulge information about customers to Dell.

The requirement, no matter how innocent, creates a perception among some dealers that Dell eventually may try to get the customer to buy from them, analysts said. Dell sells most of its PCs directly to customers. HP and other PC dealers also have tussled over similar customer-information issues in the past.

"The biggest push back seems to be the perception that if a system builder worked with Dell, they would lose control of the customer," said Leslie Fiering, an analyst with Gartner.

Dell CEO Michael Dell also hasn't been wowed by the white-box program yet, though the company plans to continue it. "We have not been superimpressed with what we've seen," Dell said during a conference call in February. "I'd still put it in the experiment phase."

A Dell representative declined further comment for this story, except to say that the company's modest expectations had been met. Later the representative said Dell's policies do not require dealers to hand over specific customer information, unless Dell is shipping its products directly to the buyer.

Despite the challenges with white-box PCs, some dealers say they are seeing momentum in selling the company's servers--another part of the initiative. But the uneven state of affairs means that Dell executives have not included the initiative so far in the discussion of the company's latest goals for the future in the company's annual meeting with financial analysts, which kicked off on Wednesday. Instead, Dell announced that it had broadened its partnership with software maker Oracle to cover new world markets and to introduce new products such as computing clusters and new services for businesses.

Although Dell and computer dealers have been at odds in the past, the company decided to jump into the white-box PC market last August to help reach its goal of doubling revenue during the next several years and boosting its PC market share to between 30 percent and 40 percent. Dell's market share stood at about 15 percent of the worldwide PC market in the fourth quarter of 2002, according to analyst IDC.

White-box PC sales have grown quietly during the past five years and by some accounts could make up as much as a third of the PC market. In addition to lower price tags and flexible software options, the promise of local, immediate service is a big selling point for both small and large businesses.

Uneasy alliances
Crafting a program that satisfies Dell and the dealers has proved elusive. Dell initially said it would build PCs for dealers and offer tech support. It also expanded the program to include servers, workstations and notebooks.

North Lauderdale, Fla.-based Lynn Computer Products, which sells PCs and upgrades, has sold about one Dell desktop per month for the four months it has been offering them, according to proprietor Doug Lynn. "I wish the markup was better," he said.

Dell's white-box desktops start at about $500 without a monitor for its 510D white-box model. Dealers are given discounts based on sales volume, but they are often required to pay shipping fees of about $99 per PC. On its own Small Business Web site, Dell sells similar Dimension 2350 desktops at prices starting at $399. As a result, some dealers see Dell as an outright competitor.

Other customers are nervous about giving Dell their customer information, which they say is required to make a transaction.

"It's been a positive relationship with Dell, but not without tensions because of some of the unorthodox things that Dell does," such as requesting customer information, said one sales representative with a computer dealer in the Northeast, who asked not to be identified. Despite some initial successes selling Dell servers, "the jury is still out," he added.

Branding, not just the release of customer information, also has been a sticking point between Dell and its dealers. Dell initially prevented dealers from advertising that Dell built their systems, a move that likely hampered the white-box program, analysts said. The company eventually changed its mind based on requests from dealers.

Dell's persistence in sticking with the program suggests that the company is bullish about its potential. Dell is usually quick to abandon projects that don't meet expectations.

"At the end of the day, the program may not have been a big success, but Dell probably learned from the experience," Fiering said.

Analysts believe Dell's next moves will be to offer more high-end computing gear for corporations as well as some new, multimedia-oriented consumer products, such as digital cameras. A new line of beefed-up Axim PDAs that include wireless is also a possibility.

"One thing that's clear about Dell's model so far is Dell quickly moved off its original franchise, desktop PCs to things that had higher margins: servers and such," said IDC's Roger Kay. "I see new products being more like switches...and infrastructure software. That puts Dell more clearly in IBM's space."