Beyond the Beige Box

The drop in volume in the PC market during the past year has brought back to
the limelight, a problem, which was always lurking beneath the surface–the
problem of margins. During the last five years or so, the margins on hardware
were under pressure. However, the growth in volumes made up for that to some
extent. But the last year has put the squeeze on percentages and volumes. This
has resulted in pressure on the channels to find alternative paths to profits.
And while the problem is more severe for the channels, vendors too are under
pressure to create value opportunities for their partners. Both short and
long-term solutions have to be found if the channels have to grow.

So what does the average dealer do in this situation? One solution is to wait
and let the situation improve. That however, is more of a hope than an answer.
The present margin crunch is not just due to the depressed economic conditions
of today. The basic nature of computer usage is changing. There are multiple
customer segments that have widely different needs and expectations. But the
product/service offerings for them are still developing.

“IT would be really worthwhile if just 100 underprivileged children get better access to education and information” 

Shyam Malhotra

The home segment buys computers for education, entertainment and Internet
access. This is further sub-divided according to the buyers’ propensity to
pay. There are some for whom brands are important for reasons of status or
perceived quality. There are many others who are in the price sensitive band and
look for unbranded options in order to save money. Their need for pre-purchase
selection services is often high. These segments need basic software. But beyond
that, they only need a machine that does not breakdown or hang everyday. Once
purchased, the computer is used for relatively simple applications. Hence
warranty, troubleshooting and a feeling of support security are important
considerations. There are services for which these customers will pay–provided
they feel confident that they will get their money’s worth. So what are the
services that they will pay for? The obvious answer would be the ones that suit
their needs. But ask the channel partners and the usual refrain is–customers
do not want to pay for all these. They want them free. Customers do want to keep
getting free what they have been used to or what they consider are intangibles.
At the same time, there are markets where services /add-ons have become sellable
and provide decent margins. Servicing of cars is one example. The amounts that
are paid today are far higher than were earlier. In the case of mobile phones,
there is a premium for the latest models. Old ones are quickly discarded. This
would not have happened a few years ago. Essentially the problem of low margins
here is a marketing issue and not one of technical specifications. The approach
has to be aimed at the heart of the buyer not his head.

Moving on, middle level organizations want more than entertainment and
Internet access. They need service/support to make their systems work reliably
in small networks. They could also use software support. They need packaged or
semi-customized software for their basic database and financial applications
that address their primary businesses without too much of effort. Here, there is
an availability issue. Ask anyone the names of the software companies doing work
for GE in the US and you will get the answer. Ask for companies who can
develop/assist software development for middle level players and there are no
names. The huge mass of middle level users and suppliers remains a nameless
entity. Yet these are the needs, which if fulfilled, can drive this market and
also provide margins. It may not be a huge market. Yet it is not to be
dismissed. If one assumes that there are two million computers sitting in this
segment (40% of the installed base) and only Rs 2000 is spent on each computer
each year, it is a Rs 400 crore market. Apart from the match making issue, there
have to be worthwhile offerings.

The large corporates have needs which run into multiple numbers on a regular
basis. For them, hardware is just a cog in the wheel. The real issue is business
solutions. Most of them have in-house departments for that. Many now prefer the
outsourcing model provided they find the right supplier. There are a few
emerging in-house departments for many needs and they may or may not pick up
boxes of any type. Their concerns are at the overall system level and the box is
just one small part of their need. Since many of them are under budget
pressures, price and costs are important considerations. But so is trouble-free

They will therefore prefer brands but not for style or status considerations.
Their preference would be for brands that promise trouble-free service at low
cost. In many cases they would prefer upper end systems for processing and not
for games or other entertainment related applications.

Channel players have to recognize and accept the existence of different
customer segments. The need differentials may not always be in technical
specifications but in the way the customers are handled. If that becomes clear,
the channel partners have to map their strength areas vis-à-vis the customer
needs. The differences in customer preferences are not recognized—or not
worked on consciously. This level of fundamental differences does not occur in
most other industries. You do not have dramatically different usage of the same
hardware by different customers. In theory, the market is structured to meet
these varying customer needs. The box sellers are termed dealers/distributors
while the more service oriented suppliers are termed VARs (value added
resellers) or solution providers. But the distinctions get blurred.

Both the channels and vendors have to recognize this and work out
significantly different product positioning and customer servicing strategies.
The trader dealer has to make money by constantly rotating capital, introducing
new products and work towards higher volumes. The vendor has to support them by
brand building, better credit terms, and warranty and after sales support etc.
The technical dealer has to work at providing more integrated services with a
reasonable degree of technical support. The vendor has to help this segment by
providing technical updates, productised services and associated software.

If a clear distinction is made and the vendors and channel partners position
themselves accordingly, there is no logical reason that there will no margins in
this industry.

Shyam Malhotra
The author is editor-in-chief, Cyber Media

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