PC makers relearning how to compete

PC manufacturers are refashioning themselves into computer supermarkets to bolster bottom lines that have been left in tatters by PC price wars. These companies are making rapid changes in their businesses to sell services and third-party hardware.

The goal: to capture a bigger slice of the profits that normally goes to retailers, resellers, and even Internet service providers.

Just this week, Dell Computer opened up an online superstore offering peripherals and software to all comers; the store had only been in development since December. Meanwhile, Compaq Computer talked of plans to sell and distribute third-party software through its Web site, only the latest in a string of e-commerce moves the PC giant has made of late.

Why the frenzy of activity now? "There's just not as much [profit] margin as there used to be. Some companies will have to take less or get squeezed out," said Roger Kay, a PC industry analyst with International Data Corporation

As PC companies find it harder to compete on price alone, they will increasingly have to offer "value-added services," said Tony Amico, director of PC channels research at IDC. Amico made his remarks at IDC's Directions 99 conference in San Francisco earlier this week.

Some services will make companies more money than others, though it seems that the more active PC players are trying just about every angle imaginable. At present, developments are concentrated in three main areas: connections to the Internet, financing services, and equipment and software sales. Most announcements have been made in the first two.

Wiring their customers
One of the first companies to make a move to expand its horizons beyond just hardware already seems to be having some success. Gateway has seen its quarterly revenues--and profit margins--rise as a result of the YourWare financing program, under which consumers buy additional hardware, software, or services along with a PC for relatively low monthly payments. Gateway gets higher average sales with the deals, as well as added profit from financing contracts.

One of the most successful elements of this program has been Gateway's ISP services. Customers pay Gateway around $15 for monthly Internet service, but the company pays only $7 of that sum back to UUNet for providing the actual connections, said Kurt King, analyst at Montgomery Securities.

King recently upgraded Gateway's stock because the company seems to have "put together a plan that will get them away from a reliance on selling computers," he said. "It beats the hell out of just selling more computers."

At last count the company said it had around 200,000 customers, and plans to sign up 400,000 by midyear. The company now offers Internet access "for free" with every new computer over $1,000, hoping to make money on the deal by retaining customers after the one year period is up.

Most other major computer companies already have deals to funnel customers to ISPs. Financial analysts estimate that computer makers typically receive between $25 to $50 per subscription.

Dell and Compaq have also been striking deals to offer high-speed Net connections, angling to tap the ongoing revenue that goes to service providers. Service companies find these deals attractive because by bundling hard-to-install digital subscriber lines or cable modems, PC companies are saving providers the cost of maintaining fleets of service trucks.

Neither company would comment on the financial arrangements they have made with service providers.

Some sell it all
PC makers are almost usurping the role of the retailer as they round out their e-commerce strategy by moving beyond just selling the PC.

Compaq hopes to stay linked to customers through an e-commerce plan that includes the AltaVista search engine, the acquisition of Shopping.com, and efforts to sell software directly to consumers. Dell is staying focused on computer related products with its recently opened Gigabuys.com online store. The site offers 30,000 computer products, including 3Com's PalmPilot, digital cameras, printers and software.

Gateway's tack is similar, though it also intends to own a stake in an independent, privately held reseller of PC equipment and software. The company will then would offer goods through SpotShop.

IBM has a program for consumers that lets them shop for software at its own EasyChoice site, with online reseller Chumbo.com providing back-end support for the service. Is it worth it to jump into sales of third-party goods? Some companies are pushing their sites more aggressively than others, so results will vary. In general, profitable catalog and online computer resellers might make an average of between 10 and 15 percent profit on net sales of hardware and software products, research shows.

And in the PC market's current climate, that could mean the difference between life and death.