Computer Industry Analysis Training

Computer Industry Dynamics
HIGH TECH CORE GROUP TRAINING PROGRAM

3
BUT AVERAGE SELLING PRICES ARE FALLING
PCs
Dollars
-6.2%Average price
decline
Servers*
$ Thousands
-3.6%
Mainframe servers
$ Millions
-4.4%
1,000
1,200
1,400
1,600
1,800
2,000
1999 2003
10
12
14
16
18
20
1999 2003
1.0
1.2
1.4
1.6
1.8
2.0
1999 2003
* Entry and midrange
Source: IDC
Key factors causing ASP decline
• Increased price decline due to commoditization
• Industry shift towards more cost-effective direct distribution models
• Industry shift towards more efficient manufacturing, e.g., one-touch process
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6
* Sun, Compaq, Siemens, and NEC each have about 4%
Source: Dataquest
Percent
WHITE BOXES PERSIST IN THE PC LANDSCAPE AS COMMODITIZATION
OCCURS
Market segmentation and vendor share based on 1998 data
Revenue, $ Billions
Commercial
Consumer
Entry-level
servers
Midrange
servers
Mainframes
110
38
22
15
8
• PC segment is
fragmented and
white- boxes
hold a significant
market share
• Server and
mainframe
markets are
dominated by
large
manufacturers
PCs
47 7 6 6 34
IBM HP Unisys Fujitsu Other*
26 20 15 14 25
IBM HP Sun Compaq Other
13 10 9 7 6 6 4 3
Compaq
Packard
Bell
Gateway
IBM Apple
HP Acer
Dell Other / White Box
14 13 10 6 5 4 3 2 43
Compaq Dell IBM HP
Toshi-
ba
Acer
Apple
Gateway
30 13 12 12 5 5 23Compaq Dell HP IBM
Sun NEC
Other
42
Other / White Box

9
GATEWAY “BEYOND THE BOX”
PC alone
* Hardware, software, internet access, and other on-line expenses
Source: Cnet News.com
Revenue
PC plus 5-year revenues stream*
Profit Customer
acquisition
cost
Revenue Profit Customer
acquisition
cost
$1,845
$133 $115
$6,000
$1,200
$250
Includes:
• Internet access
• Software
• E-commerce
transactions
By year end,
Gateway
expects to
generate 40%
its profits from
services

12
20-25%
13-17
2
0
6-10
Gross margin
SG&A
Development
costs
Channel costs
Pretax profit for
vendor/OEM
INDIRECT VS. DIRECT CHANNEL ECONOMICS 1998
Percentage of average sales price for commercial PC products
Source: Industry literature; Team analysis
Indirect channel Direct/BTO channel
(-6)-+4
1
6-10
20-25%
8-18

15
DELL HAS ADDRESSED 3 KEY VALUE-CHAIN ELEMENTS TO
BUILD A SUCCESSFUL DIRECT CHANNEL
• Increase inventory turns
• Fast turnaround time
• Reduce stockouts
• Product testing
• Link with supplier
• Service and support
• Order tracking
• Order fulfillment validity
Assembly and
configuration
Order fulfillment and
product distribution
Up-front order
management
• Customer relationship
management
• Instant communication to
supply chain
Key
success
factors
• Colocation with
component suppliers and
logistics partners
• Creation of supplier hubs
• Drop ship components
directly to assembler
• ERP system for order
checking and validity
• Pull vs. push (channel
model)
• Quick turnaround on
service request
• Assign managers for
each account
• Technical support for
configuration help
• Knowledgeable staff-/
user-friendly interface
for order taking
Trends

18
MAJOR DISRUPTIVE CHANGES ARE ENABLING THE RAPID GROWTH OF A
INFORMATION APPLIANCES AND SERVICE MARKET
Changing behavior
Consumers increasingly
embrace a “Web” lifestyle at
work and at home; “Smart”
appliances and
personalized services
become important
New technologies
Disruptive technologies
(e.g.,Web-centric
computing,
broadband, low cost
storage and electronics)
enable new value
propositions
New business models
“New breed” competitors’
business models (based on
customer ownership and
recurring revenue streams)
are emerging as early
winners
Changing business
landscape
Major cross-industry
moves across multiple
value chains to deliver
integrated experience to
many users

