Vendor Ventures Beyond Box

Micron Electronics leaves the PC business world

Micron Electronics Inc.s decision late last month to quit the PC business and focus on its application hosting division is, depending on whos asked, either a great strategic decision or a bow to the inevitable. Either way, the Nampa, Idaho, companys move may presage other near-term strategy shifts among second-tier PC makers.

Specifically, Micron said it will leave the PC business entirely and will sell the MicronPC division to an unspecified "large, private, technology equity investment firm." Also, it will sell its SpecTek memory division to parent company Micron Technologies Inc., of Boise, Idaho.

Micron Electronics will focus on its fledgling application hosting business. It will merge Atlanta-based Interland Inc., which Micron acquired recently for $130 million, with Micron subsidiary HostPro Inc. under the Interland name. Micron Electronics President and CEO Joel Kocher continues as CEO.

Had Micron waited for further market shake-ups, some industry observers posit, it may have been knocked out, as computer makers struggle with a decline in demand and increasingly competitive pricing that has significantly reduced profit margins (see story, Jan. 1/8, Page 17).

Micron Electronics was already feeling the effects of price and margin pressures. In its second fiscal quarter, Micron Electronics reported a net loss of nearly $170 million, or $1.75 per share.

But Micron looks now to nurture its HostPro subsidiary into a full-scale contender.

"All Ive heard about for the last year and a half is beyond-the-box this and beyond-the-box that," Kocher said. "If all the profit potential is coming from beyond the box, then I think this should be seen as a bold move. We positioned our shareholders in a company that is now a leader in a growth market."

Customer reaction was mixed. On the surface, many HostPro users said, the news will yield good results. The reincarnation of Micron Electronics as Interland should bring more hosting locations and lower prices, said HostPro customer Blair Merriam, general manager of Inc.

"Ill love it that they dont have anything else distracting them," said Merriam, in La Jolla, Calif.

But the new company should focus hard on its customer service, a former HostPro user said. "We were having issues that I think are indicative of the things theyll have to watch out for," said Robert Bismuth, CEO of Vision- Compass Inc. The Seattle-based company stopped using HostPro in September to bring its application servers in-house.

"We had real problems [with HostPro]; it would take 4, 5, 6 hours to get a response that made any sense," Bismuth said.

"I used to work for [Digital Equipment Corp.] ... I can tell you that someone who runs a [computer hardware] business is not necessarily someone who runs a service business," Bismuth added. "If I was the chairman of Micron ... Id take a look at the talent I have in there."

Indeed, Microns experience with application hosting has not been all sunshine, either. For its second fiscal quarter, the hosting business posted a loss of $9.7 million, or 10 cents per share, on sales of $14.7 million.

Kocher seemed to be happy to have the PC era behind him. "I consider my time with MicronPC as having been very challenging," he said.

Officials would not identify the MicronPC buyer, although they said the sale will be finalized this summer.

In a letter to Micron customers, PC division President Mike Adkins wrote, "The current PC business leadership team will remain intact under the new ownership. ... All of our policies regarding warranties, service and support will continue completely unchanged."

"Were still waiting for the other shoe to drop," said Roger Kay, an analyst with International Data Corp., regarding the buyer.

"By the end of the year, we might see three of the top 10 PC makers dropping out of the PC business," said Kay, in Framingham, Mass. "What were seeing is the result of the maturing of the PC industry as well as a bad economy."

Micron tried for years to establish a sizable base of corporate customers, yet the PC maker remained largely reliant on consumer sales, touting relatively low-cost systems to attract customers. But the companys made-to-order business model, which once let it consistently undercut larger rivals prices, ultimately didnt provide enough savings to let it compete in todays more price-competitive environment.

Because Micron was not a high- volume PC maker, such as Compaq Computer Corp., Dell Computer Corp. or Gateway Inc., it did not get volume discounts on components like the larger players did.

With the U.S. economic slowdown and PC pricing pressures expected to continue for at least the next several months, industry analysts are predicting that other companies will soon join Micron in abandoning the PC business.

Such pullouts, analysts say, could start a domino effect, where potential customers choose to buy from a top-tier vendor because they fear all smaller PC makers are at risk of going out of business.

Meanwhile, analysts say, Kocher faces new challenges in leading a purely service provider company. His primary experience is in computer hardware companies Power Computing Corp., a Macintosh clone maker, and Dell.

Kocher acknowledged the differences between running an application hosting business and a PC business, but, he said, "its still a computing business."