28th > August > 1999 Archive

The Register breaking news

HP turns to nVidia for mobo graphics

Hewlett-Packard has chosen nVidia's RIVA TNT 3D graphics processor as the standard motherboard graphics scheme for HP Pavilion 8580C and 8590C multimedia personal computers, the company announced yesterday. "By selecting the RIVA TNT, with its high performance and complete feature set, HP Pavilion customers can now enjoy all of the latest graphically-intense applications, web sites and entertainment titles," nVidia VP Jeff Fisher gushed. nVidia claims the RIVA TNT 3D processor has been "optimized" for PIII-based PCs, by which they mean that they've added support for the processor's Streaming SIMD Extensions. The TNT offers fast fill rates of up to 180 million pixels-per-second and an enhanced dual 32-bit color 3D pipeline, as well as a full hardware triangle set-up engine, full screen anti-aliasing, anisotropic filtering, 32-bit Z/stencil-buffer, bump mapping, and DVD playback capabilities. nVidia graphics processors are further "optimized" for both Direct3D and OpenGL APIs. We were unable to determine precisely what they mean by that. nVidia was apparently so drunk with success yesterday (OK, so it was a big OEM win) that no one at the company was able to return The Register's call for additional details about the deal with HP, or their amazing TNT gizmo. And we were prepared to be impressed, too. ®
Thomas C Greene, 28 Aug 1999
The Register breaking news

Thieves ransack Register office

Opinion This article was first published in April 1999 I'm not sure whether the thieves who broke into my office were chancers or technophiles. Ignoring the Compaq server, the top-of-the-range Samsung monitors and the Hewlett Packard Vectras, my friendly neighbourhood burglars made straight for a couple of Fujitsu system units. They also had away with a Lexmark Optra, a Sony TV set and video, a Nokia mobile phone and a small amount of cash. Maybe Fujitsu machines are easier to sell through the classifieds than HP Vectras. Maybe expensive Compaq servers are too easy to trace - or just too heavy to get down the stairs. It is also entirely possible that the thieves were stealing to order. According to a Home Office study, Pulling the Plug on Computer Theft, crooks are stealing PCs pre-selected by fences, who research the market for hot equipment and meet dealers to assess demand prior to the crime. More shocking is that up to one-third of the phone numbers in the computer sections of free ad newspapers belong to dealers who have already been convicted of peddling stolen kit. If the US experience is anything to go by, the internet auction houses will deliver an even more efficient thieves' bazaar. Computer theft accounts for 18 per cent of non-domestic burglaries in the UK, costing businesses on average more than £2,600 per crime, according to the Home Office. It costs the country as much as credit card fraud. Professional teams travel all over the country, using anti-surveillance techniques to throw police off the scent, and - surprise, surprise - commit repeat thefts. Out of a study sample taken of 1,048 items of recovered stolen property, there were 477 computers, 372 other items of hardware, 153 printers, 31 word processors, 14 pieces of software and one computer game. Six companies in Salford, Manchester, were investigated for the study, which also pinpointed the robbers' favourite brands of computer. OK, so it's not a big sample, and I'm surprised that there any companies daft enough to operate out of that town, which is possibly the robbers' capital of the universe. But anyway, Compaq came out top, accounting for about 10 per cent of stolen kit. IBM came a close second with about nine per cent, followed by HP with seven per cent. And orders for stolen Dells couldn't have been too hot in the north west - the direct seller lagged behind at less than five per cent. Isn't it about time the computer sector got its act together on theft? By doing little or nothing, large companies are effectively colluding in crime. A centralised database of stolen PCs would be a start, with a unique identifier alerting it when the PC was switched on for the first time by its proud new owner. Intel's controversial serial numbers as proposed for the Pentium III could come in handy and the chip giant should resist calls to allow OEMs to switch off the facility. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

To hell with the Government and its recycled PCs for the poor

Opinion This article was first published in March, 1999 You may remember that a couple of years back, Newt Gingrich, the well-known American Republican, proposed that computer notebooks be doled out to poor people.
Drew Cullen, 28 Aug 1999
The Register breaking news

Who says PC industry optimism is sky high?

Opinion This article was first published in April 1999 Roldec has been a victim of its own success. The former high-flying Wolverhampton system builder - twice featured in the Sunday Times Top 100 list of fastest growing UK companies - crashed with £2.5 million debts. Not bad for a company turning over less than £12 million a year. An awful lot of distributors and vendors are going to get their fingers burnt on this one, especially as it comes so soon after the Memsolve debacle, which crashed owing £4 million. Trade Indemnity, the credit insurer, can't be too happy either. In the best case scenario, insurance premiums will jump; in the worst, insurance protection will be withdrawn from vendors thought to be too free and easy with their credit. Either way, credit will tighten this year. And that means more low-margin dealers and system builders will take a tumble. Which brings me to accountancy firm Deloitte & Touche (D&T). According to its US consultancy arm, short-term optimism for the PC industry is at a five-year high. It also tells us customers hold the power, which is enough to make any self-respecting PC builder feel very miserable indeed. Basing its analysis on 1998's fourth quarter, D&T pronounces the biggest winners to be companies that can come up with unique sales and margin strategies. Take a look at IBM, a company more capable than most of deploying unique sales and margin strategies. As a vendor that builds its own parts - CPUs, storage and the like - it is (with the possible exception of Packard Bell/Nec) the most vertically integrated PC vendor of the lot. It's big, it's powerful - and its channel-friendly PC business lost $1 billion last year. Bad news for IBM's personal systems division is bad news for IBM resellers, distributors and its channel assemblers, but very good news for Dell. No wonder IBM is cosying up to Dell, with its $16 billion purchasing pact. The direct vendor can soak up IBM components and make much more use of its profitable services division than IBM's channel dependent PC operations can. So what was D&T saying about optimism again? "Our PC report indicates that the market is optimistic about the future of the industry,' said Charles Goldenberg, partner in Deloitte Consulting's High Technology Group in San Francisco, California. 'Despite recent announcements that selected PC makers' shipments are decreasing, business and consumer PC buyers alike are bullish about new technologies," he added. But Goldenberg had bad news for manufacturers. He said vendors must be more aggressive in finding ways to cut costs in preparation for the next threshold of price declines - the sub-$500 PC. And these methods included using less expensive materials, lower manufacturing costs and economies of scale. And this means more system builders will go bust. Short-term optimism? I don't think so. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

