Baltimore Sun’s BEST party in 2 weeks

Computers anonymous; The 3-year-old Arbor Computer Corp. hopes for $1 billion in sales of its generic computers next year. Makers of such "white box" computers now account for 30 percent of the PC market.

THE BALTIMORE SUN

IN ANONYMITY lies opportunity.

At least, that's the business philosophy of Arbor Computer Corp. of Walpole, Mass., which has a key factory in Arbutus.

Arbor makes the "white box," or generic, personal computers that rival big brand-name machines of IBM Corp., Dell Corp., Hewlett-Packard Co. and Compaq Computer Corp.

In September, IDC, the influential high-technology research outfit that publishes PC World magazine and the ubiquitous, yellow-jacketed, everything-"For-Dummies" book series, held a PC market symposium attended by the industry's biggest manufacturers and distributors.

Evident among the conferees was a concern about the increasing success of the white box hordes, according to one industry analyst.

The reason was that White box PCs will account for 7 million to 7.5 million of the computers sold in North America this year, more than will be sold by Compaq, the industry leader. (In 1997, white box companies sold 6.4 million units.)

"There is a growing fear of the [companies] that are building their own boxes," said Tony Amico, IDC's director of distribution research. "And they are capturing a good deal of the share of sales to small and medium-sized businesses."

That fear could increase as the industry becomes less fragmented. The white-box sector is deeply divided, with as many as 40,000 makers, from the part-time consultant who assembles a few computers a month in his basement to multimillion-dollar corporations such as Arbor that turn out thousands.

Even so, sales of generic computers account for an impressive 30 percent of the overall market. And the white box industry is growing at 10 percent a year and probably more, analysts say.

Michael R. Shabazian, Arbor Computer's chairman and chief executive officer, aims to build a large, profitable company by bringing order to that white-box jungle.

The 3-year-old company has eight plants under the Arbor umbrella. The Knecht Avenue factory in Arbutus, with more than 50 employees, was the first. Since its acquisition in 1997, Arbor has added plants in Boston, Denver, Phoenix, Portland, Ore., Seattle, Salt Lake City and Spokane, Wash.

And it's on the prowl for more.

Arbor's strategy is to use standardized, name-brand components, such as Intel's Pentium II processors and Western Digital's hard drives, to build generic computers designed for small to medium-sized businesses and price them aggressively.

But instead of using its own sales force or Web site to sell directly to users, Arbor sells the machines to consultants known as value-added resellers, or VARs.

The consultants sell the machines to their customers -- schools or businesses -- after adding value by loading software, conducting training or lacing them into useful networks.

White boxes are configured according to each user's requirements, orders are turned around quickly (typically in 72 hours), and the PCs are priced so the VARs can make double-digit profit margins when they resell the machines, compared with single-digit margins with name-brand machines.

'Get more control'

"We get more control over what we get," said Ron Baddock, president of Amtek Co. in Arnold, a dedicated Arbor customer. "Because Arbor is located right here, they can change things right away [in response to different demands by different Amtek customers]. You don't get that kind of response from any of the national companies."

Shabazian and Arbor co-founder Frank H. Slovenec decided to take the white box business model further.

They wanted to have manufacturing plants in several big markets around the country that could be centrally managed but still quickly serve their local markets.

They wanted to standardize parts, product lines and quality levels across all the plants.

And they wanted Arbor to largely remain out of the limelight -- even to the point of putting the reseller's name and logo on the computer case and instruction manuals. It also created reseller Web sites, where the end user could sketch out his computer needs. But unknown to the customer, the information is sent directly to Arbor Computer, not the reseller.

"We elected to make our customers bigger than life to their customers," Shabazian said.

$200 million in sales

With annualized sales of about $200 million, insiders say, the privately held company's goal is to become a $1 billion manufacturer of white box machines by the first half of next year.

Because it's already a big company, it gets volume discounts and technology "road maps" from its suppliers, confidential insight into what kinds of products companies such as Intel have on the drawing board.

A respected veteran of the PC industry, Shabazian, 57, earned his stripes by setting up IBM's North American distribution channels in 1981. Later, he was president of Computerland Corp.

Analysts say all that experience might be the reason Shabazian reached an epiphany ahead of much of the computer business, namely that the perceived quality of a PC doesn't depend on the name on the box, but on the parts inside the machine.

With all the attention on PCs and the Internet in recent years, most customers are sophisticated enough to articulate their technology requirements.

For example, they can say they want their computers to be Intel-powered, have a U.S. Robotics modem and Microsoft software, said Richard March, senior director of distribution channel services for CMP Media Inc., a market research business in Jericho, N.Y.

3,000 machines a month

The 40,000-square-foot Arbutus factory, which still wears its former "Micromatix" nameplate, turns out as many as 3,000 computers a month. The company plans to add another production line to increase that to 5,000 a month.

The products range from sub-$1,000 PCs to $78,000 servers, the powerful machines on which Web sites reside and that need four Intel microprocessors.

Each member of the plant's "call center" is required to handle at least 100 calls a day. Though the factory sells its wares in 48 states, 50 percent of its customers are in Maryland and 20 percent of its machines are picked up at the plant, said C. Timothy Jewell, the factory's general manager.

Operating revenues for the local factory on a "run-rate" basis should approach $75 million by the end of this year, Jewell said.

A run rate, one way to measure how a fast-growing company is faring, is calculated by looking at the current rate of sales at a point in time and projecting that rate over a full year.

When it was Micromatix, the Baltimore plant generated about 75 percent of its sales from components that resellers assembled into finished PCs and 25 percent from building machines. Now, about 90 percent of the business comes from building white boxes, and Arbor is trying to "convert" all its customers into buyers of generic machines.

Buying vs. building makes economic sense for the resellers, Jewell says. For roughly $100 over what the parts would cost, the reseller can get a finished machine that's been tested and is guaranteed.

Arbor does have a plan to put its blue company medallion on some of the machines it distributes, but it will not change its strategy of making its reseller customers successful.

Other companies will probably copy the Arbor business model, analysts say, which is likely to steepen the challenge facing makers of brand-name computers.

Even so, said March, the CMP Media analyst, "the white box is here to stay."

Pub Date: 2/14/99

Because of incorrect information provided to The Sun, an article in Sunday's Business section about Arbor Computer Corp. contained an inaccurate date. The company expects to achieve $1 billion in annual sales on a run-rate basis by year-end 2001, not 2000 as stated. The Sun regrets the error.
Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
64°