Gaming PCs and high performance computing: Last fortress of system builder margin?

System builders and resellers that have been squeezed-out of the desktop PC market by commoditization, falling prices and shrinking margins do have one area they can turn to, where buyers are willing to pay more for design expertise, for quality components and for the knowledge and expertise of a skilled solution provider: high performance computing.

A board category, high performance computing can include everything from workstations and near-super computers to high-end, hot-rod gaming systems. It’s one of the few remaining segments of the PC market where margins remain strong, design expertise is valued and buyers are willing to pay more for the knowledge and skill an experienced system builder can bring to the table.

It’s also not an insubstantial market opportunity. The server piece of the high performance computing market alone is a US$9 billion/year market according to Steve Conway, research vice-president, high performance computing with analyst firm IDC, and heading towards moderate growth to reach US$10.5 billion in the next few years. Just 10 years ago, it was only a US$2 billion market.

“What’s been driving the growth has been that the systems are based primarily on commodity (x86-based) technology instead of custom technology,” said Conway.

While 15 to 20 years ago, a super computer would have cost $20 million, now the same function is performed by systems starting under $10,000. Conway said the high-end of the market has moved into lower price-points with commoditization, allowing the major vendors such as HP (NYSE: HPQ) and IBM (NYSE: IBM) to enter the space. However, the cost of sale in the high performance space is too high for a direct play, says Conway, opening the door to resellers. Users include everything from an engineering firm designing windshields for an automotive company or an oil and gas company doing modeling.

“It’s not a VAR opportunity so much in the customization of technology, but in knowledge of the marketplace and the customer business. The reseller has to really learn something about what these types of customers are doing, or it’s a tough sell,” says Conway. “But if resellers are willing to do so, they can earn really good rewards. It’s not a shop, drop and forget-it opportunity. You need to hold the customer’s hand and walk them through it, and help them thru deployment.”

Conway says OEM margins are typically in the 30 to 45 per cent range, with strong margins for their resellers as well. “It’s a value-added market, and the margins reflect that.”

One major OEM player in the high performance workstation market is HP, with offerings such as its Z Series line of workstations. Ira Weiss, category business manager, workstations, point of sale and thin clients for HP Canada, says with the advent of higher density multicore processors, workstations are more powerful than ever. HP has found strong interest in the digital content creation market, as well as oil and gas development, medical imaging and financial services.

“Clients are looking to VARs to provide expertise on the product they’re representing, have some knowledge of the applications they’re running and how they can provide a workstation environment that can best meet the needs of those applications, as well as provide some additional service around those applications and systems,” says Weiss.

The partner revenue tends to be a blend of margin from the product sale and value-added services, says Weiss. HP’s high-end workstations average about 25 to 30 per cent of their overall workstation sales. He adds while some VARs drive a higher percentage of HP’s workstation business, he’s not aware of any VARs specifically focused on the workstation or high performance computing market.

Processor developer Intel Corp. (NASDAQ: INTL) sees high performance computing as a multi-faceted market says Doug Cooper, country manager for Intel Canada.

Virtualization has opened up whole new markets, and where once clusters of systems were employed by universities to tackle complex problems by breaking them down into complex systems, now more powerful high performance systems are up to the task. Cloud computing, both public and private, is also being driven by advances in virtualization, says Cooper.

“For the system builder and solution provider, there are opportunities to create a business around these scaleable server farms where clients basically rent a server instance, a virtual server, to run their business,” says Cooper. System builders will use standard components to build customized servers balancing storage and performance to specific needs. “As SMBs shift into the virtual cloud and need to decide between private or public cloud, there are opportunities for sophisticated resellers to create these business models.”

The more interesting extreme opportunity though, particularly for the system builder, is in gaming. Intel has designed a special processor for the market, the Core Extreme. Differing from the Core i7, it allows the system builder to overclock the processor and has turbo mode and hyper-threading enabled to push the system even further and improve game performance.

Cooper says the gaming market appears to be fairly consistent for system builders, and offers strong margin potential, both on the system and on add-ons, such as integrated vibrating chairs for the full gaming experience.

“These systems definitely can’t be bought off the shelf. There’s good margin, and it’s definitely a space where people are paying for the result so they’re looking for the best,” says Cooper. “They want a well-integrated system so some expertise is required to integrate all those components together and have them work.”

Component expertise is one area where extreme system builders can add value, and earn margin. Cooling is very important on high performance systems, and Calgary’s CoolIT Systems is finding success with its liquid cooling systems.

“People are starting to recognize the value of performance,” says CoolIT CEO Geoff Lyon. “If you take a $250 processor and pair it with our $50 cooling system, you can deliver the performance of an $1,100 processor.”

CoolIT is seeing traction in the performance and enthusiast spaces, which Lyon defines as systems starting at $1,200 and is actually quite broad, encompassing everything from lawyers offices buying a high performance system to lengthening the upgrade cycle in the commodity PC space, to animation consultants and digital content creators to, of course, gamers.

A success story:

Why a good gaming PC is also a good regular PC

If system builders can bring the right expertise to the table, and find their target market, buyers are willing to pay for the value-add. Based in Union, NJ, Maingear Inc. is a high-end system builder that formed eight years ago with a focus on the gaming market. Maingear CTO Chris Morley says, at the time, the gaming system builder space was fairly unique. The tier ones have since learned you can put some expensive graphics cards in a system and pass it off as a gaming PC, but there is still a strong market for those who know, and value, the difference.

Maingear has also evolved its business from its gaming roots, however. Morley says they’ve come to realize that what makes a gaming system great – quality components, solid design, robust performance – also makes a great PC. The company is finding a growing business with what Morley calls “tier one orphans” or customers fed-up with the big OEMs, and just want a reliable system.

“People don’t think they want a gaming PC, but they really do, because a good gaming PC is going to be good at digital editing, for example, and the graphics processing unit (GPU) is becoming a more integral part of a good system,” says Morley. “We’re selling a lot of our gaming PCs to people who know they’ll never fire-up a game, but know a better video card can encode video to their iPod in five minutes instead of 30.”

The key for tapping this new market, though, is to not overwhelm them. Maingear’s Web portal has one path for consumers and another for gamers, with messaging designed to speak to the interests, and experience of each market.

“It’s the same systems in each portal though, we just talk about the same hardware in different ways,” says Morley.

The key to system builders looking to follow this path, says Morley, is to diversify, build on your strengths and core competencies, and be prepared to work hard and earn it over time. Much of Maingear’s success is based on marketing, positioning and reputation.

“We’re fighting for a small segment of the market, and the barriers to entry are pretty high,” says Morley. “You can get the higher margin but you have to fight for it. You earn it by spending time with the customer before and after the sale, and being prepared to swallow a $10,000 order if something goes wrong. It’s an endurance game. Someone won’t immediately trust you with $10,000 of their hard-earned money.”

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Jeff Jedras
Jeff Jedras
A veteran technology and business journalist, Jeff Jedras began his career in technology journalism in the late 1990s, covering the booming (and later busting) Ottawa technology sector for Silicon Valley North and the Ottawa Business Journal, as well as everything from municipal politics to real estate. He later covered the technology scene in Vancouver before joining IT World Canada in Toronto in 2005, covering enterprise IT for ComputerWorld Canada. He would go on to cover the channel as an assistant editor with CDN. His writing has appeared in the Vancouver Sun, the Ottawa Citizen and a wide range of industry trade publications.

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