Simply falls into Global Direct Mail's arms

Analysis This article was first published in February 1999 In 1997, Simply Computers declared its intention of reaching an annual sales target of £130 million by June 1999, an ambitious aim considering the reseller was selling £70 million a year at the time. The east London PC builder also expressed an interest in floating on the stock market. What a difference two years make. Simply has been bought by US giant Global Direct Mail for an undisclosed sum. Presumably the amount was enough for Simply's venture capital backer, Alchemy Partners, to make a profit on its minority stake investment, made in 1997. Simply will now run alongside GDM's two existing UK subsidiaries, Misco and Global Direct, as an autonomous unit. The takeover was not necessarily what Paul Berry, executive chairman of Simply, would have wanted, judging from the email he sent to suppliers announcing the deal. He attributed Simply's problems on the implementation of a computer system, which had put 'a massive strain on the entire company and, in particular, on our cash flow. This has led to irregular payments, lower than anticipated sales volumes and generally strained our relationship.' This sounds more like a case for the contract lawyers, than for the M&A advisers. But it just goes to show how little room for manoeuvre there is in this sector when something goes wrong. Especially when you have a venture capital firm breathing down your neck. Let's not forget that in 1997, Alchemy Partners said Simply had enough working capital to achieve #130 million turnover targets. Much of Alchemy's money was used to buy out Simply co-founder Maria Knowles. How much went into the company and how much went the way of Knowles and other directors is a matter of speculation. The size of Alchemy's investment was not revealed at the time it was made in deference to Knowles' sensibilities. And let's not forget that Simply Computers is - or was - one of the UK's most successful off-the-page merchants. If Simply found itself struggling, what about the other direct boys out there? Last year, US direct giant Insight established a foothold in the UK market, by snapping up Choice, based in Nottingham. But there aren't that many US companies willing and able to buy up local mail-order resellers whenever the going gets tough. This year, things will get tougher. What are the odds of a high-profile collapse? As for Simply, it's business as usual. In his email to suppliers, Berry said he would continue at Simply's helm, with the support of his management team. How long he lasts will depend on how much interfering GDM gets up to, I guess. For Simply's story now belongs to Global Direct Mail. Group UK sales stand at $350 million, with internet sales reaching an eyebrow-raising $60 million. The decision to merge operations in some form will surely not be too far away. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

Apple dealer cull makes sense

Opinion This article was first published in February 1999 Apple UK is terminating all reseller contracts at the end of February and dealers are up in arms. Particularly CJ Graphics, the Apple dealership with a £12 million turnover that went bust last month. The London Apple dealer is blaming its chief supplier, Apple, for the "forced disposal" of the company to rival dealership Rapid Group. CJ Graphics owner, Floral Street, sold the assets of the company for "up to £500,000" on 29 January, after its bank pulled the plug on all the company's financing facilities. AIM-listed Floral Street has ceased trading and is initiating insolvency procedures - the directors expect there to be a deficiency of net assets. Some financial engineer will pay good money for reversing a company or two into the shell that is now Floral Street. Aziz Punja, chief executive of CJ Graphics, said: "It is no secret that we experienced a downturn in business during the latter part of 1998. This, combined with mounting orders due to Apple's lack of product and the recent changes imposed by Apple, has really forced our hand." The buck clearly stops there, as far as CJ Graphics is concerned. Apple has struggled to keep up with UK demand for the iMac, its most popular launch, with many models on allocation throughout the fourth quarter last year. But how many other Apple UK dealers have gone bust recently because of product shortages or channel changes? Banks do not usually pull the plug for these reasons. Besides, CJ Graphics could have been reasonably certain that it would retain a direct relationship with Apple, post channel reorganisation. With five retail outlets nationwide, CJ Graphics looks less dependent on Apple than many of its rivals. The company also sells graphics arts materials and office furniture, as well as Apple kit. Its future now looks secure under the wing of the Rapid Group. What about the future of the remaining Apple dealers, who are now expected to apply for reaccreditation? The future doesn't look bright for low-volume dealers, who are already losing out in new volume breaks introduced by Apple disties Ingram Micro and Computer 2000. This could force smaller resellers to raise prices by up to eight per cent, which, as one source said, will mean they will lose out to low-price mail-order resellers. But is Apple behaving so outrageously? It wants minimum volume commitments of #60,000 a year from its dealers, which doesn't seem such an awful lot. It is also trying to impose minimum requirements for staff size and company standards. Apple appears to have concluded that it has too many dealers in the UK. And Apple would be right. Its direct sales operation, AppleStore, is already a fixture on the Mac scene and with a few choice third-party applications and add-ons, could represent a big threat to the mail-order guys. In this context, low-volume, low value-adding resellers are an irritating distraction. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

Onsale: Kamikaze pilot or Voodoo economist?

