Shrinking margins

Within a year or so, virtually every aspect of the computer industry is going to be far less profitable to sell. Editor Ed Sperling tells you how and why it will happen.

Still living on product margins? You may be long overdue for a new business plan, because the same competitive forces that sucked the profitability out of selling and fixing PCs is about to move upstream—way upstream.

That doesn't mean you should stop selling hardware and software, but it does mean you're going to see a shrinking percentage coming from product margins, no matter what you're selling. It also means that actually taking title to products will become less attractive by the minute.

The best indication of what lies ahead is in the expansion plans of mass distributors. Tech Data, whose operating expenses are 3 percent in the United States—yes, that number is correct—plans to push into the midrange market and a variety of specialty areas by early next year. You can expect Ingram Micro to follow suit, and you can expect it to cause some serious belt-tightening and price-cutting up stream among all distributors.

The mass-distribution market already is down to a two-horse race. Inacom is gone, Pinacor is in Chapter 11, and Merisel's MOCA unit has been sold to Arrow Electronics. The same kind of competition that wiped out all of those players is about to spread into new areas.

Within a year or so, virtually every aspect of the computer industry—including havens like wireless and applications like customer-relationship-management software—are going to be far less profitable to sell. As competition increases in the midrange market for distributors like Gates/Arrow, GE Access, Hall-Mark and KeyLink, they will be forced to compete on price to keep their customer base intact and look for other avenues of income.

That, in turn, will put increasing pressure on specialty distributors like Westcon and Comstor in the networking arena, and companies like Bell Micro in storage. It also will put more pressure on vendors to push higher-end products through distribution—even if it looks like they're actually selling direct on the front end—because they can't get their operating expenses down anywhere near as low as the mass distributors.

If your business model is predominantly service-related, that is good news. You can look forward to much better service and support than you've ever gotten in the past. Unlike competition among your peers, competition among your suppliers is a good thing.

But if you've grown accustomed to sizeable margins in the midrange market—and 5 percent on a $2 million server is nothing to scoff at—you'd better be scrambling to find a replacement source of income. After all, profits are the only thing that count these days.

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