Elegant boxes may mean ugly future for PC makers

Elegant, inexpensive computing devices coming next year will bring a touch of class to corporate desktops--and also present PC makers with a new set of competitive headaches.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
4 min read
Elegant, inexpensive computers coming next year will bring a touch of class to business desktops--and also present manufacturers with the same sort of problems they've faced in the consumer PC market in recent years.

Small, stylized computers, such as the iPaq from Compaq Computer or Hewlett-Packard's ePC, will give businesses the computing power they need for $499, according to estimates, far less than the $750 business systems customers are buying today.

The problem is that these machines, if they become popular, could lead to the sort of low-ball pricing that has squeezed the consumer PC market for the past three years.

The effects of price obsession in the consumer market has been dramatic. Second-tier PC makers--and even former major players such as Packard-Bell--saw their markets dry up. The price war in particular has hit Packard Bell very hard, resulting in massive layoffs and the termination of its consumer brand in the United States.

Meanwhile, as computer prices fell, a few of the top consumer PC makers experienced dramatic increases in sales; but the big price cuts rained on that revenue parade.

"In 1999 there was a bloody battle in consumer [markets]," said Roger Kay, an analyst at International Data Corp. "The same could happen in commercial."

Other analysts agreed.

"This is the other shoe dropping," said Dean McCarron, principal analyst at Mercury Research. "This happened in the consumer market and look what it did. It was just a question of who was going to do it first."

It is still far too early to estimate how businesses will react to these new devices. But proponents point to Apple Computer, which experienced a complete turnaround through the creative use of colored plastic, image and new technology.

But even if another iMac-like story doesn't unfold, the market is rich with possibilities. These new PCs will also emphasize centralized management and control, which could drive more server computer sales and open the door to ongoing service opportunities such as application hosting, data storage or wireless deals.

"Today our traditional competitors are HP and IBM," said Jerry Meerkatz, the vice president overseeing Compaq's Internet Access Appliance Group. "Tomorrow, we will be competing, or collaborating, with Nokia and Philips, or IBM and Philips." Deals will come with "implied exclusivity," he added.

"Less is more" has become the guiding mantra of both Compaq and HP in the corporate desktop space. To users, these Internet appliances will function exactly like a Windows-based PC. The changes will come in case design and how the keyboard (or other peripherals) plug in. To IT (information technology) managers, however, a Net appliance will be a PC with "dumb terminal" characteristics.

HP's ePC, for instance, will come in a sealed case, making it impossible to add more memory or change hard drives. For years, customers demanded a case that could be opened, said Achim Kuttler, marketing manager for HP's business desktops in North America. But when pressed, customers largely admit they never use the option, he said. Sealing the case, meanwhile, saves money because the PC costs less to make. Also, employees can't meddle with the innards.

"In internal expandability it is stripped down," he said, adding that the ePC will be "significantly cheaper than a regular [corporate] desktop."

Another feature of these new PCs is that the configuration--the specific collection of hardware, software and drivers found in a PC--will be frozen, or at least minimally changed. This will reduce the onerous and often expensive "qualification" or testing procedures that corporate buyers go through whenever new technology comes in the door. Both companies will emphasize management and support software to centralize control over PCs.

For the manufacturer, these machines cost less to make and service.

"You've got overkill in technology" with current desktops, said Meerkatz, which artificially inflates expenses. These computers will also lack "legacy" technology, such as ISA slots and traditional connection ports, which allows for smaller, less costly motherboards and cases.

Considering the existing price pressure today in the corporate market, the gross margin on each appliance will likely be equal or better to what the company gets now on corporate desktops. Compaq will also sell the systems directly to customers, thereby reducing inventory costs.

Still, although gross margin per machine may not decline, the total number of margin dollars derived from each PC will shrink, which means that volume will be a key consideration.

Kuttler concurred. "Success is in volume," he said. "How many products can you sell?"

Competitors are seemingly waiting in the wings to see how this evolves. Dell Computer, for instance, has designed a similar PC for consumers. The company has not stated plans to bring these kinds of PCs to a corporate market as yet, said Bill Peterson, a Dell vice president, but it could.

Where else will profit be made up? Servers and side deals. If central management takes off, corporations will need to buy IT departments more servers to manage applications and upgrades, industry observers have said.

Service possibilities abound as well. Qwest and HP, for example, are "looking at the whole possibility of getting information appliances to the end users," said Mike Weir, marketing manager for business PCs in North America. "We want to be able to offer the whole thing"--a situation where the "client" computers would be preconfigured for the task at hand."

Nonetheless, HP will remain a hardware company. "We want to be the people selling the pans, not necessarily panning the gold ourselves," Weir added. "We have a model to make money on this."