Opinion This article was first published in January 1999 Everywhere, middlemen are under threat from their suppliers. And not just in the computer industry. Travel agents, for example, are starting to look increasingly threatened, with airlines squeezing commissions by up to half in recent years. Now, Delta Air Lines is imposing a two per cent surcharge on all bookings for domestic flights that are not made through its own Website. The computer industry is less hostile to its middlemen. But it doesn't take a genius to forecast that increasing amounts of business will be conducted over the Web directly between vendor and consumer. There is little reason why, say, Apple should not transact most of its commodity hardware business over the internet. With a more or less closed user base and weak reseller channel, Apple would have no trouble redirecting more customers to buy off its Website. Especially if it sold third-party software from the likes of Adobe and Quark and - even better - if it gave discounts to customers buying through AppleStore. The economists' rather clumsy term for this is disintermediation - cut out the intermediary and go direct to the consumer through the Web. The idea is that you strip out costs while improving service. There will still be room for intermediaries on the internet, only they might look a little different from traditional outlets. For example, look no further than the unholy alliance between Onsale, the loss-making but biggish internet auctioneer and Tech Data, the profitable and gigantic distributor. Onsale is now selling PCs at zero margin over the Web. On offer are 35,000 PC and accessory stock keeping units (SKUs) for the price Onsale pays Tech Data. It will eke out its operating margin from maintenance and leasing contracts, banner advertising on its Website and a handling charge. And presumably, Onsale will swipe customer credit cards before it shells out money to Tech Data, giving it operating cashflow benefits. Channel conflict rears its ugly head, of course. You could argue that trade-only distributor Tech Data is effectively selling PCs direct to the general public - with Onsale providing the retail veneer. And you would be right. Sensibly, Onsale should account for only the agent element - the bit that generates the operating income - of each PC sales transaction as turnover. But with internet stocks trading on heady multiples of turnover, it will be very tempting for the company to record each PC sale in its entirety as revenue. It gets the asset value (in the form of rising stock price) while Tech Data books the sale. Is Onsale a voodoo economist or a kamikaze pilot? Only time will tell. I suspect it is onto a winner. Last month, it took up a tenancy on Yahoo, which will result in higher traffic and - hopefully - higher sales. If Onsale has got it wrong, we can mark it down as an interesting failure. If Onsale has got it right, the implications for resellers - especially the direct response guys - are very serious indeed. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

Sugar takes Viglen private

Opinion This article was first published in December 1998 Following the failure of Viglen Technology shareholders to take executive chairman Alan Sugar's advice, the PC builder looks set to return to the private sphere. Shareholders accounting for 22 per cent of the company accepted the purportedly reluctant takeover bid of Sugar's wholly-owned holding company, Amshold. The offer for the remaining shares -- about 30 per cent of the capital -- is now unconditional. Sugar's gloomy statements about Viglen's future as a PC builder will have done little to reassure shareholders. Last month, Sugar made a mandatory offer for the outstanding shares in Viglen that he didn't already own. But in a curious twist, he urged other shareholders to refuse his offer. The offer, at 24p per share, values Viglen at £29.3 million - about one-third of turnover. Sugar was required by takeover rules to make an offer for the entire share capital of Viglen after raising his stake in the company on 8 October to 41.7 per cent. At 24p per share (the price Sugar paid for his new shares), the company was undervalued, he argues. It was also in Viglen's "best interests to maintain its listing on the London Stock Exchange," he said in a statement. "As such, it is not my wish to take the company private." It looks like Sugar has got himself a bit of a bargain. However, his gloomy statements on Viglen's future have done little to reassure the market. Announcing Viglen's year-end pre-tax profits of £4.4 million on sales of £94.6 million in August, Sugar warned profits would remain "linear" in the foreseeable future. Viglen was for a very brief time the UK's biggest indigenous PC builder. But its attempt to hold the line on PC prices last year misfired badly. The company said it would move away from purely direct PC sales which took a massive hit in the corporate sector last year as market share fell by 50 per cent. Now it appears that Viglen's heart is no longer really in the PC building business - except for the education sector, where 1998 sales in hardware and software were up 14 per cent on the previous year. Sugar said: "We are committed to growing our share of the schools market.' Looking sideways at RM (an overvalued company if ever there was one), an educational push makes sense, especially with the £100 million-plus a year extra budget released by the Government for schools' IT infrastructure Viglen's future also lies in more profitable networking and software services, according to the company - in other words, as a reseller. Viglen's acquisition of Xenon Networks in February this year enabled the company to change tack and this is where Sugar sees future growth and profit margin. This transition may make sense, but does it really need the stock market along for the ride? Maybe enough shareholders will stay on the register for Viglen to retain its London Stock Exchange listing. Remaining shareholders should bail out now. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

Workplace buys Lanbase

Analysis This article first appeared in November 1998 Consolidation is picking up speed in the UK network reseller market, with Network Si and Anite Europe both falling to South African-owned companies recently. The latest merger - namely the marriage of Workplace and LanBase Holdings - is an all-British affair. And it's a big one. Workplace Technologies is paying up to £19.5 million in cash and shares, roughly equivalent to historic turnover for its smaller rival, which is on course for £24 million turnover for 1998. This would make a combined turnover of about £105 million. Keith Berry, founder and managing director of LanBase, is to join the Workplace board. 'This is our first acquisition and it is low risk. Lanbase is a good, solid growing business,' says Workplace managing director Andrew Vaughan. Post-merger, the group aims to leverage better purchasing terms from suppliers. Vaughan adds: "Workplace is 3Com's biggest UK reseller, Cisco's fastest growing UK reseller and, following the acquisition, the UK's largest Bay Networks reseller." It expects to achieve 'key operational synergies, such as training and stock management', and LanBase will deliver a big boost to Workplace's post-sales support business. Support contracts account for 20 per cent of LanBase turnover. Workplace is now the biggest UK player in the networking equipment reseller channel. Operating out of 11 branches in the UK and Ireland, it will have a workforce of more than 500. However, there's still some way to go before it matches rivals such as South Africa's Comparex Holdings and DataTec, or German-owned Siemens Networks for international scale. True enough, it does get a foothold in the Spanish market through the acquisition of outstanding shares of Madrid-based LanBase Espana not already owned by LanBase Holdings. This is a £3 million turnover business. To gain scale rapidly, Workplace would probably have to be bought by a better-capitalised company. Its takeover of LanBase - in common with the acquisitions of Anite Europe and Network Si - are merely the first round in a wave of mergers to come. Driving this are vendor pressures to integrate technology and customer pressures for integrated service. The reason that Datatec UK bought Bluepoint, a desktop infrastructure reseller, was to complement its Logical Networks networking arm. The drawing together of voice and data is not adequately reflected in the channel. Networking resellers will have to acquire - or be bought by - telecoms dealers. Also, the big product resellers are waiting in the wings. Specialist Computer Centres and Compel are underpowered in this area, although whether they could afford to buy a substantial networking reseller is another matter. Computacenter's networking equipment business could be worth up to £30 million if you throw in the cabling contracts. But this is puny in relation to its size. A quick and dirty acquisition would make all the difference. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

