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Can Mini-PCs Mean Maxi Profits?

By Olga Kharif Gigabyte Technology has seemingly entered the PC market 10 years too late. Computer sales were stagnant in 2002, and after years of turmoil, brand-name PC makers have shrunk to a half-dozen survivors, with three manufacturers -- Dell (DELL), Hewlett-Packard (HPQ), and Gateway (GTW) -- controlling nearly half the consumer market. On Jan. 7, Gateway announced that its fourth-quarter sales and earnings would come in below expectations. Yet Gigabyte, the world's No. 3 maker of motherboards, started making standard desktops a year ago.

It may look like poor timing, but the Taiwanese company believes it has size on its side. Last month, Gigabyte rolled out its first mini-PC, a no-frills computer for word processing, accessing the Web, and playing CD-ROMs and DVDs. It can't be upgraded, but the price is right. Depending on features, the mini-PC sells for between $200 and $300, says Alonzo Cardenas, vice-president for marketing and business development at Gigabyte-USA. That's a lot less than the $1,100 for a typical consumer desktop, and it comes at a time when many buyers are no longer entranced by fancy bells and whistles.

What lots of customers want is a smaller box. As the mini-PC name suggests, the box containing the processor occupies 30% less space than a standard desktop. For many PC buyers, space is at a premium. Take Oregon Health & Sciences University (OHSU), a Portland (Ore.)-based hospital and medical school, which plans to wire its examination rooms within the next 12 months, according to John Kenagy, OHSU's chief information officer. Those rooms are tiny, and since doctors will use the machines for little more than punching in a few numbers, spending thousands of dollars on the newest and greatest doesn't make sense. That's why Kenagy plans to go with the mini-PCs, as do other medical centers, banks, and department stores.

MARCH OF THE MIDGETS. Saving space also appeals to consumers, who have shown a willingness to pay extra for smaller PCs that boast all the features of a high-end models but can fit on the VCR shelf of their entertainment centers. That's an opportunity for Gigabyte and other newcomers. "They are hoping to take advantage of demand for a new 'form factor,'" says Roger Kay, an analyst with tech consultancy IDC. "They think [the established PC makers] are making old stuff."

By some accounts, the market for smaller PCs is exploding. In the U.S. alone, sales growth has been up as much as 50% a month, estimates Brown. In five years, he believes, mini-models should account for more than 50% of all desktops sold. That would be a huge market considering that 75% of the 128 million PCs shipped worldwide in 2001 were desktops, according to market consultancy Gartner Dataquest.

Many major computer makers still don't offer the most compact models. And if they do, many consumers recoil at the prices. That's where some of the lesser known PC outfits are trying to make inroads. Motherboard manufacturer Micro-Star International, based in Taiwan, is developing its own mini-PC along the lines of those Gigabyte and others are already producing. "A lot of this is grassroots, it's customers coming to us, [asking for mini PCs]," says Richard Brown, associate vice-president for marketing at VIA Technologies, a maker of PC components.

MULTIFUNCTION MINI. Other entrants also are targeting consumers. Walnut (Calif.)-based display manufacturer ViewSonic, a privately held company with $1 billion in annual sales, will ship its NextVision machine this month. To be sold through major retailers like Comp USA and specialty stores, it's designed for the living room, where it will function as a VCR, TV, digital music player, and other devices. NextVision will allow users to burn movies and music onto DVDs and CDs, and keep their photos and music library in one spot -- the unit's hard drive. And it will fit into a home-entertainment unit. ViewSonic is betting that this combination of features will encourage consumers to shell out $1,995 for the cheaper of the two models.

Until the giant PC makers jump into this blossoming market, the smaller, newer players could benefit handsomely. Motherboard manufacturers, whose margins have been squeezed along with those of their PC-maker clients, are finding that parts for smaller desktops sell at a major premium. VIA, which has lately booked 8% to 9% gross margins on standard PC motherboards, enjoys 10% to 20% gross margins on the same parts for mini-PCs, says Brown.

Major manufacturers are starting to notice. Dell, which holds 25% of the corporate desktop market, in October introduced its most diminutive desktop, the OptiPlex SX260. About 50% smaller than its predecessor (but still bigger than Gigabyte's model), it weighs eight pounds and can be mounted vertically or horizontally. Unlike the Taiwanese makers, Dell has retained PC-level power. "We don't want to compromise any of the performance," says Chris Zagorski, the senior manager supervising the SX260's launch. The downside is that Dell's cheapest mini-PC still costs a not-so-mini $766.

"A DIFFERENT WAY." Gateway, too, is trying to get a piece of the action. Last August, it introduced Profile 4, a sleek, all-in-one PC with a flat-panel display that starts at $999. And in November, it came out with its Media Center PC, a beefed-up successor to its Destination series. HP is selling a rival model, also known as the Media Center PC. "The traditional PC business has matured, but we are seeing PCs being used in a different way," says Randy Farwell, director of desktop products at Gateway. "There are lots of opportunities for PC companies."

Still, prices on the biggest players' mini-PCs and Media Centers remain high compared to what newcomers like Gigabyte are charging. Dell is looking at making cheaper mini-PCs to sell to customers like gas stations, which don't need powerful computers. And the established manufacturers have a leg up on less familiar or unknown brands. At J.E. Higgins Lumber, a San Francisco-based hardwood distributor, info-tech specialist Michael Romero decided that manufacturer support makes the Gateway Profile 4s he recently purchased worth the higher cost.

Mini-PCs probably won't spark the kind of booming sales that the computer makers long for and haven't seen in several years. But this latest twist is creating opportunities, especially for small-fry manufacturers. The edge they're now enjoying might not last too long. So, investors should keep an eye on developments as the industry's giants recognize the potential and learn to think small. Kharif covers technology for BusinessWeek Online in Portland, Ore.

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