Simon Meredith writes…

Column: A weekly column from leading channel journalist Simon Meredith

This is the first in a series of regular, weekly columns from Simon Meredith. Simon is one of the most well-known and well-established channel journalists in the UK. Each week, here on The Register, Simon will turn his attention to some of the burning issues of the day. More information about Simon’s work can be found at his Web site. This week: Don’t panic Compaq! Is IBM about to enter the chip war? Are PCs ready to go timeless? Hard times not over for distribution yet Don’t panic – it’s not over yet! The idea that Compaq will now have to go direct with its PC business might seem to have gathered momentum in the past few days. But the change of management is unlikely to bring any paradigm shift in the company’s policy according to European sources. This is pretty good news if you are customer or one of Compaq’s channel partners. But it is not certain information as yet and you must now hope that Compaq’s management resist all temptation to push the panic button as Wall Street squeals and waves its arms around. There may be some relatively short-term changes in the UK – which is unique in Europe in having embraced both mail order and direct business with open arms. June is the time set for the changes and what we are likely to see, unless plans change (which they can), is a similar idea to the Presario hybrid direct/indirect idea we saw two years ago. But we should not be too harsh on Compaq. What is happening to the company right now is also happening to all the other PC vendors. In the UK, most of the big name indirect vendors are finding life difficult. One leading PC distributor told me recently: “Talk to all of the big guys at the moment and they are all not doing their numbers and they are all starting to panic.” Panic is an important word here and it is of course, what they must not do. But what then does Compaq do about the weeks of stock currently still in the channel? In all probability, it is mostly made up of PIIs and Intel has been TV advertising the PIII for several weeks now. Dell is also invading living rooms with its excellent ‘be direct’ campaign. Compaq needs to improve its performance one way or another. There is a strong temptation to use direct tactics and attack the market and this is what Compaq may try to do. But Dell’s rivals must not panic. Across Europe at least, the signs are that they have no need to panic. Compaq still has around 17 per cent of the market across the EMEA region; Dell and IBM both have around 9 per cent. They have a long way to go before they catch Compaq. It looks different in the UK where Dell’s share is double the European figure and around 30 per cent of all machines are sold direct or off the page - in the desktop sector at least. To the strategy makers in the US and in the UK, the picture may seem more desperate than it really is as Dell makes hay in the markets that like to buy direct. But elsewhere it simply is not happening and nor is it likely to happen. One senior vendor in Europe I spoke to recently, said that he thought it would be a mistake for Compaq to try to impose a hybrid model on the market – that this would only upset resellers by forcing pricing issues. Much better to go down the route Compaq has followed in Germany where it has launched a Prosignia desktop aimed at the mass market with a very aggressive price point. Another hybrid attempt to address the advance of direct sales in the UK will only result in disgruntled dealers and will remove very little cost from the channel. Compaq then has to do one or the other. But abandoning the channel would probably be suicide. Better to take cost out of the channel by getting the channel to do the assembly and the distribution. The question then is who should do it – the hybrid resellers, or the pure distributors? But that’s another debate. Also, there is the question of where Dell goes next? It is selling mainly into the corporate market and there is no current evidence to suggest that it is doing better with SMEs than anyone else. Many SMEs do want a local supplier – a supplier they can see and visit. Will Dell then, hit a corporate market ceiling eventually? Probably, and can it really offer the broad and consistent services that the big companies need? If Dell takes the lead in the PC market, will it become the company that everyone wants to take down a peg – just like IBM was once and just like Microsoft and Compaq are today. Users may start to be nervous of having too many eggs in Dell’s basket and what then if Dell tries to diversify, buy big enterprise companies and services businesses and turn itself into something other than a direct PC supplier? It will then be following Compaq’s footsteps. Dell’s rivals must not panic – they must simply listen to what the customer wants and respond. Compaq in particular must not panic, it must stick to its long-term aim of becoming an enterprise player, tighten up its brand image again – and stay with the channel But it must also take cost out and