21
INFORMATION APPLIANCES
Source: IDC
1999 2004
Net TV
Gaming
Devices
Email
Web terminal 23,190
51,559
12.1%
8.9
43.9
34.5
60.3
36.3
1.1%
2.3
7,364
22.4%
5.5
31.7
40.5
55.8
38.6
2.4
3.2%
Units
Thousands
Revenue
$ MillionsGAGR
2000-2004
22%
124%
71%
28%
6%
GAGR
2000-2004
30%
111%
60%
23%
20%
1999 2004
(Excluding handhelds)

24
MAKING INDIRECT CHANNEL EFFICIENT WILL REQUIRE MODIFICATIONS IN
EVERY STEP OF VALUE CHAIN
Example
Vendor
Solectron Ingram Micro, Inc.
Assembly and
configuration
Order fulfillment and
product distribution
Up-front order
management
CDW
• Manufacturing focus; very
efficient
• Manages entire product
cycle
– Design
– System integration
– Testing
• Colocation arrangements
with distributor (JV with
Ingram)
• Customers include IBM,
HP, Sun
• Using web applications
to do channel assembly
• Moving from “push” to
“pull” to reduce inventory
• Web-integrated value
chain enables order
tracking and
configuration
• Assigns account
manager/relationship for
each customer
• Backs direct sales with
configuration and technical
support
– Not just an order-taking
website
• Very high customer
retention rate
Best
practice

27
Historical situation
• Recently acquired Digital and Tandem
• Indirect model focus
• Strong, across-the-board presence in all regions
• Mastered the direct model in U.S.
• Replicating direct model in other markets – launching
high-end servers and workstations
• Fast becoming a marketing portal
• Primarily a U.S.-based consumer PC company
• Following Dell’s example in leveraging Internet
• Aggressive move to internet access devices
• PC business is a loss leader
• Primarily indirect (with the same issues as Compaq)
• Advantageous Merced relationship with Intel
• Strong solutions focus
• Primarily an indirect player
Key issues
• Unclear strategy
• No progress towards a direct model
• Uncompetitive cost structure
• Relatively weak in EMEA
• Lacks a services partnership (though IBM
could provide this)
• Lack of presence in Enterprise (is current
position tenable in long term?)
• Need to expand geographic footprint
• AOL relationship
• Success of internet access device as
“razor” for services
• Need to decide whether to continue in PC
hardware market or focus on services
and components
• No direct model
• Need to leverage the Internet
DOMINANT OEM PLAYERS FACE A DIVERSE SET OF
CHALLENGES
OEM
Compaq
Dell
Gateway
IBM
HP

30
* Merged computer systems businesses in 4Q 1999
Source: IDC; team analysis
WORLDWIDE SERVER REVENUE BY VENDOR
25.6 26.1 24.6
7.5 11.1 15.2
11.5
13.0
13.0
7.8
10.0
12.7
22.1%
4.7
1.6
2.9
4.2
3.9
5.1
3.4
4.1
3.3
29.1%
37.6%
IBM
1997
100% = 67,792
Compaq
HP
Sun
Dell
Fujitsu*
Siemens*
Other
-2
43
6
28
72
-9
2
-23%
$ Millions, percent
65,023 68,014
CAGR
1998-99
1998 1999
Compaq
SUN
Dell

33
1,206
291
232
183
1,537%Dell*
SERVER COMPANY RETURNS
Percent
*
Source: Compustat
Sun
IBM*
HP*
Compaq
3-year TRT 1997-99

36
STORAGE MARKET IS DIVIDED
* Calculated based on 3-year revenue-weighted average of representative companies
Source: Yahoo! Finance; team analysis
Average net margin 1996-99*
Hardware
systems
Software
Hard disk
drives (HDD)
Other
mechanisms
• Enterprise
systems storage
market is currently
much more
attractive than
mechanisms
• Mechanisms
market has been
commoditized and
subject to strong
PC pricing
pressure
Systems
Mechanisms
14
1
-1
23

39
Current
architecture
1999 2000 2001 2002 2003
32,265
WORLDWIDE STORAGE SYSTEMS REVENUE
$ Millions
Source: IDC
SAN
NAS
38,259
45,808
54,291
63,861
CAGR
1999-2003
19%
66%
66%
11%
Server market
expected to
reach $79
93%
4%
90%
9%
84%
13%
9%
78%
17%
10%
73%
4%
3%
6% 7%

