What Will You Do When the Price War Comes?

As a result, PC vendors are getting more and more aggressive to win business, in some cases agreeing to discounts of as much as 40 percent to close deals.

According to IT buyers, the aggressive pricing affects all kinds of equipment, from notebooks to desktops to servers.

Vendors would rather take a short-term hit on profits than give up market share, and they will do whatever it takes to protect their positions. Slowing PC shipments aren't their only concern; they also must continuously try to fend off new threats.

For instance, Apple Computer claims it now owns 12 percent of the U.S. laptop market, a whopping increase from 6 percent a year ago.

Company executives say, and analysts agree, that Apple's decision to switch to Intel dual-core processors for its notebooks is paying off. The vendor this week reported its second-best quarterly results ever.

In comparison, direct-selling king Dell is struggling. The company this week sought to temper expectations for its next quarterly results, warning that earnings will be lower than in the previous quarter.

It's not that Dell is selling fewer computers. To the contrary, the vendor's worldwide shipments grew by nearly 11 percent, but Dell's aggressive pricing is affecting the bottom line.

So the stage is set for a potential price war that will leave the top PC vendors bruised but will likely have little effect on Apple, whose switch to Intel chips is bound to continue attracting new buyers.

For the channel, a price war is never good. The rewards are finite. Customers that want nothing more than dirt-cheap computer equipment are the least desirable. They come and go.

In addition, price drops also put pressure on the profit margins of solution providers. Though vendors will absorb much of the diminished returns from price cuts, they no doubt will try to pass some of that on to partners.

So if channel companies want to turn the current downward pricing trend to their advantage, they had best be wrapping services and other products around their hardware sales.

Customers need storage and backup technology, security, peripherals and business applications that savvy solution providers can try to add on to sales of PCs and servers.

Ideally, channel companies would place their customers on contracts that generate recurring revenue.

Or at least, for those companies that don't yet have the capability to take advantage of recurring-revenue models, they should sell time-based maintenance contracts that keep them in front of the customer and, therefore, increase the potential for future business.

Vendors can cut prices and take profit hits, perhaps even a quarterly loss or two, but they can move on once the dust settles. For solution providers, a couple of bad quarters can mean risking the business altogether.

So while downward pricing pressure carries the inevitable appeal of potential increased sales, channel companies had better tread carefully. And if they haven't considered making a move toward recurring-revenue models, such as managed services and software as a service, the time is now.

Pedro Pereira is editor of eWEEK Strategic Partner, contributing editor to The Channel Insider and a veteran channel reporter. He can be reached at ppereira@ziffdavis.com.

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