The New York TimesThe New York Times TechnologyJune 24, 2002  

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Despite Slump, Niche PC Makers Are Flourishing

By STEVE LOHR

In 1996, when Alex Aguila quit his steady job as a medical technician to start a personal computer manufacturer, there were questions about his sanity, let alone his business sense. "People were constantly telling us `You're crazy and you're going to fail,' " he recalled.

Their skepticism was logical enough. After all, the personal computer business seemed to belong increasingly to the big PC makers, buying chips by the boatful and cutting costs with ruthless efficiency. As the industry matured, aggressive price-cutting to gain market share was the order of the day, and Dell Computer, the emerging powerhouse, was the master practitioner of that strategy — selling directly to customers online and constantly honing its marketing, manufacturing and procurement.

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How could Mr. Aguila's fledgling startup hope to survive? Within months, one of his two partners got cold feet and bailed out, and took his $3,000 investment back. Yet Mr. Aguila and Nelson Gonzalez pressed on with $10,000 in cash and limitless sweat equity. Against the odds, they succeeded, building a specialist PC maker, called the Alienware Corporation.

The Miami company makes expensive computers, typically about $3,000, offered in eight different colors. The Alienware machines, tweaked and tuned for high-performance and reliability, have become popular with computer game enthusiasts and other customers willing to pay more for souped-up computers — from Dale Earnhardt Jr., the race car driver, to Marc Andreessen, who wrote the first commercial Web browser and cofounded Netscape Communications.

Last year, when the PC industry slumped, the sales at Alienware, a private company, tripled to $28 million, and its sales are on track to double to $50 million this year, Mr. Aguila said. And it is but one of the many thousands of smaller computer companies — from niche producers like Alienware to unbranded, "white box" makers that typically cater to small businesses — that have shown remarkable resilience amid the worldwide decline in the PC industry.

Two weeks ago, IDC, a large computer market research firm, reported that it was revising upward its figure for the number of PC's sold worldwide last year, to 133.5 million from 125.5 million. The research firm was forced to recalculate because it had underestimated the shipments of the small manufacturers.

To be sure, Dell continues to gain market share, though its gains seem to be coming mostly at the expense of the rest of the 10 largest PC makers, whose sales all declined last year. One of those leaders, Hewlett-Packard, justified its recent merger with Compaq partly as a way to gain the size and economies of scale it needed to compete more effectively against Dell.

Yet the surprising strength of the smaller PC makers shows that the industry is not consolidating inevitably into a handful of companies. The PC industry may be maturing in some respects, but it does not look like a rerun of the American auto industry, as some experts had predicted.

Size is not everything. "The industry has gotten caught up with the importance of scale and the view that PC's are commodities," said Loren Loverde, an analyst at IDC. "But so many of these small companies had done well with a different model, emphasizing local service and being easily available for customers."

Much of the worldwide growth among smaller companies comes in emerging markets like China, India, Eastern Europe and Latin America. But Thomas M. Kilroy, Intel's vice president in charge of sales to smaller PC makers, said sales of his company's chips to his customers in the United States rose as well last year amid the slump in the industry as a whole. "These guys are thriving," Mr. Kilroy said. "These are companies that have been around for years. They know their customers, provide personal service and technical support."

John Samborski started making computers in 1983 as a sophomore at the University of Wisconsin where he was an engineering student. "Back then, you had to hand-solder the motherboards yourself," he recalled. The business begun in his dormitory room continued, building computers for friends and small companies on the side, even as he became a bridge engineer in Illinois. "I didn't drop out of school like Michael Dell," Mr. Samborski joked, "but maybe I should have."

In any case, his side business became a full-time business in 1991, and today Ace Computers, based in Arlington, Ill., has three offices, 45 employees and sales of $18 million last year, and a roster of hundreds of loyal customers. Ace Computers sells online, but personal service is its real advantage.

Unlike large corporations, small companies cannot afford in-house help desks that can be called when a PC behaves badly or crashes. For many small businesses, it is the local white-box PC maker that provides a level of technical support, training, personal service and customized manufacturing that the PC giants cannot. That is a major reason there are still 15,000 PC makers in the United States.

Sheldon I. Epstein has been a customer of Ace Computers for more than a decade. He owns a small engineering company that makes computerized inspection systems that can be used to detect defects in everything from auto parts to contact lens. His machines link powerful PC's to video equipment, processing the images quickly to spot flawed items on assembly lines.

Mr. Epstein compares ordering from Ace Computers with having a personal relationship with a restaurant chef. He needs high-performance PC's and, he said, the ordering process begins with a conversation with Mr. Samborski. "I ask John, `What's the best stuff you can get me?' " Mr. Epstein said. "For us, a PC is not a commodity. It's an engineered product."

Yes, Mr. Epstein said, buyers get certain customization choices from a Dell, Hewlett-Packard or a Gateway. "But the options you get are the ones some marketing committee decided on," he said.

At Ace Computers, Mr. Epstein explained, "I know I'm getting the best parts available in my PC, the people there know their stuff and I know the president and I have his home phone number."

The specialty computer makers who produce expensive machines, especially for the gaming market, can be seen as the computing equivalent of a Ferrari or Lamborghini, or perhaps a Savile Row tailor.

Some of the producers have a bespoke mentality. At Falcon Northwest Computer Systems Inc. in Ashland, Ore., which sells to gamers, Kelt Reeves, the president, said: "We don't really have models. Every one is custom built."

Mr. Reeves has 17 employees, and no desire to get big too fast. "We're not a volume shop," he said. "We're the opposite of Dell."

In the computer industry, because technological change is so fast, with processing speeds and storage capacity doubling ever 18 months or less, today's Ferrari is tomorrow's Taurus. So the leading-edge market tends to be watched closely for emerging trends, which may soon enter the mainstream.

Mr. Andreessen, who is now chairman of Loudcloud, a Silicon Valley software startup, is a satisfied customer of Alienware — and the way he uses his machine at home is the fond hope of the PC industry, which is now in the doldrums. The machine he bought last year has a 720-gigabyte hard drive for storage — or 18 times more than a typical desktop PC sold today.

Mr. Andreessen is not a big game player, though he does enjoy "Grand Theft Auto." But he does use his home PC for storing and managing all his home entertainment — a library of classical music, album upon album of digital photographs, movies and television programs, some downloaded from the Morpheus peer-to-peer file-sharing service, including 50 episodes of "Seinfeld."

A shift in PC use from tasks like writing documents and sending text-based e-mail to entertainment uses like music, photos and video could touch off a new cycle of demand for PC hardware and software. An hour of video, for example, consumes a gigabyte of storage.

"It'll blow the lid off," Mr. Andreessen said. "It will happen. It's just a matter of when."

In Miami, Alienware, which sells mainly into the game market, but to others as well, hopes to ride the edge of that wave. Alienware sells its PC's mostly online, and has a small but growing international clientele. A few months ago, the Best Buy chain began featuring Alienware PC's in small kiosks in some of its stores.

"This could be a $500 million company someday," Mr. Aguila said.





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Richard Patterson for The New York Times
A powerful motherboard is inspected at Alienware, a maker of high-end game systems based in Miami.

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