Dell's White-Box Play

The Round Rock, Texas-based direct PC king last week said it's rolling out a white-box PC program for the VAR channel. With the move, Dell is targeting a piece of the computer market that it previously had conceded: unbranded systems, which account for nearly 30 percent of computer sales via solution providers, according to CRN research.

Industry executives said the white-box plan marks a strategic shift for Dell. The company that grew up deriding resellers as "middlemen" is now courting them to help sell aggressively priced unbranded systems, which could help boost that segment's appeal, solution providers said.

Initially, Dell will target SMB-focused resellers with no more than $5 million in annual sales, said Frank Muehleman, senior vice president of the vendor's small-business division. Many of those solution providers qualify as "end users" because they act as outsourced IT departments for small businesses, he said.

"We are not really opening up to the entire reseller market or looking to do things in any kind of traditional [channel distribution sense," Muehleman said. "This is really an opportunity for us to provide to end users what we think is a good product with good economics. We know that in the small-business market,which is where this [product is targeted,if you can get the right economics for the end user, it works."

Dell Chairman and CEO Michael Dell gave the green light to the white-box initiative in mid-August, according to Muehleman. "He is very supportive," Muehleman said. "He sees the opportunity."

The unbranded systems business could add one-half of a percent to Dell's annual revenue, Muehleman said. That figure would amount to $156 million, based on the $31.2 billion in total revenue Dell generated in its most recent fiscal year.

Plans call for Dell to provide configure-to-order, unbranded desktop PCs based on Intel Celeron and Pentium 4 processors. The systems will ship under the generic "Channel Partner Solutions" name, which will be located in an unobtrusive spot on the PC, Muehleman said, adding that solution providers will have the option of affixing their own brand.

The base model will be the $499 Channel Partner Solutions 510D, with a 1.7GHz Celeron processor and no monitor. Configuration options include a Pentium 4 processor; a vertical or horizontal chassis; up to 2 Gbytes of DDR SDRAM; a 20-, 40- or 80-Gbyte hard drive; a CD-ROM, CD-RW, DVD-ROM or combo CD-RW/DVD-ROM drive; and factory-installed Windows 2000, XP Professional or XP Home operating systems.

"There is no standard configuration," Muehleman said. The Channel Partner Solutions units are a lower-end "hybrid" of designs for Dell's Dimension and OptiPlex computer lines, he said.

The unbranded products can be shipped directly to solution providers or their customers. "If they want us to drop-ship to different sites across the U.S., there is no charge for that," Muehleman said.

Dell is going to great lengths to "eliminate any perception" that it's gunning for solution providers' customers, Muehleman noted. "We are not going to do that," he said. "They are our customers." To that end, Dell plans to allow solution providers to maintain contact with customers and provide support and warranties on-site, selling them as an "ongoing service," he said.

Dell initially will offer solution providers a telephone ordering system for the white boxes, but it expects to have an online ordering system available by October, according to Muehleman. The vendor will provide phone and warranty support to solution providers, not to their customers, he said. The white boxes will carry a one-year, limited-parts-only warranty, with an option for three years, and the warranties won't include labor reimbursement. Dell will maintain the same 30-day return policy for the unbranded systems that it now provides for its branded products.

"Warranty is a cost, and we want to keep warranty costs down," Muehleman said. And to help keep product costs in check, no price protection or market development funds will be offered in the Channel Partner Solutions program, he said. "There is a large hunk of the small-business market being served by solution providers, and a lot of those folks are acquiring nonbranded equipment," Muehleman said. "And when we started looking at that and got some nonbranded equipment and started comparing it, we looked at the price points that the solution providers were paying. And it became clear that we could offer something that was economically better, at a better price point."

Even with the unbranded systems' slim price tags, Dell expects to make a profit on the line. "We are profitable on every unit we sell. I refuse to do business where I can't be profitable. And I expect the same thing here," Muehleman said. "I don't think the margins will deviate significantly for us. This needs to be a profitable business for us."