South Africans swoop on European reseller scene

Analysis It helps when your business is not for sale. It helps, too, when your prospective buyer is one of the South Africans who seem to be paying top dollar for European channel companies. Latest on the scene is USKO, a Johannesburg Stock Exchange-listed company that has marked its arrival in the UK with the £15.5 million acquisition of Bytes Technology Group, the Epsom-based corporate reseller founded by chairman Shaun Frohlich (PC Dealer, 21 October). Compare and contrast with the £10 million that Info'Products paid two years ago for Simmons Magee, the former billet of BTG managing director Simon Ogden and marketing director Tim Hall, and a company more than twice the size of BTG. True, Info'Products has - with the outstanding exception of what became SHL Learning Technologies and was put out of its misery earlier this year by Action Computer Supplies - been labelled as the worst acquisition record of any UK reseller. True, USKO is putting comparatively little money up-front BTG's way (most of it is released after three-year lock in), but that's an awful lot of jam tomorrow for the management team at BTG. And true, BTG has a much bigger services element than Simmons Magee had. By nailing its colours firmly to the Microsoft/Compaq mast, it has prospered. It accounts for about 25 per cent of all Microsoft Select licence sales (by accounts -- not by volume) in the UK and is already making money in thin client technology and storage management. But how does an ambitious £20 million-plus company like BTG make it into the premier league of resellers? The answer is that it can't - not on its own, at any rate. 'We weren't going to get niche and we weren't going to get out, so that leaves getting big,' says Hall, who adds that the acquisition has accelerated the company's business plan by three years. Under the wing of USKO, BTG will carry on much the same as before, except it will have a member of the parent company sitting on the board as a non-exec. Up for discussion is whether it forms USKO's beach-head into Europe or whether USKO opts for a more devolved holding company style. USKO appears to have plenty of money sloshing around for acquisitions. Founded in 1911, it has its roots in manufacturing. But in the last 12 months, it has built an IT division throught the acquisition of 'top South African IT companies and IT solution providers'. Its stated aim is to increase overseas earnings to 60 per cent of turnover by 2003. It wants, in other words, to get as many assets out of South Africa as possible. UKSO's fellow South African channel conglomerates, Datatec and Persetel Q Data Holdings, are equally keen to build multinational arms. A combination of high share ratings, a failing home economy, an uncertain political scene and plain ambition are the drivers. This should translate into many more reseller acquisitions in Europe. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

Computacenter share concern overdone

Opinion This article first appeared in October 1998 "The price at which Computacenter shares were floated in May looks more disturbing by the day," thunders Tempus in The Times. Tempus blames investors for chasing up the 670p share issue. And he (she?) acknowledges that five months later the equity markets and IT valuation criteria are different - that is, much less favourable than in May. But central to the misjudgement about Computacenter was the "underestimation of the importance to its business of distributing computer hardware and the failure to appreciate the price of PCs was so precarious". Ain't hindsight a wonderful thing? These comments would have been more helpful if they had been made in, say, April. Standing at 442.5p on close of play, 5 October, Computacenter's share price represents 18 times forecast earnings. According to Tempus, this begins to look like 'reasonable value', while warning that 'wider equity market problems and anti-IT sentiment are likely to undermine the shares'. So what are we to make of Morse, the highly regarded Sun reseller, which has pulled its - never publicly confirmed - flotation, The Sunday Times revealed last week. In July, paper reported that Morse was preparing a £600 million IPO, valuing the company at 13 times more than its £46 million MBO less than three years earlier. Morse was forecasting sales of £200 million for this year, valuing the company at three times turnover. Profit for the year to 30 June 1997 was £15.6 million on #133 million turnover. Throw in a £600 million valuation and you get a pre-tax multiple of 40. This is madness, as I said in July. Morse intends to get away an IPO next year when market conditions are hopefully better. But its chance of getting £600 million must rank somewhere south of zero. Computacenter is worth £600 million - and maybe a few pennies more. Pre-float, Investors Chronicle criticised the company's advisers for restricting the share issue to institutional funds. The issue could have been a triumph for popular capitalism, the magazine argued. Popular capitalism is all well and good in a raging bull market - or with utility privatisation stocks, where the government sweetens the issues with hefty Sid-friendly discounts. But it has no place in a high-risk, low margin, volume-driven business such as computer reselling. Computacenter was right to restrict its pitch to the institutions. By floating, the reseller created a clutch of employee millionaires, shelled out millions of pounds to City advisors, created liquidity for shareholders. And it established a high water mark for computer reseller valuations. The Computacenter flotation was an enormous success. So what if it's been downhill since then? Computacenter is no fly-by-night company and its institutional shareholders are grown-ups. And after all, what goes down can always go up. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

Intel's ill-thought leasing scheme

Update This article first appeared in November 1998 It takes just a few simple questions to establish that Intel knows less about leasing than I do about designing microprocessors. Intel's decision to plunge into the leasing market for its SME resellers could be construed as ambitious. Luckily, Intel has signed up Dana Commercial Credit (DCC), a big shot in lease financing and a former partner of Compaq, to handle the mechanics for its big idea for the channel. Under the banner of Intel Financial Services, the vendor is offering a range of small-ticket leasing options through its 1,500-strong UK channel of Intel Product Integrators (IPIs). Intel is offering both finance and residual value leases and for a cost, users can upgrade systems during the lease term and write off residuals against new leases or purchases. The minimum deal starts at £450 and applications for up to £20,000 can be approved within 20 minutes, Intel claims. No maximum amount has been set, although we can assume this is entirely theoretical. This is a good idea - by sheer dint of size, Intel commands much better finance terms than its IPIs can. System builders are able to offer attractive financing options to customers, enabling them to flog more PCs while offloading financing costs onto Intel and DCC. It's also a good idea for many small business customers who are battening down the hatches in advance of the recession. And as the old saw puts it - buy appreciating assets, lease depreciating assets. Jon Singleton, UK sales director at DCC, says leasing enables businesses to fit computing into tight budgets. "It helps protect against obsolescence, it provides the ability to upgrade equipment while maintaining a predictable payment schedule is a benefit." Leasing is also good for Intel because it gets to sell more chips. Any kit returned reverts to Intel Financial Services - some systems and components will be recycled while others will be channelled through Intel's environmental disposal programmes. But let's say 15,000 PCs are returned each year at the end of their leasing term. Reproduce that across Europe and you're talking 100,000 PCs each year. How are these to be disposed environmentally? How many secondhand PCs can charity and educational establishments soak up, when they are inundated with offers from corporates and other PC vendors? And how realistic is it to break up returned PCs for recycling into the maintenance market? Compared with Dell and Compaq second user kit, the resale value of Intel IPI machines is negligible. Intel returned kit has been assembled by thousands of assemblers, using tens of thousands of different components, to widely different quality standards. Intel does not appear to have thought through the back-end implications of its leasing scheme - the more successful it becomes in writing new business, the bigger the disposal and financial headache it will face down the line. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

