PC Business a Commodity
In 2001 you made Wayne CEO of eMachines. At the time hed been senior vice president of merchandising at Best Buy. Now hes CEO of Gateway. And hes brought a couple of execs with him to Gateway who are former Best Buy execs. The question is, has the computer become commoditized to the point, do you think, where marketing is more important than things like innovation, performance and features? A lot of people have not noticed that the PC business, as far as were concerned, has become a commodity. Especially below the $1,000 or $1,500 range is what we call the commodity market. So at eMachines we purposely looked for a CEO from the retail sector. Someone who knows the consumer. Instead of coming from a technology background. And I think Wayne was one of the few that qualified for this kind of background. Thats why we actively sought him and hired him to be the CEO of eMachines. It was a shift in the industry that a lot of people didnt really notice.Well the industry actually shifted a while ago. But there are a lot of people still living in the old days, where you have to build your own PCs. But theres no such thing anymore. Its become a commodity. The manufacturer in China or Taiwan or Korea has become so specialized that we call them big ODMthey design everything and they can make things much cheaper, and do the R&D much better, over there than here. Over here, it becomes companies like eMachines, like integrators, innovators because those people have been talking about it for all this time but not one company that I know of has actually hired a consumer guy to really represent the marketing side. In the old days, it used to always be the technology side. You need a better Windows, you need a better CPU, you need a bigger hard drive. More and more now the consumer says, "Hey, we may not want the speed, we may want a better cable modem. We may want the wireless to be better. We may not necessarily want the [faster] clock speed." We see this all the time. More consumers formulate what products will sell and wont sell. So then at what point does an eMachines have discussions about choosing one technology over another to go into your systems? I can only explain to you what eMachines used to do. At eMachines they created what we called a "value formula" that Wayne developed at Best Buy. They attach value to every single component of a PC. They can at any time tell you if you use, lets say a DVD RW versus a CD ROM how much more the consumer is willing to pay. Now that has nothing to do with the cost. Because if the value that the consumer will attach to every single component. For example, how much is the consumer willing to pay for a 512MB system versus a 256? They can attach value to it, because the consumer knows they can easily buy the memory and stick it in themselves. But the memory prices go up and down everyday. So they have a certain perceived value. And when that perceived value is high and the cost is low, thats when eMachines would put those components in there. For example, at the very beginning of eMachines, I was on the eMachines side, and Wayne was on the Best Buy side. We were trying to sell eMachines to Best Buy. In the beginning Wayne penalized us for $150 because we had to compete with HP. Howd he penalize you? What that means is, if we had the same configurationeverything identical to HPhe wanted us to be $150 cheaper than HP. And the reason? Because of what they call brand name value, tier value. Eventually, as eMachines got more popular and more popular, he reduced the premium, slowly to $100, to $50. Until the last year of eMachines when we were told there was no differential value at all, on the low-end side. On the high end there was still a premium involved. So Best Buy didnt add value to your systems at that point, right? No, no, they did not. Let me explain it a little bit better. At that time we had, lets say a 200MHz machine, and [Intel Corp.s] Celeron identical to an HP machine. And if HP was retailing the system at $500 and we would come in at $400, Wayne would not carry it. Period. He just wouldnt carry it. He just wouldnt carry it. He would say, "This will not sell. This is not worth the bother." So if HP was at, lets say, $650 and we were coming in at $500, hed say, "OK, well carry you." Next page: Knowing Best Buys value formula.
What does that say about the industry going forward? Do you see this as the beginning of a shift in the industry?