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  • 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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