Hurrah for grey trading

Opinion This article first appeared in September 1998 Multinational vendors are uncommonly fond of restrictive distribution practices. By dictating who can sell what to whom, vendors can exploit price differentials in different markets and maximise their profits. Although restrictive distribution is supposed to be banned by the European Commission, a recent daft court ruling has given manufacturers the right to ban grey imports from outside the EU. Never mind that the manufacturers are exploiting laws designed to stamp out counterfeiting, rather than grey imports. Let's hope the Parallel Traders' Association succeeds in its attempt to get this ruling overturned. Hats off in the meantime to Ideal Hardware for cocking a snook at restrictive distribution practices. It has beefed up its overseas business, by setting up its first distribution facility in mainland Europe. Based in Rotterdam, the warehouse opens for business on 1 October. The company says delivery times will speed up, and distribution costs will go down. Ideal sells its volume storage products to resellers anywhere in Europe - a Rotterdam warehouse will enable next-day delivery. Restrictive clauses, of course, do not exist in the EC (how could they, when they are illegal?), but it is a brave wholesaler that breaks out of its allotted territory or country. Ideal does not care a fig for such niceties. It already sells into Europe in a fairly big way. In the past half year, Continental European sales advanced from #1.9 million to #21.8 million. However, gross margins were much worse than in the UK (3.2 per cent against 14.3 per cent). So Ideal is probably losing money on Europe. Instead of acquiring Continental disties, Ideal employs native salespeople, working from home in their own countries. Fulfilment is managed from the UK and now Rotterdam. What Ideal does not do is buy other distributors, as managing director James Wickes told me recently. 'It is very difficult to talk on this subject without sounding arrogant, but why buy distributors in Europe when I already do better than them?' Distribution margins do not justify paying for expensive subsidiaries all over the place, he believes. 'Today's haulage infrastructure means you can sell from anywhere - Dell proves that. And as far as suppliers are concerned, credibility and credit-worthiness are far more important than where you ship from.' Commissioned vendor salespeople based outside the UK may not agree with this sentiment. European data storage distributors on the Continent are also probably not very happy about this brash newcomer on its doorstep. Ideal can get away with trading across Europe, because its balance sheet is stronger than its competitors. But isn't this the way the single market is supposed to work? And grey trading will make the market work even better. ®
Drew Cullen, 28 Aug 1999
The Register breaking news

How much is a Cisco distribution franchise worth?

This article was first published in September 1998. How much is a Cisco distribution franchise worth? At least £30 million, according a surprising source, The News of the World - the UK's best selling newspaper, but not one noted for its business or technology coverage. It reveals that RBR Networks founders Rory Sweet and Ben White are on the verge of 'another mega-deal which could net them nearly £15 million each'. That would be the acquisition of the company by DataTec, the South African serial buyer of networking resellers and distributors, then? White and Sweet are forecasting sales at RBR to top £80 million this year. The company has seen turnover jump from £3 million in 1994 to £7 million in 1995, £23 million in 1996 and £50 million in 1997. Not bad for a company that spent much of its short life trading grey Cisco kit. RBR was so successful that Cisco had no choice but to dole out a franchise. But the outcome could have been very different, as the News of the Screws reveals. 'They admit that their fun-loving antics nearly put their mega-bucks deal at risk before it had even started. Instead of agonising over balance sheets, the night before the meeting with their US client, they hit the town and got drunk over a curry. 'Ben said: "It was a huge drinking session and when we woke up in the morning, neither of us could remember where we had left the car. When we got to the meeting we must have created a terrible image as we were still in our clothes from the night before. My T-shirt was so stained with curry and wine that I had to swap it for my senior manager Michelle's blouse".' It's hard to see the duo staying on too long after the sale of the company. People who pose naked for their own marketing brochures are not the sort to enjoy spending their time composing management reports for corporate bosses. Still, with £15 million each their pockets, they'll have more than enough to fund what The News of the World dubs a 'wild playboy lifestyle'. Although I'm not sure that driving expensive sports cars (a Ferrari 355 in Sweet's case, and a super-charged Jaguar XK8 in White's) makes you a wild playboy. But the chums do appear to have a knack for making money while taking it easy. Before flogging Cisco kit, they ran a second-hand computer broking business from the basement of their 'tiny flat in Pimlico'. White recalls: 'Businesses such as BP, Shell and Esso were buying computers for millions, then throwing them away when they got something new. We bought them for virtually nothing, put them in the basement and sold them for loads. 'Half the time, we didn't get up until 11am and only worked until 1pm. But suddenly, at 25 years of age, we were earning £100,000 a year each.' The pair showed impeccable timing by quitting the business when 'hundreds of wannabes flooded the market' and the sale of RBR shows they have lost none of their sense of timing.
Drew Cullen, 28 Aug 1999
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Low DRAM prices are good for the industry

