The Profit's in the Peripherals
by Paul McGoldrick
The personal computer industry is unique in its structure and the way that it conducts its business; it is as different a model as anything else in any other trading operation. Whether you are looking at software or hardware, there are business practices that are completely extraordinary from both a business and a customer perspective.
Take software: You pay a large amount of money for what is essentially a low-cost product -- the media that it resides on -- with an enormous amount of intellectual property embedded in it. Of course you don't actually buy the software, only a license to use it (with a lot of restrictions on that as well) and in most cases the vendor doesn't even accept any kind of responsibility for the product to actually do what it claims, or what you expect. Not that any of us have any problems, right?
We even have situations where the vendor will only allow us to load software a fixed number of times, just in case we are being naughty about the conditions of the license; but often another piece of software drives us in an everlasting loop of lock-ups and errors.
Software is, by its nature, a highly profitable business to be in. The cost of goods sold is tiny, distribution is cheap, and by condition of the license the user accepts, returns to the vendor are negligible. The software manufacturer does have additional costs, especially legal, in making sure customers stay honest with the products, and in tracking down counterfeit products and the people involved in selling them.
On the hardware side of the PC business we are all (those of us who really have to go Wintel) tied to the price of the processor that we specify. Why people have blindly assumed that speed is worth more is beyond this analog engineer's capacity to understand; once we have pushed processor speed beyond I/O speed those of us not rendering graphics all day could care less. And, at last, there are some indications that the industry is waking up -- not something that Intel will be looking forward to very much. But the principal manufacturers of processors will come up with some sort of "Q" of quality to mimic performance: It still won't take into account I/O and they can continue to battle about around yet another bogus number.
Nevertheless, the price of the processor (and the operating system) being pushed through the supply chain are the most significant costs in the PC. The power supply, mother board and the mechanics are incredibly cheap in volume, as are drives and most common add-ons. In effect, the computer vendor is acting as a distributor for Intel and Microsoft -- the places most of the accounts payable goes. And the margins really aren't that great because of the intense competition, and aren't going to get better. With careful supply chain controls the likes of Dell can get money on the bottom line, but if you are a reseller who has to keep your paid-for stock on the retail floor this is not an area of your business that will earn your retirement.
But in the arena of non-fodder peripherals the story is different. I remember when a company I was working for first got involved in a PC product. The supply chains -- at distribution level -- were asking for (at least) 40% margins! And this at a time when our main business was with distributors who were very grateful to get 20%.
So, support your PC vendors! Buy peripherals!