Refurbished apple computer

Parts suppliers may profit; Apple gets another headache

New York -- Long a fringe industry, the refurbished PCs business is going mainstream. The drivers: ample supply and increasing demand. A glut of inventory is forcing OEMs to deplete overflowing warehouses, while corporations offload old systems. At the same time, more reputable companies selling refurbished and last year's computers are luring the more cost-conscious, yet discerning customers -- such as schools -- with low-priced, yet powerful, Pentium-based systems.

Many of the increasingly sophisticated computers that companies are routinely putting out to pasture are landing in classrooms. That should worry OEMs that bet some of their business on the education market, particularly Apple which has traditionally viewed that market as one of its strongholds; few of the refurbished machines are Macs.

Since traditionally Apple has held at least half that market, the shift could rapidly and significantly reduce its current installed base. That's in addition to the larger dent new PCs have already made. Among new systems, Apple's 53 percent installed base in schools is forecast to drop by 10 percent this year, according to market research firm International Data Corp. (IDC). And many Macs in the installed base are ripe for replacement; most are out of date Apple II and LC machines.

Education wasn't mentioned in Apple's tagline at the recent MacWorld conference -- new media, advertising, design, art entertainment and publishing won out. That's not too much of a surprise, since the company's been backing off that market, as well as others, for awhile. Despite its longstanding commitment to education, last year the company was uncharacteristically quiet on the subject, although it periodically made noises about a big back-to-school splash this spring. In February, the company intimated that a sub-$1,000 machine would emerge at the FETC education show in March. (EN, Jan. 26).

The earlier discussed machine is the Imac, launched May 6. Its price tag? $1,299. Though it's an impressive machine, that's still way too high for most schools, particularly since last year's $999 x86-platform system is now priced about $200 lower, or comes with a monitor for the same price. And the Imac won't be available this school year -- systems aren't expected to start shipping until August.

Apple agrees that it needs to lower its prices to compete with the Dells and Gateways of the world, as PCs make inroads into classrooms and dorm rooms. "(But) we're starting to do much better in the education market," said Steve Jobs during his keynote address at Macworld, referring to the market share Apple lost last year to PCs.

Yet while the company watches its back for Wintel machines, refurbished and donated machines are sneaking up on both camps.

Value for Money

The refurbished PC market is attractive to the education segment for several reasons. First and foremost, the value proposition is appealing. Cash-strapped schools often need to cut costs for rudimentary supplies like paper and pencils, so saving money on high-end purchases like PCs is a major plus.

Those that do have an IT budget, albeit small, find that they can double the number of PCs they put in front of kids by going second-hand. That's particularly pertinent in 1997, a year when federal and state governments have earmarked mammoth funds to wire schools, an expensive and time-consuming process. It's hard to cut corners on infrastructure -- which can be complicated, involving issues like asbestos and concrete walls -- leaving little for volume purchases of computers. Buying refurbished PCs may also enable a school to equip both the computer lab and every classroom with a system.

And lastly, knowing very much what they do need, many schools know what's too much. And high-end multimedia systems are over the top. "Today's reconditioned computers are perfectly adequate for your average school," said IDC analyst Christine Arrington. "We've transitioned to the Pentium, so they're no longer putting 486s into labs and classrooms," she added, calling many computers on the market today "overkill" for most schools. "They don't need to spend that money."

The value-for-money proposition for used PCs is compelling. Studies show that PCs depreciate daily, and are only worth 10 percent of their purchase price within two years, and nothing in three.

"To get three to four times the computational resource for the same dollar -- that's an enormous leverage," said Brian Kushner, CEO of Recompute, an Austin-based reseller of refurbished machines (see sidebar). "Schools don't need -- and often don't want -- powerful systems targeted at multimedia, engineering and software compilation applications." Though the used PC market has been around as long as there've been PCs, informally at least, the beast only began to take shape over the last five years. And its arm is reaching further.

"For many years, the used PC market was a relatively minor factor in the industry, but recently it has become a concern for new PC vendors," reported IDC in its recent study of the refurbished PC market. "The fact that buyers can obtain a full-function PC with few compromises for such a low price applifies the issue of how used PCs and new sub-$1,000 desktops are likely to affect each others' sales over time. Obviously, these two product types will be competing for many of the same dollars," the report continues, with warnings of used PC sales cannibalizing sales of new systems, particularly in the home office and small office markets. "Used PC vendors will continue to represent both a valuable resource and a form of competition for new PC vendors. This competition will become more intense during the next year, if, IDC expects, compelling new software applications that would drive users to upgrade to new high-end hardware do not appear."

Worldwide, around 40 million PCs were retired in 1997, with 15 million of them in the U.S. Some of those systems were donated or discarded, while others were merely shipped home or given away. But, increasingly, they are being resold.

What's driving that growth? Highly-visible vendors with more sophisticated marketing channels such as the Internet and retail shops. Plus lower-priced, powerful and certified products, many of which are richly-configured systems with Pentium processors, more RAM, bigger hard drives and multimedia.

The IDC study estimated that 5.5 million computers were shipped backed into the U.S. market in 1997. Lumped in with the 31.5 million new computers shipped in the U.S. last year, used systems accounted for nearly 15 percent of all computer shipments in 1997. Even though the lion's share of sales of those shipments lay in transfers between homes -- with no intermediary and no refurbishing involved -- that percentage surprises many. Internationally, those numbers are two to three times those of the U.S., says Recompute.

Based on those numbers and continuing trends, IDC expects both supply and demand of used systems to increase exponentially. The firm projects a 14 percent compound annual growth rate, to 9.86 million units by the year 2002. Mirroring price cuts of new systems, prices of used computers should drop, too: an oversupply of powerful, refurbished systems (with warranties) will drive price competition. Many used systems that meet average performance requirements already sell for around $299, while full-featured Pentium units hover around the $600 mark. A wider selection of used servers and notebooks in the near term should also drive larger-scale buy in. And lower prices will lure new buyers in.

The used PC market is made up of three distinct groups of products: refurbished, used and liquidated inventories of new machines. Refurbished systems range in quality, but they are always used machines (meaning they may have been returned straight out of the box due to buyer's remorse or a minor technical problem, or they may be leased machines) that are reconditioned, often with warranties. Used systems may or may not be refurbished. And liquidated machines are probably last year's surplus.

"The used PC market has been evolving from a dumping ground for unwanted and under-powered systems to an acceptable source of low-cost hardware to fit a variety of budget and power ranges," said IDC's Ms. Arrington. "The new and used PC markets are becoming competitive but will remain highly interdependent." Until recently, small offices and businesses looked at refurbished systems as an economic alternative to higher-priced systems. But, increasingly, as schools become networked, they are finding that it makes sound sense -- in terms of both price and service -- to buy in volume from companies like Recompute. "Schools tend to not have as much of the raw performance requirement, so they trade off performance for price," said Kevin Hause, another analyst at IDC.