This article was first published in September 1998 A fool is always busy - except in the computer industry, where resellers who charge too little for their products and services soon go bust. The process takes a little longer for vendors, but go bust they do. Siemens Nixdorf's decision to shut down its DRAM manufacturing plant on Tyneside, with the loss of 1,200 jobs, is a case in point. The company is writing off an investment of more than #1 billion. And, presumably, it will also have to pay back some of the #50 million in UK government grants it received for building the plant. It has complained to the EC that it is dumping memory chips well below cost. Hamstrung by the collapse of their country's currency, the Korean giants are dumping - so the argument goes - in an attempt to pay off dollar-denominated debt with much-needed hard currency. In the US, Micron Electronics, America's sole surviving memory chip manufacturer, is making much the same noises as Siemens. It blames structural oversupply in the DRAM market squarely on the Korean chaebols. Their reckless expansion of DRAM production in the mid-90s on the back of government grants, loans granted on unfeasibly cheap terms and cross-subsidies from sister companies caused this sorry mess in the first place, Micron claims. It has secured the backing of most members of the Semiconductor Industry Association to lobby for strict terms imposed on any IMF bail-out money that goes Korea's way. At its peak in 1995, the worldwide DRAM market was worth $45 billion, at user prices. This year DRAM vendors will pull in $20 billion - if they're lucky. DRAM prices have collapsed by anything between 90 and 95 per cent since 1995 - the year Siemens made its fateful decision to invest in North Tyneside - and unit production has sky-rocketed since then. With hindsight, Siemens made the wrong investment decision in opening Tyneside. It was made at a time of very high DRAM prices, which were fuelled by product shortages. The Siemens Tyneside shutdown will lend huge weight to pro-dumping forces in Europe. My guess is that the EC will take its cue from the US Federal Trade Commission and we'll see anti-dumping duties slapped again on certain categories of DRam before the end of the year. This would be a mistake. Whenever I hear calls for dumping duties or for 'fair trade', I hear the pleadings of protectionists at work. For who is suffering from low DRam prices, exactly? Manufacturers, obviously; employees, clearly (but in such a capital-intensive industry, there are not so many of these as you might think); some distributors too. But the rest of us - resellers, system builders and users - benefit from low DRAM prices. In 1995, the semiconductor industry made enormous profits on the back of supply shortages. Now it's our turn to do the squeezing. ®
Drew Cullen, 28 Aug 1999
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So are PC retailers responsible for ‘Rip-off’ Britain?

Opinion This article was first published in July 1998 Another day, another whinge from Fujitsu, this time about the burden of taxation placed on our downtrodden schools, whenever they buy PCs. The vendor has filed a series of representations with UK consumer affairs minister Nigel Griffiths, claiming that schools in other EU countries are given tax breaks and so can afford to buy more PCs than UK schools are able to. In the quotation that appeared all over the press, Fujitsu UK managing director Brian Taylor asked Griffiths: 'You're trying to bring IT into education - why don't you make this a level playing field?' He gave Griffiths a sheaf of documents showing that other EU countries, especially Sweden, had a preferential rate to encourage schools to use PCs. But why should the UK government alter its fiscal policy to indulge in a piece of social engineering on Fujitsu's say-so? Especially when UK schools by all accounts already have the highest PC penetration in Europe. And prices are coming down, anyway. Why not lower VAT rates on bicycles, tampons or pianos? No amount of PR-inspired special pleading for the little children can disguise Fujitsu's naked desire to shift more kit. It is also a vociferous campaigner against high mark-ups, which it claims are levied by UK retailers, pointing its finger firmly in the direction of Dixons Stores Group, the dominant player in the UK electronics retail market with 35 per cent share of consumer PC sales. The argument goes like this: UK computer prices are up to 30 per cent more expensive than in Germany. Therefore UK consumers are getting ripped off and UK retailers are to blame. Let's leave aside the consideration that Germany is the most fiercely competitive and most heavily loss-making PC retail market in Europe, a country that has seen the disappearance of its most important PC vendors, either into the arms of the liquidator (Escom), into bed with an OEM (Siemens Nixdorf) or into the maw of the ever-expanding CHS (Vobis). More interesting is the inference that DSG has some sort of monopolist power to impose its will on the market. Sure, it mopped up two competitors recently - Byte Computer Stores, the 16-outlet PC superstore chain and the 40-branch retail business of Seeboard, the electricity supply company. These retailers weren't put up for sale because electronics goods prices were too high - they were sold because their owners were unable to cope with fierce price erosion in the market. If Dixons chose to operate a price war, even more retailers would fail. But it doesn't. Operating in a bombed-out retailing sector, Dixons wants to conserve as much margin as possible. The group may be powerful, but with 12 per cent of all UK PC sales, it's unable to enforce minimum PC prices in this country. The company is free to choose the prices it sells at. And if it gets its prices wrong, customers are free to go elsewhere. Just as Fujitsu is free to blame others for its singular lack of success with UK consumers. ®
Drew Cullen, 28 Aug 1999
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Outlook for European PC merchants ‘generally grim’

Analysis This article was first published in June 1998 So you thought times were tough? Not according to IDC, which says buoyant PC sales in Western Europe are prompting major PC vendors to redouble sales efforts in the territory. PC shipments in Western Europe will grow 14 per cent in 1998, but sales will rise only four per cent. This will help the big PC vendors to ride out poor sales in the crisis-hit Far East. IDC reckons the outlook for Western European vendors is 'generally grim, as witnessed by the recent fall of the long-established Dutch firm Tulip, the sale of Germany's Siemens Nixdorf PC manufacturing operation to Acer, and the slide experienced by Italy's Olivetti'. US vendors are not immune either. Last week, Unisys completed the handover of PC manufacturing to Hewlett Packard. But IDC makes a good point. As it says, the dynamics of the PC market in Western Europe have changed. Terry Ernest-Jones, senior consultant at IDC's European Personal Systems research group, comments: 'As typical business configurations for desktop and portable PCs fall further and faster in price, it is projected that the average lifespan of a business PC will shorten. So the frequency of upgrades and market growth will increase beyond levels previously expected. Lower entry-level pricing, improved product and support service packaging and more effective marketing will also encourage homes and small businesses to upgrade a little more frequently and purchase systems for new users. Sub-$700 PCs (including monitor) are already being advertised.' And just when you thought you had your logistics sorted out, Dell comes along and screws things up. Dell, the acknowledged master of the PC logistics game, says it will reduce inventory levels by half by the end of the year. The company says real-time information internet links with suppliers will enable it to cut inventory turns from eight days to as few as four or five. Dell will no longer have to anticipate demand - it can order components as and when it needs them. By increasing inventory turns, PC vendors are not left with old stock at a time of frequent falls in component prices. This enables the big guys to ratchet prices downwards and still make money. This, for example, is HP's stated goal for its PC manufacturing business - although recent results suggest there is some way to go before it pays off. But price-squeezing tactics like this will mean that fewer and fewer smaller OEMs can compete, and they will drop out of the market, reckons IDC. Some of these 'smaller' OEMs will be biggies. According to the estimable PC Europa, German retail giant Metro has put its computer businesses - Vobis, Maxdata and Peacock - up for sale, because it reckons the rules have changed on both distribution and manufacturing fronts. If you can't stand the heat - sell the kitchen. ®
Drew Cullen, 28 Aug 1999
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Computacenter and its masterful IPO tactics