42
SYSTEM STORAGE INDUSTRY OVERVIEW
• Assist clients with the design,
integration, operations, and
maintenance of their storage system
• Includes HDD-based storage devices
(e.g., RAID boxes, non-redundant
drives) as well as tape drives and CD-
ROMs
• Manage online storage to ensure data
integrity and availability
– Includes file systems, volume
management, and replication tools
• Tools that manage properties of
physical and logical storage resources
– Includes media health, availability,
and utilization
• Manage off-line storage and retrieval,
including backup, restorations,
archiving, and hierarchical storage
management (HSM)
• Includes switches, hubs, and cables
associated with storage area networks
Description
• Metropolitan data farms that allow
companies to outsource their
storage needs
Enterprise
storage
Services
Software
Hardware
Life cycle
Mainframe
Mainframe
Hosting
Distributed
Distributed
Back-up/
HSM
Storage
devices
On-line
Resource
management
Other
hardware

45
INVASION OF CAPTIVE MARKETS MOVING FROM HIGH-
END DOWN WORLDWIDE RAID SALES 1998
Source: Dataquest; McKinsey analysis
Captive
37
2
19
2
2
8
3
2
EMC
Amdahl
EMC
Compaq
IBM
Other
EMC
Compaq
Share of total high-end
Share of total midrange
Share of total entry-level
100% =
Captive
markets
breaking
Captive
markets
intact
• Mainframe
• Unix
• AS/400
• Open
VMS
• Windows
NT
• Net Ware
57 48
5243
1995 1998
$4.5 billion $3.0 billion
Noncaptive
Captive
100% =
74 66
3426
1995 1998
$10.0 billion $10.1 billion
Noncaptive
Captive
100% = $1.9 billion $7.2 billion
Noncaptive
90 91
910
1995 1998

48
COMPARISON OF STORAGE ALTERNATIVE ATTRIBUTES
Traditional
approach
(server-attached
storage)
Weakness
Strength
SAN NAS
Total cost of
ownership
Scalability
Open architecture
Reliability/backup
Ease of
implementation
Performance
Ease of
management
• SAN is ideal for mission-
critical data storage, but it is
not yet mature
• NAS is a good solution for
smaller companies that
require scalability and
compatibility at low costs
• Server-attached storage no
longer addresses all
enterprise storage needs

51
POTENTIAL SAN SCENARIOS
Future SAN
Open (storage products
from multiple vendors
can be used in 1 SAN)
Vendor-led
Server company
(e.g., Compaq)
Services
Closed (only 1
vendor's storage
product can be used in
a SAN)
Industry (e.g., SNIA-
led) standard
Large players offer
independent solutions
(e.g., EMC) solution
incompatible with IBM
storage devices
Connectivity company
(e.g., Cisco)
Software company
(e.g., BMC)

54
The computer industry is continuing to grow robustly. The growth is being accelerated by new segments which are changing
the overall landscape and competitive dynamics. Increasingly many players are looking to other elements in the value chain to
gain profits and new standards battles are emerging
• PC players have experienced fundamental change as direct players gained ground. Furthermore direct players are leading
the charge to capture profits “beyond the box and to exploit non-Wintel information appliances.” Indirect players will
continue to have a difficult game of catch-up
• Server growth has been driven by the internet. The emergence of “application servers” may be the trigger for a long
rumored growth of Linux
• Storage systems have emerged as a sizable and highly profitable segment, and are not simply peripherals to servers. The
emergence of new storage architectures, particularly storage area networks (SAN), create a discontinuity that will likely
impact storage and related computer segments from servers to software.
• Smart handhelds are emerging as the next growth engine. A diverse set of devices are
emerging that could fundamentally threaten the Wintel monopoly. But new OS standards
owners are not likely to capture Microsoft like profits as a significant share of the value is
expected to migrate from hardware to services
– Changing technologies, behavior, business models and business landscape are likely to
spur the deployment of information appliances
– The fast developing wireless infrastructure facilitates smart handhelds with smart
phones having the highest potential
–Commoditization will limit the hardware and OS upside. Digital content and services will
likely capture most of the value
COMPUTER INDUSTRY DYNAMICS