Muehleman denied published reports that said Dell's unbranded systems would yield profit margins of two to three points. Because the Channel Partner Solutions PCs are highly customizable, he said he couldn't specify the product's margins. "I can't really answer that, and here's why. What we did was get [solution providers' actual quotes of 'Here is what I am buying today' and 'Here is what I am paying for this.' So what Dell can do is provide them with something at less cost," Muehleman said. "How they will bundle that, mark it up and wrap it up with services, I don't know. All I know is Dell can provide them with a box at a lower cost than the equivalent box they are buying today."

Nevertheless, solution providers had mixed reactions to Dell's white-box play. Ted Hunter, president of Downtime, Portland, Maine, questioned the potential margins he could make on a Dell white box vs. unbranded and branded systems from other vendors.

"I signed up for a Dell reseller program seven years ago, and I couldn't do any business with those margins," Hunter said. "If Dell wants to work with solution providers, it has to offer us more than two points on a white box," he added.

Yet Steve Harper, president of Network Management Group, Hutchinson, Kan., said he and other solution providers serving smaller markets might welcome a Dell unbranded system, since two- or three-point margins would be irrelevant if the white boxes spawn service opportunities.

"This is just another arrow in our quiver," Harper said. "If I was a reseller in New York or San Francisco, the low [margin points would not make it worth my time. But if I can tie $2,000 or $3,000 in services onto a Dell solution in Kansas, then I'm all for it."

What's more, if Dell starts building relationships with solution providers, Hewlett-Packard and IBM might treat their channel partners with more respect, Harper added. "If Dell's being in the channel helps make HP's and IBM's channel programs stronger, then I'll welcome them," he said.

Some solution providers, however, said they're concerned about Dell's direct-sales history. Frank Ferreira, principal of the Ferreira Group, New Bedford, Mass., said he wouldn't offer Dell white boxes at the reported margins because he now sells unbranded systems from D&H Distributing at about a 10 percent margin. Dell's longtime reputation as a channel foil also could work against the company in the white-box realm, he said.

"They never thought the VARs were anything," Ferreira said. "They thought they could do everything. Their volume is based on low price."

Alan Weinberger, chairman of the ASCII Group, an association of SMB solution providers, said his organization opposes Dell's white-box plan. "Once you give Dell access to your customer base, it's easy for them to take that customer direct," Weinberger said. "This is a business model that's not good for the channel."

Still, Muehleman said channel executives exhibited ample support for a Dell unbranded system. "We tested that [idea with a bunch of focus groups and then followed up with some quantitative research. And the feedback we got from solution providers we talked to was very positive," he said. "It was, 'Yeah, we'd be very interested in this. We like the convenience factor.' We didn't tell them it was Dell. We told them it was just a major OEM coming in. A lot of them were not happy with what they were getting today. We saw that as an opportunity."

One participant in the Dell research,Oli Thordarson, president of Alvaka Networks, a Huntington Beach, Calif.-based solution provider,said he was amenable to a Dell white-box offering for the channel. "I was part of the focus group that they had with 10 [Southern California VARs on this topic. Reaction was mixed," Thordarson said. "I thought they were fishing [for ideas."

The Dell unbranded systems program could be a harbinger of deeper relationships with the channel, said an executive at one large HP solution provider that also sells Dell systems. "I have been telling [Dell for years that they could make another $1 billion if they opened up a reseller channel," said the executive, who requested anonymity. "We won't sell white boxes, but if this program is successful I think they will expand their channel."

Before Dell can expand its dealings with the channel, though, it will have to "earn its stripes," said John Samborski, CEO of Ace Computers, Arlington Heights, Ill. "Dell always wants to know who the end user is so they can take that account direct," Samborski said. "I'd never sell a Dell box because our job is selling customized, high-quality systems."

Even if Dell tries to compete with solution provider-built systems on price, it ultimately will lose on the service and support end, according to Warren Finkel, president of RLM Group, an East Brunswick, N.J., white-box maker and distributor. At the very least, Dell's white-box foray will heighten that computer segment's visibility, Finkel said. "They are putting credence into the white box, which is fantastic for guys like us," he said.

CRAIG ZARLEY, JEFF O'HEIR and BARBARA DARROW contributed to this story.