Update This article first appeared June 1998
Drew Cullen, 28 Aug 1999
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Azlan and those Fraud Squad investigations

This article was first published in April 1998 'What experience and history teach is this: people and government never have learned anything from history, or acted on principles deduced from it.'Hegel, The Philosophy of History. I knew that philosophy degree would come in handy one day. According to Henry Ford, history is bunk. According to Azlan, history is what the previous management team did with the company's accounting procedures and controls. Now the Serious Fraud Office is researching Azlan's history. Even more serious, the Fraud Squad of the North Yorkshire police is poring over the Azlan story. (I assume North Yorkshire is involved because its beat covers Azlan's eccentrically sited European distribution facility.) The two organisations are checking out the 'events leading to the suspension of the shares of Azlan by the stock exchange in June 1997'. In a terse press statement, Azlan says the present management team 'will give its full co-operation' - as if it had any choice in the matter. Citing an earlier shareholder circular, Azlan refers to the 'overstatement of profits and the failure of management and internal controls' which led to the share suspension in June 1997. This failure caused a £28 million hole in the accounts. In the year to 5 April 1997, the distributor lost £14.1 million on sales up from #196.5 million to £293 million, compared with the £14.8 million profit forecast in April. Peter Bertram, Azlan finance director, is more expansive in The Financial Times. 'The company has already had its own forensic review into what went on, so that gives them a good start. This is a historic investigation into what happened over a year ago.' Market makers are not buying the history story. In the quaint phrase of The Financial Times, Azlan Group shares 'gave up 7.5p to 50p' when the company announced the SFO investigation into 'suspected offences of false accounting'. Let us recall the results of the KPMG forensic review, announced last year by chairman Barrie Morgans. He said the nine staff who were disciplined and three who resigned in connection with the KPMG findings were 'silly, but not fraudulent'. In an interview with the Daily Telegraph, Morgans said at the time: 'No instances of fraud have come to light, but obviously there has been neglect on the part of some individuals.' The SFO and the North Yorkshire Fraud Squad clearly think that more than neglect may be involved. The company's current story is getting interesting - for the right reasons. SBC Warburg Dillon Read, Azlan broker, forecasts a break even at year end, and pre-tax profits for the full year to March 1999 of #8 million. At the current share price, Azlan is woefully undervalued. And there is plenty of upside to come. In this context, any legal action against former employees is an irrelevancy. But until the SFO completes its investigation, it will be impossible to treat Azlan as a 'normal' company.®
Drew Cullen, 28 Aug 1999
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What AST didn't want you to know

This article was first published in February 1998 Three weeks ago, I learned that AST was about to scrap its desktop and server product lines in Europe. The stricken vendor also planned to fire up to 60 per cent of staff at its European headquarters, I heard. Not having much use for scoops these days (I'm a columnist, don't you know), I passed the details on to a reporter of a more investigative persuasion. So why did the story not appear any earlier? It had something to do with the fact that AST threatened an injunction against the reporter to prevent the story being published. A small piece forecasting some job cuts provoked an AST letter bandying words such as 'defamatory'. AST achieved its purpose with its blustering tactics - the story on desktop and servers was not written until AST had lifted threats of legal action and was ready to speak. You may have gathered that AST is not exactly flavour of the month, either with me or with many other journalists who write about the computer industry. But I am, of course, far too professional to let any thoughts of personal animosity sway any assessment of the company. AST's auto-destruction in the European desktop and server sectors marks the demise of a once nearly great PC manufacturer. The company is also firing 300 people from its assembly plant in Limerick, Ireland. Fortunately, Dell is hiring 2,500 more staff for its plant in the area. AST is now effectively reduced to being an OEM outlet for Samsung components, which make up 65 per cent of AST Ascentia notebooks - also designed by Samsung. In a letter to resellers and distributors obtained by PC Dealer, Con Mallon, AST European marketing director, said: 'AST is confident that a stronger notebook-focused organisation will secure it a long-term future in the European notebook market.' Samsung has been an indulgent parent, injecting more than $700 million into its loss-making subsidiary. Now the Korean currency crisis means 'can't pay, won't pay'. But Samsung can offer AST core technology and reliable build quality. By all accounts, the Samsung-sourced AST Ascentia M is a product with plenty of features. In years past, AST notebooks have been of variable quality - quite understandable as many models were OEM'd. With Samsung's support, AST should have a strong competitive advantage. But the withdrawal from the desktop and server markets may cause collateral damage to the AST brand for notebooks. It will only have itself to blame if it fails to persuade customers its notebook business is here to stay. AST will no doubt go into marketing overdrive to reassure the corporate market. Typically, such initiatives include getting the message across to the press. But AST may find that some UK computer journalists are less than interested in listening to what the company has to say. ®
Drew Cullen, 28 Aug 1999
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So how low can PC prices go?

