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Sun 18 Apr 2004 04:00 AM

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Speculate to accumulate

Even the very best IT products need marketing investment and promotion to become successful and pick up market share. To produce the former and scrimp on the latter is like building a super car and not bothering to put any wheels on it.

Even the very best IT products need marketing investment and promotion to become successful and pick up market share. To produce the former and scrimp on the latter is like building a super car and not bothering to put any wheels on it — looks great, sounds great but goes nowhere. Nevertheless, some vendors seem intent on letting their technology do the talking and hope that elevation of the brand status will follow in due course.

The Middle East market is awash with new vendors from around the world clamouring to launch new products, recruit resellers and build new revenue streams in the region. After all, this is the fastest growing region in the world for IT spend — admittedly from a comparatively small total market size starting point — and everyone is keen for a slice of the action. But not everyone is prepared to commit the up-front investment required to crack the market in a meaningful way.

Vendors can be divided into two distinct categories: those who lead from a technology marketing perspective and those who prefer to concentrate on building brand equity in the minds of end-users through advertising and promotion. In the Middle East market, AMD and Intel provide prime examples of these two approaches.

AMD has committed limited resources to the Middle East market to date. By opening an office in the region, it is hoping that global alliances with enterprise infrastructure vendors such as Sun Microsystems can be rolled out in the Middle East. It has also appointed a master distributor and set itself the task of finding in-country distribution partners to push its product. Rather than tackling Intel head-on, it is quite prepared to chip away at the edges of its market dominance and grab the low-hanging fruit.

Intel’s dominance in the market is so great that AMD’s strategy will probably see it take some market share. As the number one chip supplier in the market, Intel’s channel programmes are all about developing ever-tighter relationships with its first-tier and second-tier partners. To understand this model, it becomes necessary to wade into the murky depths of rebate and incentive models.

Intel has its ‘Intel Inside’ promotion scheme which gives PC assemblers — and all other parties building systems using Intel chips — a hefty dollop of marketing development funds (MDF) on the condition they spend it on marketing and advertising and use Intel logos and jingles in these marketing messages. The scheme combines an attractive financial proposition with a marketing message that reinforces the Intel brand in the mind of end-user. It draws the vendor and partner ever closer together and makes it difficult for these partners to consider switching to a rival supplier such as AMD.

AMD’s response is straightforward enough. Pierre Brunswick, regional sales general manager Africa, former Soviet Union and Middle East at the chip vendor, recently said: “We would rather give the margin up front to the channel as opposed to locking resellers into promoting a brand to qualify for rebates and incentives. We feel it is important for resellers and retailers to give the customer a choice.”

These are admirable sentiments but do little to derail the sheer momentum and dominant brand position Intel enjoys in the Middle East market. Intel’s approach is a logical model for the market leader to roll out in order to maintain its position. If the ‘Intel Inside’ funds were not being filtered in as marketing and development funds, they would be entering the channel higher up through reduced product prices.

Intel’s Japanese office was recently raided by the Office of Fair Trading investigating whether or not Intel exerts pressure on manufacturers not to use rival chips. Much depends on the interpretation of the word ‘pressure’ here. Withholding supplies to manufacturers working with multiple chip vendors could probably be deemed unfair. But maintaining a dominant market share through an emphasis on the four Ps of marketing — product, price, promotion and place — is merely indicative of a strong business model.

What the ‘Intel Inside’ scheme also does is keep the processor brand uppermost in the minds of the customers. It is the sticker everyone looks for in the retail outlet and probably one of the few components where the vast bulk of customers can actually name a brand. Intel’s job is to maintain processor brand as a major selection criteria for customers.

The decision between technology and brand led marketing is a tough choice for a vendor to make, requiring a detailed understanding of the risk-reward dynamic. Choosing to concentrate on price, product, place and paying minimal attention to promotion often results in a very slow incremental growth rate. Given the rapid pace of product evolution in the IT industry, this can be difficult to justify.

In Taiwan, Asus is the number one notebook brand and the company also boasts a massive product portfolio spanning networking and servers as well as its core components products. In the Middle East, Asus is still perceived as a motherboard vendor. Leveraging brand equity in the motherboard space on to its wider product set is no easy task. After all, components are a channel play whereas finished systems and products require end-user awareness.

Asus undoubtedly has fantastic products, massive economies of scale, aggressive price points and strong design skills. But without a significant investment in channel building and brand building activity aimed at the right customer segments, it should not expect soaring growth rates. This is a market where it is necessary to speculate in order to accumulate.

For resellers, it is often more comfortable to stick with the market leader and enjoy the security that offers. Backing the underdog is a calculated gamble that few channel players are prepared to take given the tight channel margins that currently exist. Failure by vendors to support those few players prepared to make the leap with aggressive marketing and promotions makes resellers even more wary of taking a chance.

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