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The White-Box Industry: Surviving on Poor Accounting?

By Paul Murphy
Aug 5, 2004 7:12 AM PT

Last week a dashboard light in my car (a Volvo V70R) came on, leaving me groping for the manual while trying to survive traffic. As it turns out, an "ETS" light is a failure warning from something called the "electronic throttle system," so the obvious thing to do was find a place to pull off the highway and reboot the computer by restarting the car. That worked then, and it also worked a day later when the light came on again.

The White-Box Industry: Surviving on Poor Accounting?

The local Volvo dealer couldn't find the fault, but charged me $84.67 in Canabucks for a software upgrade -- something they were at pains to point out isn't covered by the warranty. Since then, the warning light has stayed off but I've been getting an intermittent failure that feels like fuel starvation and high-end power seems down considerably.

BK Motors, of course, claims they can't roll back the software upgrade, can't find the problem, and can't replace "a thousand dollar part" without solid evidence (that is, a car that has to be towed) that the throttle control system is dying.

Specialization Bred of Industrialization

I wasn't surprised at their behavior, in part because the problem could theoretically be unrelated both to the software upgrade and to the original ETS warning, but it did raise an interesting question: How many thousand-dollar parts are in this thing?

A few minutes with Mr. Parts Guy suggests that the answer is well over 200 -- meaning that the truckload of preassembled pieces needed to build the car from scratch could be expected to cost at least six times as much as a fully assembled and tested new car.

That's true in a lot of other areas too. New blades for a kitchen appliance, for example, cost $19.95 each at Linens & Things while a brand new machine with five different tool combinations is $59.95.

What's going on here is obvious. The cost of getting replacement parts into the hands of consumers or service organizations is a lot higher than that of getting the same parts to a factory that orders large quantities at predictable intervals.

You'd expect, in fact, to find that the cost of the parts always exceeds the cost of the product for any widely distributed manufactured product because inventory, handling, packaging and insurance costs all have to be higher for parts retailers than original equipment manufacturers. That pricing ratio should in fact be a universal truth, an obvious and required consequence of the specialization inherent in industrialization.

But it isn't. There's an exception: the Wintel PC.

The Early Days of PC

Wal-Mart's Microtel 1.6 GHz is one of the least expensive fully assembled machines you can buy at $278 excluding a monitor. That's inexpensive by any standard, but the surprise is that, except for shipping, you can assemble it from parts for about the same total.

The savings you can hope for from assembling your own PC vary with the specifications of the assemblies used and the brands you want to pick. Get the best of everything and your total cost will easily exceed that of the name-brand product. If you cheap out, parts nominally comparable to those in a Dell 4600 listing at $729 are available for no more than $650 before shipping. Those in a Dell Optiflex GX280 listing at $1,101 without a monitor run around $900.

Part of the net difference comes from the fact that parts are sold without the operating system license from Microsoft. You can't buy a Dell PC without paying the Microsoft tax in one way or another, but you can buy the parts to build your own machine without directly incurring those costs.

That doesn't amount to much now, but had a big influence in the early days of the PC. At that time, license enforcement was a lot looser and home assembly shops based much of their appeal on the ability to include things like a free copy of WordPerfect. In those days, therefore, a big part of the profit margin on assembly operations came from software theft and you have to think that at least some of those people are still buying and reselling "genuine softwares" for a few pennies on the dollar.

The Bottom Line

Today, however, the biggest contributions to the apparent profitability of the white-box industry seems to come from valuing labor and risk at nothing or nearly nothing. I talked to a couple of acquaintances who sell house-brand white boxes as part of a PC service business. In both cases, I got the unpleasant feeling that they're using technician downtime as a free resource while failing to account for warranty liabilities.

Unfortunately, my questions took me off their Christmas lists because I asked about license verification for customers who demand Windows XP and because I suggested that he'd be better off just putting his own cases on Dell systems and laying off a technician.

Oops. So I asked a couple of suppliers in Toronto -- of whom I'd never heard before -- for quotes on home-built PCs delivered to a local office and specing a machine very much like a Dell Optiflex GX270. Surprise. There was no price difference whether I wanted Linux or Windows XP. Think about that. One of those is free.

All four said their quality was higher, but I doubt that and I don't think their unit costs are any lower either. What I think is that, as an industry, they dilute their business with each sale but don't account for it properly and are blinded to this because they make some of it back as cash on additional services and licenses.

In effect they're borrowing against the future but don't expect to pay because when they go out of business, so will the warranties still held by customers.

The bottom line seems to be that the failure to account for white-box shipping, assembly and warranty operations as part of the cost of sales for their service support distorts reality and keeps them in a business they should have long since have abandoned to Dell.

I mean, Gee, who do they think they are? IBM?


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