Computers By Mail: A Megabyte Business BoomSunita Wadekar Bhargava
Mike Mikus, network manager for Denver-based environmental consulting firm Woodward-Clyde Consultants, was in a hurry. He needed a dozen PCs--and in Alaska, no less--to help cope with the Exxon Valdez disaster. There were no dealers near the oil spill, and the major PC makers couldn't figure out how to get machines to the site quickly. So he got on the phone to Northgate Computer Systems and ordered the hardware. It arrived in four days.
That was three years ago, and not many companies back then would buy PCs sight unseen through the mail. But now, large companies, including Pfizer, Smith Corona, General Motors, Time Warner, Amoco, Lockheed, and Occidental Petroleum routinely use direct mail to get personal computers quickly and at rock-bottom prices.
AMBIVALENT FEELINGS. As a result, direct-mail computer sales are booming. While most U.S. PC makers faced stagnant revenue growth last year, shipments by direct-mail marketers jumped 35%, estimates WorkGroup Technologies Inc., a market researcher. By 1995, says WorkGroup President John O. Dunkle, 30% of all PCs sold in the U.S.--or about 9 million out of 30 million--will be via direct mail (chart). The leader of the direct-marketing movement, Dell Computer Corp. in Austin, Tex., racked up a 63% sales gain, to $890 million for its fiscal year ended Feb. 2. And Gateway, which edged out Dell in unit shipments in the U.S., expects to break $1 billion in revenues this year.
No wonder the computer industry's biggest names are considering mail order. IBM is already selling PCs through catalogs in Europe and uses a telephone-sales operation to push OS/2, its personal-computer operating system. It also has a toll-free customer help-line in Atlanta that analysts say could become the nerve center of a direct-marketing operation for PCs. In late April, sources close to IBM confirmed reports in PC Week that the company is negotiating to buy all or part mf Northgate, a struggling direct marketer of PC clones in Eden Prairie, Minn. IBM declines to confirm or deny the report, but a spokesman says the company would consider mail order: "We want to be where the customer buys," he says.
So do most of IBM's competitors. Industry analysts say Compaq Computer Corp. is almost certain to get into direct marketing, although a spokesman will say only that the company is "seriously studying" the move. They also expect Apple Computer Inc. to go the direct-mail route--at least for its low-end Macintoshes. But nothing will happen soon, says a spokeswoman: "Down the road, it's something we might look at."
The major players are clearly ambivalent about direct marketing--and for good reason. "It's short-term and opportunistic," says Michael Morand, vice-president for marketing at AST Research Inc. "Anyone can get an 800 number and put a catalog together." AST and other leading brands fret about mail order tarnishing their images. Worse, they fear offending the dealers they have depended on to sell their products for a decade.
IDLE HOURS. The dealer channel worked well in the 1980s. But with the contraction of the PC market and the recession, IBM and Compaq have been forced to slash prices, squeezing dealer profits. Even so, the major brands continued to lose sales to mail-order houses and to clones that sell through mass merchandisers and so-called superstores, giant warehouse outlets. "Guys in stores are twiddling their thumbs waiting for customers," says Michael S. Dell, CEO of Dell Computer. "Our salespeople handle an average of 40 to 60 calls a day."
The toughest obstacle in direct marketing for the big suppliers is the economics. Even after cutbacks, IBM and Compaq have relatively high overhead. Also, they are geared up to sell huge runs of a few standard configurations, while mail-order houses generally build to order. "For shipping onesies and twosies with different configurations across the country, the big companies will need to establish an entirely different organization," says Seymour Merrin, president of market researcher Merrin Information Services Inc.
Still, the big guys have little choice. Now, all but the most exotic PCs are seen as commodities, and "the educated user doesn't need that much support," says Richard Zwetchkenbaum, senior analyst at market researcher International Data Corp. Many large companies service their own PCs and don't need dealers, but they turn to mail order for what they do need: low prices and quick delivery. For small customers, Dell says, 93% of service problems are handled by calls to its 24-hour support line. Most top mail-order brands have such lines and offer on-site service, too.
QUICK EXIT. Some established PC makers have already dabbled in direct marketing--with mixed results. Wang Laboratories Inc. entered the mail-order business in February, 1990, but quickly backed off when mail-order sales began to steal customers from its sales force. Digital Equipment Corp., the $14 billion minicomputer maker, now aggressively pushes PCs through the mail for half the price it sells them through its regular channels. Even so, Merrin says, customers report that DEC's prices are too high to compete with Dell's or Gateway's. Still, DEC says that catalog sales now account for 80% of its PC sales, up from just 20% a year ago, helping double U.S. PC revenues this year, to $350 million.
In a market where growth is hard to come by, such results are hard to ignore. "Any vendor who does not consider mail order is cutting off one-third of the market," says WorkGroup's Dunkle. So get ready for 1-800-BIG-BLUE.