Have You Hugged Your PC Today? Turning PC Sales Into Profits

Is the PC dead?

Pundits have been debating this question for years, as what was once the reigning king of productivity began to be replaced by tablets and other devices. This past year, however, the answer became clear. The PC is alive and well in North America.

According to research firm IDC, U.S. consumer and commercial PC sales are up 4.3 percent overall this year. But the real news is that U.S. commercial sales are up 18 percent this year compared with last year. IDC forecasts U.S. commercial sales will end the year up 12 percent.

While most agree that the PC's heyday is over, the bigger questions for solution providers are how sustainable is the PC business, how can they make money selling commodity hardware with razor-thin margins, and how long can PC sales continue to move north?

Solution providers tell CRN that the past 10 months have been great for their PC business. That trend, according to IDC, is due to booming Chromebook sales, end-of-life Windows XP upgrades, and an improved economy that has loosened the purse strings of IT budgets.

BIGGER MARGINS VIA OEM CHANNEL ALIGNMENT

"Our PC business is very strong, growing 15 percent over the past year," said Douglas Grosfield, CEO of Xylotek Solutions, an Ontario-based solution provider and a Dell and Lenovo partner.

As the larger IT industry grapples with a transformation to cloud and enterprise services such as Infrastructure-as-a-Service, OEMs such as Dell, Hewlett-Packard and Lenovo haven't ignored the PC, said Grosfield. These vendors have focused on channel alignment with partners and stepped up efforts to deliver more incentives and launch programs to drive PC sales, he said.

"PCs used to cost $2,000. Now a comparable system runs $600," Grosfield said. As a 20 percent margin has shrunk to 10 percent on increasingly lower-priced PCs, distributors and OEMs have been stressing service contracts, new customer bonuses, SPIFs and back-end rebates to help solution providers recoup some of that margin.

For Xylotek and other solution providers, that has helped keep their PC business profitable.

Joe Lore, sales director of at Sunnytech, a white-box system builder and Lenovo partner based in Woburn, Mass., said PC sales have been solid over the past year. "For PCs, profitability is still dependent on volume," Lore said.

Lenovo is the world's top PC maker with 20 percent market share in the third quarter, ahead of HP and Dell, according to IDC. But in the U.S., Lenovo has plenty of room for growth -- or at least to gain some ground. HP owns the U.S. PC market with 27.7 percent share in the third quarter, compared with Lenovo's 10.7 percent behind Dell (24 percent) and Apple (13 percent), IDC reported.

Chris Frey, Lenovo's channel chief, told CRN earlier this month that while many longtime PC solution providers are throwing in the towel and moving their business higher up the IT stack, there is plenty of room for growth in the PC market.

"There are plenty of partners that don't want to be in the data center. And they prefer being in the high-volume PC business. We think there is still plenty of room for data center and PC partners," Frey said.

ADOPTING NEW MODELS

For other solution providers, making money in PCs has required revamping their business model.

Larry Velez, CTO and founder of Sinu, a New York-based managed service provider, said the company has rolled its PC business into its larger services portfolio.

"We deliver hardware as a service and we include PCs as part of our offering," Velez said. "We treat the PC just like security, software and, you name it, with our customers."

Sinu customers don't buy PCs; rather, Sinu charges customers a per-user, per-PC fee. That, Velez said, has helped customers shift the burden of buying PCs from a one-time large capital expense to an affordable operational expense.

"There is only so much margin you can get out of a PC sale," Velez said. "Hardware as a service allows us to move away from the box-pusher mentality and begin to drive more recurring revenue, which makes our company more sustainable in the long run."

For other solution providers faced with the challenge of turning PC sales into profits, it has meant rethinking the hardware business for the cloud era. Chromebooks, for a growing number of solution providers, deliver healthy margins on the back side, despite razor-thin front-side margins on the sale of PCs that can cost as little as $250.

Google partners say Chromebooks are tied to more lucrative sales opportunities of Google Management Console licenses, Google Apps and managed services. While licenses top out at $30 per device for the education market, Google offers two tiers of licensing for commercial Chromebooks of $150 per the device's lifetime or $50 a year per device for a transferrable license.

Cloud Sherpas, an Atlanta-based cloud solution provider specializing in Salesforce.com and Google Apps implementations, is on track to sell more than 100,000 Chromebooks this year with nearly three-quarters of those sales to commercial businesses, which will pay between $50 and $150 per device for the Google Management Console license, according to the company.

"Our goal over the next two years is to bring the number of Chromebooks and annual management licenses to over 1 million," said David Hoff, senior vice president of technology at Cloud Sherpas.

The holy grail for Cloud Sherpas and other Chromebook solution providers is to build a recurring revenue stream as opposed to traditional PC sales and its one-time commissions.

Chromebooks also have acted as a springboard to more lucrative cloud business within companies that are interested in everything from legacy application porting to the cloud to a full suite of managed services, he said.

"These are cloud-era PCs," Hoff said. "It's a different sale than legacy hardware. It takes a different skill set for sales. Chromebook sales are about tying the devices to subscriptions, back-end services, and bringing companies into the cloud."

GETTING YOUR FOOT IN THE DOOR

Perennial PC booster Michael Dell is famous for his support for PCs. And despite the company's major push into data center products such as converged infrastructure storage appliances, Dell isn't ditching the PC, not by a long shot.

Rather, Dell is using its PC business to drive cash flow and it's acting as a catalyst to more lucrative enterprise opportunities that include security, storage and servers.

"We are unabashed supporters and believers in the client PC business," said Michael Dell, CEO and founder of Dell, in a September interview with CRN. "We think it's OK to hug your PC. We love the PC. We don't think the PC is dead. We are still selling PCs. We still invest in PCs; we love PCs."

Nonetheless, the PC space can be just as treacherous for OEMs as it is for solution providers that haven't cracked the PC business and figured out ways to make it profitable.

In September Samsung said it would exit the European laptop market in a move analysts described as a thinning of the PC herd. Samsung's move comes on the heels of Toshiba saying the same month that it was reducing its PC workforce by 900 employees and de-emphasizing its consumer PC business in some markets, instead focusing on business systems and solutions. Sony, meanwhile, threw in the PC towel in February after 17 years and said it would shutter its Vaio brand by the end of 2014.

"There are economies of scale needed to amortize an OEM's PC business," said Roger Kay, principal analyst at Endpoint Technologies Associates.

Lenovo, HP and Dell have enough market share and have their hooks deep enough into the business market to make PC sales profitable, Kay said. Samsung, Sony and Toshiba, he said, were too dependent on consumer PC sales where there are few if any upsell opportunities.

"They are making margins -- albeit small -- on PC sales, but they are also selling services, solutions, storage and servers into these companies as well," Kay said.

WHERE PC MARKET IS HEADED

Moving forward, IDC said it expects the U.S. PC market to maintain a positive growth rate through 2014 and into 2015. Factors such as Chromebook adoption and stubborn companies upgrading off XP will push up PC sales.

"There is still a 16 percent commercial install base of companies running XP," said Rajani Singh, senior research analyst, Personal Computing, at IDC. Slower tablet sales also will push companies to look at notebook PCs such as Chromebooks, she said. "Companies are realizing that iPads are expensive and clumsy alternatives to laptops for field workers who need a physical keyboard to be productive."

Analysts were hesitant to forecast PC growth much beyond mid-2015, Singh said, as large commercial refreshes taper off and competition from 2-in-1 systems will limit the growth potential this time next year.

Nevertheless, they said, the PC space is a market that still has some life in it. There are a number of solution providers that would agree.

PUBLISHED OCT. 27, 2014