This article was first published in July 1999 PC vendors everywhere are running faster to keep standing still. Last week Compaq announced its intention to squeeze the prices of its mainly Taiwanese component suppliers by 15 per cent. The world’s biggest PC maker also aims to sell 25 per cent of its hardware online by the end of the year, making savings by retaining extra margin, while reducing inventory. Toshiba says it aims to improve annual stock turns from 25 to 50. If it reaches the target figure, it will merely be as efficient as Dell is now. Meanwhile Dell has signalled its intent to take down stock levels from six or seven days to six or seven hours. This is a direct assault on competitors and an indirect assault on the profit margins of mainly Taiwanese component suppliers. Today, there are two main areas of slack on PC prices – and they are Microsoft and Intel. Microsoft’s OEM prices for its operating system are looking increasingly out of whack, compared with RRPs. Its prices must fall, or else, the company risks losing share to the welter of small OS companies coming onto the market. Intel has the likes of Cyrix-Via, Rise and Transmeta snapping at its heels. It will let them fight it out and lose stacks of money in the ultra-cheapo market, while it guns for AMD, its only serious rival, in the performance sector. Intel may have profit margins in excess of 50 per cent, but it reckons that PC prices have some way to fall, especially in the UK. Last November, Intel CEO Craig Barrett famously denounced Dixons for singlehandedly keeping UK PC prices 15 per cent higher than the rest of Europe. However, what counts as robust discourse in one country is a matter for the libel lawyers in another. Barrett caved in a few weeks later, with an abject letter of apology to dear old Dixons. Dixons may have 50 per cent of PC sales to British consumers, and around 15 per cent of the market overall, but it cannot dictate prices. It does not control Microsoft and Intel profit margins and it has limited room for manouvre for its And if you ever thought the company’s PC prices were on the high side, take a look again. Dixons is knocking out PCs for under £400. Last year, equivalent specced rigs went for £800. And by Christmas, it will be knocking out stripped down PCs for £200. With price points like this, you’d think secondhand computer retailers might as well shut up shop. Only they will be selling proper PCs not the Internet connection devices masquerading as PCs that Dixons is thinking off. With PC prices at this level, Internet service providers will be able to give away kit, in return for monthly web access fees, and make a profit. This is the mobile phone pricing analogy, and one that I’m sure you’re all aware off. Maybe, Dixons could set up a Rentserve ISP. In its last financials (published 7 July), Dixons reveals that year on year PC sales grew 27 per cent in volume, but only three per cent in value. So what is it going to do about price deflation? In a curious case of running faster up the down escalator, the company is opening 100 new stores, and creating 3,000 new jobs(2,000 full-time). To maintain gross profits, Dixons has to grow sales and (by implication) market share in PCs, computer games, brown goods and mobile phones. This is a vote of confidence in the high street from one of the UK’s canniest retailers. It is also a declaration of war on other consumer electrical retailers. But more stores, and more people? Wasn’t Dixons tempted in anyway to accelerate its ecommerce retailing capabilities? After all, it is the owner of Freeserve, the UK’s biggest Internet Service Provider, and soon to be Europe’s biggest Internet stock. ®
Drew Cullen, 28 Aug 1999
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Big is beautiful for Computacenter

This article was first published in July 1999 Big is beautiful when it comes to the channel. Which means that Computacenter is the Catherine Zeta Jones of computer resellers. If it wants an account badly enough, Computacenter will go cheap - a couple of months back, it underbid an incumbent reseller to win a humungous Microsoft Select contract. I don’t know what Computacenter bid – but I can tell you the incumbent’s proposed mark-up was just £30K. On £8 million-worth of software. This is not a business for the faint-hearted. A couple of weeks back, Computacenter fended off Compel and ICL Multi-Vendor Computing (as well as 50 wannabes which failed to make the short-list) to retain the BT PC supply contract for another three years. And it has secured an option for two more years after that. BT is the biggest PC account in Britain – every three years it churns through an estimated 160,000 PCs. And then there’s the software, the peripherals, the maintenance, and so on. But with purchase running at £60 million a year or so, it still only contributes around five per cent to Computacenter’s UK turnover and a negligible amount to the reseller’s gross profits. My guess is that Computacenter makes more out of BT from vendor rebates and working the cash-flow than from GP. Then there’s some profitable services to sell on the back of the product business. This is explicitly stated in the press statement accompanying the BT win. Here we find the reselerlis teaming up with BT to sell software and services to the telco's customers. Computacenter lists ecommerce solutions, supply chain re-engineering and "innovative maintenance offerings" as areas where it will work with BT. Computacenter is building up its intranet design/ecommerce capabilities in-house. Called the iGroup, this team already employs 60 people, which already makes it one of the UK’s biggest web designers. Innovative maintenance offerings possibly has something to do with the recent £1.9 million cash purchase of secondhand computer broker RD Computers from Datrontech. This means that Computacenter will now do its own PC pull-outs, making some extra margin from end-of-life kit, and wrap it around some fancy asset management contract.RD Computers is an example of infill acquisition. It is a relatively cheap way of getting into the computer recycling and is a useful extension of Computacenter’s service portfolio. Networking is another logical extension of the company’s business. Computacenter has all the vendor badges in place and – last time I checked – pulls in more than £20 million annually from this part of the business. So, in market share terms, Computacenter is underweight in networking integration, where it is dwarfed by Workplace, Logical Networks and Siemens Business Systems. Computacenter would need a quick and big acquisition to become a major player here… and Workplace would be an obvious bid target. But to date that’s not been Computacenter’s style. It doesn’t like paying over the odds – and with South African money chasing any good networking channel company that moves – prices are well over the odds. And it doesn’t like buying big. It has moved into continental Europe, through three small purchases. The reseller it bought in France was fairly big, but bust, while resellers it bought in Belgium and Germany were both sub-£15 million turnover. But prospects for UK market share growth in product supply are fairly limited: vendors and customers won’t let it take 50 per cent of the corporate market, the company has no interest in getting its knees dirty in the SME market, and distribution has little strategic interest for or the company. This is why we can expect more European acquisitions. And this is why the temptation for Computacenter to buy high-margin, shareholder service businesses will become increasingly irresistible. ®
Drew Cullen, 28 Aug 1999