New Computer for $299?

By: Jeff Sheffer

The following is based on real deals available at the time this is written.  Is it fact, opinion or speculation?  You decide for yourself.

Have you seen the latest ads?  How can they sell a new computer for $299?

Did you know that for every 3 computers purchased in the United States, one of them is ordered from that really popular mail order company.  In the forth quarter of 2005, they alone shipped 10 million PC’s.   But is it a good deal for me?  Read on.

(source: Information Week- January 5, 2006)

With that kind of volume it’s no wonder they can sell them so cheap.  But at that price, what kind of margin do they have?  Probably not much at all.  At least not on the computer itself.  No doubt their volume is so great that if they only made $20 profit on each one they would have still profited $200 million in Q4 of 05.  But they don’t stop there.  They need more profit margin and they get it.

 What’s their secret?

They have enough buying power to make their own rules, but lower cost is not the only secret to their success.  One of their secrets is the use of proprietary parts.  What does that mean you ask?  Have you ever gone to the local geek store, bought an extra 256 or 512 MB of memory?  Tried to install it and found it would not fit or register with the system.  That’s what proprietary parts means.  Frequently it happens with cooling fans, power supplies, main boards and video cards.  Most of the big manufactures do it in one form or another.  Some times its physical or functional compatibility other times it aesthetics.  Like the really awesome looking red computer tower that has a curved front and matching CDROM drawer.  You better hope that CDROM never needs to be replaced.  Now don’t get me wrong, some parts manufactures still provide these cool towers and maintain their “generic” nature.

 But let me illustrate some of the less obvious traps.  Recently we had a client with a proprietary system.  It seems that the power supply was dead.  The power supply is the internal device that distributes power to the various components on the inside of your computer.  How did I know it was dead?  I plugged in a power supply tester and confirmed it was dead.  Next I pulled a new power supply from my spare parts kit and plugged it in.  Viola, computer boots up now.  So $39 for the new power supply and about a ½ hour for my troubles, problem solved, Right?  Wrong!  You see this particular proprietary system maintained functional compatibility with the open source replacement power supply, which is why the computer booted when I connected it.  However the tower or case was designed in such a way that physically the open source power supply would not fit unless I were to hack away at the metal backside of the case.  Unfortunately for the client, this meant that we had to contact the manufacture, convince them that the power supply was dead, provide a credit card number and arrange for the new $79.00 part to be sent out in 3 business days and a total of 1 ½ hours for troubleshooting, phone calls and second trip out to install.  As if the price increase wasn’t galling enough, have you ever called tech support of one of these big computer companies?  Sure it’s “Free” but who want’s to deal with it.  That’s a story for another newsletter.

 So why do these companies do this?  As one blog writer puts it, “they use proprietary parts customized to their financial plan”.  Huh?  Yes, in the long run it makes them money.  Margins on replacement parts and upgrades are much greater than the actual cheap pc that attracted you in the first place.  That’s why you get baited with the included “17in Flat monitor”.  Wow, you mean it comes with a one of those really cool/thin monitors?  Nope!  “Flat monitor” usually refers to a traditional CRT monitor with a flat face picture tube.   Whew, good thing I realized that before I bought it, I’m one smart cookie.  But that reminds me, I really wanted the 17” or 19” LCD monitor.  I’ll just upgrade that and the memory.  Maybe a bigger hard drive too, but that’s it!   Well except for the $29 inkjet printer that uses $59 dollar ink cartridges.  Oh yea, guess what?   You buy those from them as well.  (for 15 years I worked for a company that manufactured commercial printers, It’s all about the ink, trust me)

 If that’s not bad enough, on top of it, they out source their customer and technical support department to off shore countries as the workers their will do the job for less.  Nothing against these people but sometimes the communication difficulties makes me nuts especially when I’m trying to do an expedient job for the client.  (I try not to let the frustration show)

So perhaps your ICO (initial cost of ownership) is lower.  But at the end of the day it your TCO that really matters.

 Where does ITCS fit in? 

We are a service company that sells hardware and software as a convenience to our customers.  My philosophy has always been not to compete in the cut throat market of computer hardware.  An OEM copy of Windows XP Pro cost me $144.00.  We can’t build a $299 PC so we don’t try.  On the other hand, we can build a very nice, open source, entry level business computer for about $650 with Windows XP Pro.  Like the big players, we warranty our systems for 1 year, replacing any failed hardware resulting from factory default at no charge.

Myths

If a manufacture is known for making proprietary systems, all their systems are proprietary. 

Not necessarily true.  In most cases, manufactures have at least two lines of PC’s.  Consumer class and Business class.  Many times, not always, the business class computers are more open, thus have an overall lower total cost of ownership (TCO).

Jeff is painting a dreary picture so more clients will buy PC’s from ITCS. 

Nope, not the case at all.  We are a B2B service company.  Fact is we are likely to get more service business from client that buys proprietary systems.

Buying cheap computes lowers my TCO.

Okay, if you say so.