be quicker to market. It must not be distracted by a struggle for percentage shares of the US and UK markets and by Wall Street’s insatiable thirst for more and more short-term EPS gains. If it does it will make them at the expense of its long-term success. ® What if … …IBM chips into the 64-bit war According to some sources close to the company, IBM is about to throw its hat into the 64-bit ring by bringing copper technology to the Alpha development project. IBM is apparently planning to use copper to take Alpha speeds way beyond anything achievable right now. This will complicate an already complex situation even further and it may be worth trying to clarify your own position in all this before you go any further. Alpha is the 64-bit processor developed by Digital and available since 1992 that runs VMS, Unix and NT. That chip is currently made under license by Samsung, Mitsubishi and Intel; the latter bought Digital’s Alpha fab in February. Compaq (Digital) uses the chip in many of its servers, of course. Compaq is also a major Intel customer. So is IBM. So is HP, which is in league with Intel on the development of the IA64 Merced processor, bringing to the party its PA-RISC architecture. Well, so what? The future of the server and the desktop – that’s what. One day, everything will go 64-bit, though not for some time of course. We need operating systems and applications to catch up. Intel has dominated the desktop market for the last few years and has been accused of being monopolistic in its behaviour – even by some of its best customers – from time to time. Every vendor would like an alternative supplier. In the desktop market they have had to settle for AMD and Cyrix. HP and Sun have always, until the last few months, done their own thing – but now both are lining up with the Intel development (Sun is putting Solaris on IA64). IBM of course, has had PowerPC but that alliance is in shreds really now. Power PC is more or less back to being a proprietary Apple chip. These companies have to go somewhere with their platforms. Users want to know that they will be around and properly supported for some time. Compaq meanwhile has bought Digital and the excellent Alpha development, putting it, potentially, into direct conflict with Intel’s future developments. Even though Intel makes Alphas, its position there has to be seen as a hedged bet. Digital was trying to sue Intel before all this happened remember – for stealing some of its ideas. Intel made counter-claims, it all looked very nasty until Compaq stepped in! Where does this leave us? Intel chasing after Alpha - owned by Compaq but made by Intel – and, critically, other powerful manufacturers; and now possibly, by IBM as well. IBM, with its advanced copper production technology, may be able to speed up the development of the Alpha processor and send it zooming beyond 2GHz. This might steal the thunder which Intel has been trying to work up about all of its developments. Intel has an impressive road-map laid out and is using aluminium and well as copper technology. The key to who wins will probably depend in the end on who gets to run 64-bit NT first and who runs it better. With IBM on board, the prospects for PowerPC will take a dive, as HP’s PA-RISC has already with the Intel alliance. Sun’s Sparc chip looks increasingly isolated as well and Sun may have to do something about that. In short, these companies and their product ranges – especially when running a specific form of Unix - are increasingly looking like proprietary systems providers and the process of isolation is accelerating. If NT is going to be the main applications server of the future, the platform of the future will be dictated by how well it runs that system. Microsoft – with close Compaq and Intel ties – will have to be even-handed as it is under the close scrutiny of the US authorities. If the Alpha speeds up and pulls ahead of IA64 then Intel might get be miffed with Compaq and IBM. It can make Alphas but Intel does not have to like it. If so, where would that leave Compaq and IBM? They already use AMD and Cyrix processors and rumours about a buy-out abound as Intel’s smaller chip rivals continue to struggle. But there is also talk of some very fast benchmarks coming out of the AMD K7 and that poses a direct threat to the PIII. Meanwhile, an IBM alliance with Compaq would draw the lines more clearly in this market and make choices about future platforms a little easier. Alpha and Intel both look safe and so does NT – for both. But are you ready to put really critical applications there? Lots of companies are still putting in Unix for critical apps, as NT is not proven. Those companies using such systems though – and their reseller partners – must make sure that they feel confident about the long term future and the support they will receive on those products. ® PCs to go timeless? This is not some strange way of beating the millennium problem. It is an approach that the PC market could adopt in order to solve some of its problems by offering PCs that come with all the necessary