Scouring for the Best PC Deals

Generic drugs offer an inexpensive yet effective alternative to brand-name counterparts. The same can be true for personal computers, where generic models, known in the industry as white-box PCs, have attracted the attention of price-conscious shoppers.

The white-box industry's share of the worldwide PC market is growing. Industry tracker IDC Research, in a recent research update, says white-box manufacturers shipped 59 million PC units in 2001, up from the 51 million previously expected.

"It's obviously bigger than we thought and bigger than what other people have thought," said Loren Loverde, director of IDC's PC research. "We heard from clients that nobody had a solid grasp on what this segment was doing. It was a pervasive problem because of the trouble in defining what a white box is."

What a White Box Is

White boxes are loosely defined as PCs manufactured without a brand name attached. But some analysts define white-box makers as companies that lack an international brand, and that definition widens the scope to include second-tier manufacturers such as eMachines. Other analysts have a narrower view, limiting the definition to companies that lack a national brand and serve regional markets.

Because white-box manufacturers are usually private companies, researchers have trouble handicapping an industry dominated by smaller players who manufacture in small batches and don't report sales figures.

"I've heard that 300 guys control the business, but there are 10,000 retailers out there," said Ted Erfer, director of marketing for National Software Testing Labs, an organization that tests computers for branded and unbranded computer makers. "There are all kinds, system builders who assemble PCs for businesses, and mom-and-pop outfits who assemble for customers who walk in the door. Or the guys who sell cheap machines through the Sunday paper."

IDC's Loverde estimates that the white-box segment accounts for 30% to 40% of the PCs sold in America. "It's hard to have specifics on each vendor, since there are so many of them," Loverde said. "But we think it has been on the rise recently."

Who's Buying? White-box desktop computers are a big hit at home and in small businesses, but are less popular at larger companies, schools and in the government.
Segment	% Share of Purchases
Home	39%
Small Business	15
Medium Business	12
Small Office	11
Large Business	9
Education	8
Government	6
Source: IDC Research

Falling Prices All Around

As the recession took hold and PC spending fell, many market watchers expected white-box makers to flounder as branded PC makers such as Dell (DELL - Cramer's Take - Stockpickr) aggressively dropped prices to gain market share in early 2001. "This was supposed to push them out of existence, but it didn't happen," said Richard March, a senior vice president of research at industry tracker RoperNOP.

The heavy competition has spurred consolidation in branded PC space, pushing consumers to consider white-box alternatives.

In January, consumer electronics retailer Best Buy (BBY - Cramer's Take - Stockpickr) rolled out a line of in-house PCs sold under the brand name vprMatrix, which it plans to expand and heavily promote in its stores this summer.

"It's no secret that the PC industry has been contracting," company spokesman Jim McManus said. "We took steps to make sure consumers have choices and created a new way of retailing PCs."

Instead of killing them off, price wars gave white-box makers an advantage. Processor prices fell after Intel (INTC - Cramer's Take - Stockpickr) reduced the price of Pentium 4 chipsets, spurring AMD (AMD - Cramer's Take - Stockpickr) to follow suit. Across the board, PC component prices have dropped as manufacturers of hard drives, memory chips and motherboards have struggled to reduce inventory over the past year.

The Upside

Their small scale, use of cheap components and low labor costs combine to give white-box makers a distinct price advantage, and a white-box PC can be much cheaper than a comparable branded machine. "Typically, white boxes are more than 10% cheaper than a branded machine," March said, adding that up to 20% of a branded machine's price tag comes from marketing costs.

In addition to price, white-box makers are competitive when it comes to service. Many small businesses and consumers prefer the hands-on help offered by local manufacturers. After all, fixing a branded machine can require hours of customer-service phone support and might involve shipping a PC back to the manufacturer. An unbranded machine can be fixed at the store where it was bought.

A final advantage white-box makers have is flexibility. Unlike big-name PC makers who build machines using a list of standard components they can cover under warranty, smaller manufacturers can custom-build machines from whatever parts people want. "One of hottest areas we see this is for video gamers," said Erfer. "They're very expensive machines, but they're really souped up for video games, with special 3D video cards and extremely fast memory."

Dude, You Got Hosed! A comparison of two similar Pentium 4-based systems: the PC built by Achiva, an online manufacturer and retailer of white-box computers, and one sold by Dell
Features	Dell	Achiva
List Price	$2,199	$1,648
Processor	Intel Pentium 4, 2.53 GHz	Intel Pentium 4, 2.4 GHz
Memory	512 MB	512 MB
Hard Drive	80 GB Ultra ATA	80 GB Western Digital
Monitor	19 in., .26 dp M991	19 in., .25 dp KDS VS-195XP
Video Card	64 MB DDR NVIDIA GeForce3 Ti 200 with DVI	ATI Radeon 7500 64 MB DDR TV Dual
CD/DVD ROM Drive	16x Max Variable DVD ROM	48x DVD ROM
Sound Card	SB Live!	SB Live!
Speakers	Harman Kardon HK-395 with subwoofer	Altec Lansing AVS300 with subwoofer
Modem	56K	56K
Sources: Dell.com, Achiva.com, TSC Research

The Downside

Of course, the small size of white-box makers can be a liability, too. Companies like Dell spend millions of dollars supporting a brand and have the infrastructure in place to ensure that customers have a positive experience. Without a brand on the box, some white-box retailers are more interested in selling computers than in making sure they work well.

"I would stick to a brand I know. It's important for a company to maintain its brand and reputation," said Jed Kolko, research analyst at Forrester Research, which tracks the PC market. "It's hard for consumers to evaluate what's inside a box that has no brand."

Consumers must use caution because some white-box makers use refurbished parts, which can break easily. White-box makers can be unreliable as well, leaving customers without support if they change locations or go out of business.

In the end, it all comes down to this for consumers: How much comfort do you take in buying from a brand? Industry observers point out that we're raised from birth to believe that brands are better. That's the mindset you need to break if you buy a white box.