The Perils of Building a Cheap PC

September 14th, 2006

In recent weeks, I’ve seen an active discussion on this site about whether Apple should be producing a stripped-down computer, shorn of a few features to keep the price down. The activity has been pro and con, as some of you feel that you don’t want to pay for such “frills” as AirPort, Bluetooth, a remote control and a few other enhancements.

At the same time, it’s also true that building an entry-level PC box is not a profitable enterprise, as more and more companies are discussing, to their detriment. Take Dell, the number one PC maker. It has seen sales and profits erode, and now Chairman Michael Dell has come up with a plan to improve the bottom line, to be known as “Dell 2.0.”

Without going into the down-and-dirty details, it apparently covers things that are already in progress, such as improved customer service and reducing or eliminating the silly rebates that make it impossible to get a consistent price on one of Dell’s computers. But the rest is going to raise a few eyebrows, such as hiring a bunch of designers in the hope of building better-looking computers and putting less emphasis on the cheap stuff that doesn’t deliver a profit.

As if you can just throw money at a problem and find success, and I suspect Dell will have a really hard time building stylish products with the simplicity and elegance to match Apple no matter how many designers they hire. Of course, there are those in-your-face designs from its new subsidiary, Alienware, but I wouldn’t call those things classy.

What Dell is discovering is something Gateway has known for a long, long time, that making a profit on entry-level PCs is horrendously difficult. While I have little doubt Dell will survive, Gateway is playing the revolving executive suite game right now, trying to figure out a business plan that makes sense.

Of course HP and Lenovo, the company that bought IBM’s PC business, both seem to be doing well. Even though HP has a line of cheap computing boxes, they earn the lion’s share of their profits from printers, consumables and other products and services. And they will, I suspect, survive their current corporate boardroom scandal after a few more heads roll, but without much serious damage otherwise.

This is the business that some of you, and, in fact, more than a few tech analysts, suggest that Apple ought to enter full steam ahead. It exists on paper-thin or non-existent profits, the hope of tremendous volumes, and in an environment of cutthroat competition.

Quality, such as it is, plays a secondary consideration.

This is not to say that Apple can’t produce cheap products. It does take advantage of the tremendous volume of iPod sales to keep prices incredibly attractive, from the forthcoming $79 match stick iPod shuffle with 1GB of RAM, to the 80GB video model that retails for $349.

By placing huge orders for the expensive storage parts required for its music players, it still manages to achieve profit margins sufficient to keep its stockholders, and Wall Street, happy during each quarterly financial meeting with industry analysts.

But today’s cheapest Mac is the $599 mini. Apple makes a profit on that model, too, and it delivers plenty of value, with all the goodies you need right there, preinstalled, without having to cope with installation and driver issues to get them to run properly.

Sure, there are knowledgeable PC hobbyists who are perfectly capable of building a computer from scratch with industry-standard parts, with the knowledge and patience to make them work properly. When you factor in the time, and if you value your time as a commodity that has cash value, however, suddenly those ultra-inexpensive PCs aren’t so inexpensive, particularly if you bump into a few land mines along the way.

I’m not saying that Apple shouldn’t ditch a few features if a business customer is willing to order enough computers to make a mass customization effort of this sort worthwhile. But that’s a far cry from piling up cheap boxes in the aisles at Wal-Mart and hoping to make a few dollars if enough of them sell.

Yes, there will continue to be cheap PCs out there. But it’s clear Dell and other PC makers are having second thoughts about the value of such things, and whether they can truly contribute to the bottom line.

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10 Responses to “The Perils of Building a Cheap PC”

  1. Karry says:

    I think Dell’s problem isn’t with building cheap PCs. The “problem” is that current PCs are good enough to use for a long time. Theres less of a need to upgrade. Apple creates desire and survives primarily because it’s user base keeps upgrading their systems instead of continuing to use the good systems they already have. Proof? Apple market share remains unchanged. The numbers don’t lie.

    The PC industry understands it’s missing some precision in the building of machines. Some systems today still have an empty block in the case design (left over for the floppy drive). You’ll see on many systems how inconsistent the gaps are between your optical drives. You’ll notice how cheap the plastic power switch feels as it wiggles when you power on your machine. These things are ugly but can be fixed.

  2. Loke says:

    Notice how a car buff (over time) will spend big bucks and a zillion hours of time building up a car when they could have just bought a real nice car. People build their own houses too. But in the end, w/o good experience, the end product is never as good and polished as something that’s built by pros. Still they build because they love to.

