Update: Microsoft To Converge System Builder, OEM Divisions

The change is slated to take effect in Microsoft's 2007 fiscal year, which starts July 1. Plans call for Scott Di Valerio, corporate vice president of the Redmond, Wash., company’s OEM division, to lead the combined group and to work with Kurt Kolb, vice president of system builder and license compliance, on the transition. It’s unclear what Kolb’s role will be going forward.

A Microsoft spokesman said in an e-mail that the software giant "will continue to make investments to ensure local PC manufacturers have the tools, programs and benefits they need to succeed."

The company's stance is that the combination of the system builder and OEM groups will result in better resource allocation.

System builders manufacture custom "white box" or "whitebook" PCs and laptops, typically configuring them with the operating system and other software for customers. Custom system makers run the gamut from mom-and-pop shops to large VARs.

These solution providers, who drive a big percentage of overall PC sales, have blasted Microsoft in the past for cutting favorable Office and Windows pricing deals with Dell and other direct-sales PC vendors. Microsoft has maintained that volume PC makers get terms based on the amount of product delivered.

System builders said they hope the restructuring is a precursor to a move by Microsoft to narrow the wide pricing gap between system builders and OEM giant Dell on Windows and Office.

"I think Microsoft is starting to worry about their profit center which is the system builder channel," said Glen Coffield, president of Cheap Guys Computers, an Orlando, Fla. system builder with six retail locations.

"They use Dell and the big boys for volume and the system builder channel for profit. And we are getting squeezed on all sides."

"Microsoft sees the writing on the wall," says Coffield. "They are setting themselves up to be at the mercy of two or three big customers and that is not a good thing. It is very unhealthy."

Coffield applauded recent Microsoft initiatives to boost the profitability of system builders including a "Buy Local" program that directs buyers to local system builders.

But, he said, Microsoft must do more. "The biggest problem for system builders with Microsoft is you really don’t make any money selling their software," he said.

Coffield suspects that the number of system builders has shrunk in the wake of the onslaught of sub $300 systems from Dell. Hardware margins are down 20 to 25 percent since 1999, he noted.

"I have to keep opening more locations to make the same amount of money," he said.

Thomson Koon, sales manager for Hi and Low Computers Inc., a system builder based in Hicksville, New York, said it unclear whether the restructuring is good or bad news for system builders.

However, he said he is hopeful that Microsoft and Intel will narrow the pricing gap between system builders and Dell. He said the large volumes that Dell is doing in comparison to system builders definitely puts Microsoft and Intel at risk of being at the mercy of a single large customer.

"My hope is that Intel and Microsoft will level the playing field a little bit more to make sure that the system builder can survive," he said. "The system builders are an important part of the PC business. " Koon said that the pressure on system builders is greater than it has ever been. Hi and Low Computers is building about 200 systems a month, down from as many as 600 a month in 1999. "Pricing is just too low," he said. "There is constant price pressure."

Last fall, Microsoft launched a System Builder partner competency. More recently, the company unveiled the aforementioned "Buy Local" campaign that provides discounted hardware, training and other perks to system builders.

This report was updated Tuesday afternoon with system builder comment.