"We Know That Scale Is Everything"

That's why Micron Electronics' Joel Kocher is turning the second-tier PC maker into a Net-services company and planning to double its size

With demand slowing, midsize PC makers are facing especially tough times. Large PC manufacturers such as Dell Computer have the brand-name recognition to pull themselves through. Small, local PC companies offer personal service. But companies like Micron Electronics (MUEI ) are struggling in the middle.

Micron Electronics, 61% of which is owned by semiconductor maker Micron Technology, saw its net income fall 89%, to $1.6 million, in the three months ended November, 2000, mostly because of the softening of the PC and memory markets. Now the company is trying to branch out from PCs and enter more lucrative business segments. Micron Electronics' Internet and Web-hosting subsidiary, HostPro, already hosts more than 120,000 Web sites, so the company can claim some success.

Micron Electronics Chairman and CEO Joel J. Kocher hopes he'll be able to steer the company on a path toward greater profitability. On Jan. 19, Kocher talked to BusinessWeek Online technology reporter Olga Kharif about Micron's restructuring efforts, the outlook for the PC market, and the company's future. Here are excerpts from their conversation:

Q: What do you see as the future of the PC side of your business?


The PC business is very challenging for us at the moment because we're out of position with respect to scale. And this business is rapidly becoming a commoditized, scale business. That's precisely why two years ago we had the vision to begin a process to move the company to an Internet-services type of company.

We view this as a transformation strategy, and we are intending to strategically transform our business into an Internet-services company. Our guiding light, our guiding beacon, is to drive, or optimize, shareholder value. So as this plays out and our hosting business becomes larger and more successful, it's very clear that we have to find a way to monetize that business for our shareholders.

Q: You worked at Dell before coming to Micron. How can your company compete with the likes of Dell in the PC market?


We're struggling to compete with Dell. We're a second-tier PC company. You know, we're not naive at Micron. We know that scale is everything in this business. It's very similar to refrigerators or microwaves or washing machines in that regard. So we have a scale challenge, and we have been struggling to deal with that. And with the recent market downturn, it has even become more challenging. That is the precise reason why we have doubled down on our hosting strategy. I feel that it is very, very important for us to accelerate the speed at which we are building our Internet-services business.

Q: Please tell me about your restructuring efforts.


I've been the CEO for two, two-and-a-half years, and shortly after arriving at the company, I made a decision that the company needed to be restructured. People are beginning to adopt the notion that applications could be served to a browser, via high-speed connection, and you really don't need local processing power in a PC. Those applications will be processed on a server and then will be served to a browser interface. So, anyway, we started down the path, very aggressively, to leverage our balance sheet into this new strategy, hoping to be one of the leaders.

We have made four acquisitions. We have a [subsidiary] called HostPro. And we've been quite successful in a very short period of time, building one of the larger hosting companies in the U.S. -- actually, in the world. Today, our primary application, as you might guess, is e-commerce. But our strategy in the future is to eventually move into many of the other applications, if not most of the applications, as the applications move to the network.

Q: Your company's shares have fallen from about $15 at the end of August to the $5 range in the past week. What happened? Do you expect a quick recovery?


Well, you can never tell specifically why your shares fall or rise. But certainly, I think people are associating all of us in the PC industry with a very tough environment at the moment. The macroeconomics have put a tremendous squeeze on capital spending, both at the private, personal level and in business.

I think it's very difficult, from where we're all sitting at this point, to believe that the market is going to return to the type of growth rates that we've enjoyed over the last couple of years. There just don't appear to be any major stimuli out there to stimulate or propagate that kind of growth. To some degree, we're seeing a saturation picture emerge, which certainly will beget slower growth. People will continue to upgrade their PCs, but I don't think they're going to upgrade their PCs at the rate that we've seen them upgrade them over the last decade. And there's also the huge factor that I mentioned earlier, that the third wave of computing is upon us.

Q: What are your expectations for this year?


Well, if you look under the covers of our company, we have three businesses. We have a hosting business, we have a PC business, and we have a business that nobody talks about very much, called SpecTek, recycling memory components. When the DRAM [dynamic random access memory, a type of memory used in most PCs] pricing is high, that business is a tremendous cash cow for us. When the DRAM price collapsed, in the September-October time frame, obviously you're going to see that in our operating results, and you did. So, if you look at the decline in earnings, it's almost 100% attributable -- in fact, it is 100% attributable -- to the rapid and precipitous decline in the DRAM-pricing environment.

Q: And what do you expect to see in terms of memory prices this year? Are you planning to shift away from that business, or do you think it will recover?


We have a component-supply agreement with Micron Technology that actually will terminate at the end of August, so our expectations at this point are that we would not continue to receive memory components from Micron Technology beyond that point in time. The memory market right now, obviously, continues to be depressed, because we have a supply-demand problem in the market -- and not only for DRAMs. Supply and demand are out of whack with almost every component. Hopefully, we'll see an improving picture on DRAM pricing.

Q: Lately, you've been extending your executive team for HostPro. Could you comment on what you are doing there?


We intend to be very acquisitive and would like to dramatically increase the size of the company. So we spent September, October, November, and part of December highly focused on getting ready and preparing ourselves for a growth year in '01, by strengthening our team.

Q: Could you give me an idea of how much growth you anticipate?


I would like, in calendar year '01, to more than double the size of the company. Now we want to get big the right way. We want to get bigger fast, and even though our organic growth is very good, it's not enough, given the way this market is going to evolve. So we'll do it primarily via acquisition.

Edited by Nancy Ferris

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