services, support, maintenance – everything. PCs which are also upgraded every six months automatically. There is some talk of such a service being offered in the channel now, perhaps with the backing of main distributors. This is not a new idea. Corporate buyers have been fretting about TCO for years and bundling the cost of the PC upgrade, OS and apps upgrades, training, break-fix, support and so on, is only one step on from outsourcing. It has not happened yet because most companies still view PCs as commodities. HP is about to release a study into what users think of PCs and the word is that they have pretty damning opinions. PCs are just boxes to be purchased at the lowest possible price according to many of them. Confirming the blasé attitudes, Computacenter told me last week, that brand matters less and less to the corporate buyers - the product is the same under the skin – what matters is the vendor’s backup and support as far as buying decisions are concerned. So Compaq, Dell, IBM, HP and Siemens are probably all safe there. Then there is the complexity issue; when are you going to upgrade to Office 2000, to NT 2000, to Pentium III, to IA64, to Gigabit Ethernet or ATM? Who supplies maintenance, support etc, is there an existing relationship with that supplier. It can be a real headache trying to sort it all out – which is why a lot of companies outsource it all. So why the talk about ‘timeless’ PCs now? That has a lot to do with the direct/indirect war and the increasing difficulty of making one desktop look different to another. Management utilities are not enough anymore, there has to be something more – something ergonomic (space-saving small footprint PCs are now making a comeback) or something that will address TCO. This is where the timeless idea comes from but, for the most part, it is still the industry pressing the idea, rather than the user demanding it. One of the sadder aspects of our industry is that it takes falling sales to mobilise changes that will have a real impact on the benefits that IT can bring to a business. ® Hard times not over for distribution yet Distributors have to move with the times – they all know that. But the most recent events have been very distressing for the sector. The situation at Osmosis is going to receive plenty of coverage in the trade press and will be well documented enough there. But why has it all gone wrong? This company has been a Microsoft DSP for ages and seemed to be doing good business. But it was also in too many other non-profitable areas. PC components and white box PC manufacturing – a dangerous game still. And from having almost £200 million sales and 125 people, it has now shrunk back to 20 heads and £50 million expected sales. At least MD John Fenton has come out and said he will try to pay everyone what they are owed. He deserves some credit for that. We have also seen in the last week or so, Datrontech’s Q1 figures reveal a disappointing performance due to forays into Eastern Europe – particularly in Poland. Such adventures are proving to be highly dangerous. It did not work for Azlan, it has not worked for Datrontech. It must be said though, that the company would not have done anywhere near as badly had it not been for Poland. It has had a decent Q1, say insiders. But the list goes on ; the problems of CHS have also been well documented and then of course there has been the continued struggle for control of ilion. There have been no new developments there as yet and the smart money must go on an MBO. At Ideal, after some difficult times last year, the company seems to be getting back on track but, like most distributors, it had a tough start to the calendar year. Ingram Micro has not found it particularly easy going either in Europe with its growth slowing down considerably. Northamber has been plodding along but very quiet since its ill-advised television appearances. Only Computer 2000 seems to have come up smelling of roses. Where is it taking its increased share from though? With a market growing at perhaps 14 per cent, where does 27 per cent (admittedly for the last financial year) come from? The answer, probably, is the other distributors for the most part. Being able to move with the times and offer a broad base of products is vital now. Low cost component markets are harder to compete in. The margins have fallen out of the networking business, PCs are going direct and hybrids are moving in with BTO programmes. Unless you are in a niche, you are in a tough market in which resources - and people – are everything. The difficult times are not over yet as the PC market continues to rumble over the direct sales route and vendors look to reduce costs. Product sales have hit a wall as companies focus on Y2K and summertime is upon us all of a sudden. With product-based reseller businesses struggling as well, this could be a long hot and difficult summer for many distributors and we can expect to see more poor figures, lay-offs and takeovers before the rains return. ®

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