57
Net TV Microwave
Phone
Home
security
systems
Washing
machine
Home server iPAD
Cable
station
Time
Warner RI
Broadband
cable
PC
Connected devices will
ensure synchronized,
updated data on demand
(e.g., news)
Internet
phone/PDA
Home appliances controlled
seamlessly
Access to information
everywhere and all the time
Some of the functionality
currently utilized on PCs
(e.g., browsing for fun) will
migrate to other non-PC
devices
Content
• Email
• Video, VOD
• News
• Browsing
• Telephony
• EPG
Services
Personalized web
browsing
• Small browser
learns user
preferences and
enhances browsing
experience
Web-based
browsing and
email on wireless
phone; context-
sensitive switch
to PCS when
away from home
Real-time
monitoring of home;
home asset
management;
remote web access
to manage assets
…WHEN COUPLED WITH EMERGING COMPLEMENTARY SERVICES
THAT ENABLE A “DIGITAL LIFESTYLE”

60
Companion
1999 2003
8,262
WITHIN HANDELDS, SMART PHONES HAVE GREATER
GROWTH POTENTIAL
Smart handhelds forecast – worldwide
Source: IDC
Vertical appliance
Smart phone
35,546
CAGR
1999-2003
44%
17%
102%
36%67% 53%
11%
24%
9%
36%
Units
(000)
Revenues
$ Millions
CAGR
1999-2003
28%
12%
85%
30%54%
6%
55%
42%
26%
32%
16,882
1999 2003

63
Description Example players
End-user
services
• Services accessed by PDA devices offered by Internet
Service Providers to consumers
• Revenue are monthly access fees and advertisement
• AOL, MSN Mobile,
Palm.Net
Back-end
services
• Hosting of corporate applications (e.g., web-based SFA,
ERP, and E-mail) and content/web sites to be accessed
by PDA devices
• Revenue from monthly service/license fees
• WirelessKnowledge, Oracle
Business OnLine
Professional
services
• SI services such as consulting, project management
and custom software development services
• Revenue from monthly service fees
• EDS, Andersen Consulting
Applications
• Provider of packaged applications for both consumer
(e.g., Pocket Quicken) and professionals
• Revenue from sale of applications
• Cutting Edge Software,
Landware, Little Wing
O/S
• Provider of PDA operating system and core PDA
applications (e.g., PIM, PocketWord)
• Revenue from sale of O/S to OEMs
• 3COM, MS CE
Devices • Manufacturer of PDA devices
• Revenue from sales of PDAs
• 3COM, Casio, Compaq,
Philips
THE PDA MARKET IS COMPRISED OF SIX
DISTINCT PRODUCT CATEGORIES

66
FALLING BARRIERS TO MOBILE DATA SERVICES ENABLE A LARGE AND
RAPIDLY GROWING MARKET
• 375M+ digital handsets and 10-15M
PDAs by 2002
• Moore’s law driving improvements in
size and performance
• Adoption of open, Internet-based
standards, e.g., WAP/WML
• Enterprise applications increasingly
web-enabled
• Networks are becoming packet-data
capable and gaining higher bandwidths
(IS95B, GPRS, etc.)
• Overall mobile usage is exploding due
to declining costs
…enabling the market to grow rapidly
Estimated end-user services revenue
$ Billions
1999 00 01 02 2003
$1.4-1.7
$1.9-2.7
$3.1-4.8
$4.2-6.9
$5.6-10.0
Note: Includes 2-way paging
Source: Strategis, IDC, Yankee Group, McKinsey analysis
Barriers to mobile data
services are falling...
Device
Appli-
cations
Network

69
UNUSED

72
ADOPTION AMONG USERS
Source: Dataquest; EMC
TV households
PCs
Mobile phone
subscribers
0
200
400
600
800
1000
1200
1997 1998 1999 2000 2001 2002 2003 2004 2005

75
Series
Series
1998 Label 2 Label 3 Label 4 Label 5
100% = 000 000 000 000 000
COLUMN STACKED 100%
Unit of measure
Annotation
* Footnote
Source: Sources