    The key is to understand that “economy” does not mean cheap. It just means the lowest end model. Take the Honda Fit for example. It’s the cheapest Honda. It only has a 1.4L engine. It’s more expensive than other cars in it’s class. Still people really want this baby because it’s got serious looks, quality, and those cool folding seats.

  3. Susmania says:

    In the past, cheap PCs were definately too cheap in quality (eMachine). Things change. Quality is improved. But as we know, the profit for low end machine is razor thin. I can image that in many cases, companies don’t care. They want to lock you in as their customer. Look at the XBox for example. At some time, it was being sold at a loss. In the end it gained market share. Then they created XBox 360 and people are willing to drop $500 to buy it. Pretty impressive considering they are late in the game console market (apple no where to be found except for those whimpy games you play on your iPod).

  4. wsk says:

    I won’t buy a cheap product, but I’ll buy a less expensive one!

  5. Cat says:

    Mac Mini is very close to what an economy computer should be. The only missing part I see is the ability to upgrade graphics. It’s too easy to outgrow this machine. Still, it has quality that is unmatched in the PC world.

    Building my own machines was fun for a while. Eventually you realize that there are other things in life that are more fun. Let the builders build. Cheap PCs will always be around. This is very important in business. A Mac mini could work if they:
    a) Sell it with Windows preinstalled.
    b) Don’t include OSX. Why pay for it if you’re not planning to use it?
    c) Remove optical drive to keep price down. Modern Corporate office really doesnt need optical drive on every desktop machine.

    If you do this, half the battle is won. You gain significant *hardware* marketshare. After that, all you have to do is convince them to migrate to OSX. You’re in a great position to say you’ve already got the hardware.

  6. Andrew says:

    Can’t leave off OS X, as that is what makes people dig deeper and buy the Mini. Optical drive still needs a place too, as most of the people who buy one aren’t putting them on office desks, but in their homes.

    Those who use Macs in business still want the optical drive and OS X, as again OS X is the reason they are using Macs instead of PCs and without an optical drive, installing the new OS or troubleshooting problems is a lot more difficult. Cheap PCs still come with a CD or DVD drive, and likely always will.

  7. DanH says:

    No, Dell is not in trouble because of cheap PCs. The consumer market did not need new machines for the last few years. They are fast and upgradable.

    The story changes in Dec / January time frame. Holiday season plus knowing that Vista will be (should be, hope to be, it better be) out by then. This is guaranteed to increase sales in all PC manufacturers. Business enterprises won’t be switching immediately, but they will over time. Then, you’ll see the long term sales pick up again.

    Other than a few no-name brands. I don’t think cheap quality PCs really don’t exist anymore.

  8. daddydoodaa says:

    Apple is doing it right. It pushes the edge and creates new markets.

    Look at the announcements yesterday – downloading movies. You NEED high speed broadband to use this product. That’s going to set the environment for even more for new services, applications, and hardware.

    Just like USB, Firewire, dumping floppies, GB Ehternet, Wi-Fi, iLife, Final Cut Pro….they didn’t invent a lot of these, but they implemented them in K.A. fashion. Only recently, did the consumer hardware catch up to the software for wide spread use of iMovie, Garageband, and iDVD. Now look at the into of the 24″ iMac – awesome.

    What market can Apple succeed at and dominate with a stripped down bare bones computer? A computer to simply check email, play Bejewelled, and surf the web – it’s an already flooded market. Computers for cube farms? Another flooded market.

    Sure, Apple will go after some low hanging fruit, but they already say PCs are good for spreadsheets on their commercials…

    Full steam ahead, Apple!

  9. Dana Sutton says:

    Gene’s talking mostly about one kind of cheap. But there’s another: recently I visited a Mac computer lab at a local high school using e-Macs. They were being used as little more than slave terminals operated from the front of the room, and surely Apple could build less expensive Macs for specialized applications such as that.

  10. Bill says:

    You can upgrade the Mac Mini’s graphics by spending an extra $600 to get an iMac with a dedicated graphics card.

    No one has yet (over multiple threads) stated a single business reason for Apple to depart from this strategy
    in the consumer market.

    I’d love to buy a Mini/iMac motherboard/CPU for $200, stick it in a recycled case, and add the parts I already have on hand, but
    that doesn’t make Apple any money.

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