78
WHILE INDUSTRY APPLICATION MARKET IS FRAGMENTED, PDA
OPPORTUNITIES EXIST
Note: These categories are mutually exclusive (e.g., a vertical insurance application seat is completely different from a sales force automation seat)
1 Consists of license and maintenance revenue
2 Seat shipments calculated by taking total license revenue (80% of total software revenue) and dividing by a license price of $3,250/seat for
ERP and $2,000/seat for functional/vertical software
3 Installed base calculated by adding shipped seats to total maintenance revenue (20% of total software revenue) divided by a maintenance fee
of $570/seat for ERP and $350/seat for functional/vertical software (app. 18% of license revenue price)
4 Estimated 20% CAGR based on past CAGR and category trends
Source: IDC, team analysis
Most attractive
categories based on
volume of seats
shipped and installed
Category
Installed base
(thousands of seats) 3
20031998
Shipments
(thousands of seats) 2
1998 2003
ERP
Functional
• Materials management
• Project management
• Maintenance management
• Sales automation
• Customer support/field service
Verticals
• Banking/finance
• Insurance
• Healthcare
• AEC/professional services
• Manufacturing
• Retail/wholesale
• Other
Total
4,300
1,300
400
300
400
300
1,100
500
1,300
1,000
2,200
500
3,100
16,600
10,700
4,700
700
900
1,900
1,600
1,600
800
2,500
1,800
4,200
500
4,400
36,400
20
30
13
27
40
41
8
8
15
12
14
2
7
17
CAGR
(%)
10,500
3,000
1,000
700
900
700
2,800
1,300
3,100
2,500
5,400
1,200
7,500
40,350
26,000
11,300
1,800
2,100
4,700
3,800
4,000
1,900
6,100
4,400
10,200
1,300
10,800
88,400
Software revenue
($ millions) 1
1998 2003
17,535
3,100
1,000
700
900
700
2,800
1,300
3,100
2,600
5,500
1,200
7,800
48,300
43,6004
11,700
1,800
2,200
4,800
3,900
4,100
1,900
6,300
4,500
10,500
1,400
11,100
107,800

81
THE LEADING REGIONS HAVE ALL DIFFERENT STRENGTHS
Europe Japan USA
Enabling technologies • Wireless
equipment
• Wireless
equipment
Scope and quality
of service
• Advanced
local/regional
internet sites
• Leading
international
internet sites
Adoption among users • Internet
• Mobile
• Technology
• Mobile
• Technology
• Internet
• Advanced
local/regional
internet sites
• Datacom
equipment

84
PLAYERS AT EACH SEGMENT OF THE VALUE CHAIN ARE GRAPPLING WITH
NEW ISSUES
• Suppliers
–OEMs focused on supply chain integration
–Higher-level outsourcing demanded by OEMs, i.e., systems instead of
components
–Increased consolidation in Non-value add products, e.g., PCBs
–Pricing / Grey Market issues
• OEMs
–Indirect vs. direct model
–Maximizing customer value necessary as value-add of traditional activities shrinks
–Increasing product proliferation
–Emergence of the segment of one, i.e., mass-customization becomes necessary
• Channel (VARs and distributors)
–Falling hardware margins
–Economies of scale force industry consolidation
–Emergence of the Internet as an effective direct sales channel
–Emergence of co-location and “one-touch” processes

87
15-19
13-16
10-14
8-12
4 3 2 1
THE NEED FOR COST EFFICIENCY IS RESULTING IN
DISTRIBUTOR RATIONALIZATION MOVES
Percent reduction in inventory
Source: Team analysis
Distributor
rationalization
from >30 to
Distributor consolidation
programs
• Apple from 5 to 2
• Compaq from 39 to 4
• Seagate from 29 to 2
• Unisys from 9 to 3
• IBM in progress
Significant cost savings in
• Price protection
• Transaction costs
• LogisticsThis document is a partial preview. Full document download can be found on Flevy:

90
EMC, THE LEADER IN HIGH-END SYSTEMS, HAS
DEMONSTRATED STELLAR PERFORMANCE
Source: Compustat
Indexed total returns to shareholders (December 1988 = 1.0)
0
50
100
150
200
250
300
350
12/88 12/89 12/90 12/91 12/92 12/93 12/94 12/95 12/96 12/97
Intel
Microsoft
EMC
Dell
Tech 500
S&P 500

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