There was a time when building your own desktop computer, piece by piece, could get you the best and most affordable system possible. I had a brief, exciting moment in that time, around the year 2000. I wanted a system that ran quietly, had a case that was more or less a mini-tower, and had the kind of serious sound card that would foster my college daydreams of being an audio engineer. But picking out parts, wondering if they'd work together, and obsessing over price drops and return policies was so daunting, I'd put the decisions off by doing actual schoolwork, until an older friend in the know grabbed my shoulder, gave a knowing nod, and said one word: "Newegg."
Cut to one week later, and my tiny, quiet system with the bumping sound is up and running, but there's acrid smoke and a strange smell. That's from the microATX motherboard, which is just a smidge too big to fit the case, but I persisted in finally closing it with a mighty shove. On the phone with Newegg's service department, I can't keep from revealing that it's my first do-it-yourself system, and that I was a bit over-eager to make it work. "Well," the refund processor tells me, with a kind of verbal wink and inaudible shrug, "we can't complain that our customers are too excited, right?"
Not a year has gone by since where I didn't order nearly all my computer needs from Newegg: memory upgrades, replacement hard drives, headphones, USB drives and cables, anything that was needed to make a computer better or faster. I can probably name at least a dozen friends who buy the same way. That brand loyalty, encapsulated by the California-based firm's "Once you know, you Newegg" slogan, is no accident. Newegg turned a profit every single year since its 2001 founding, growing to more than $2 billion in sales in 2008, powered by roughly 2,000 employees. The following year, Newegg filed for a $175 million initial public offering, stating that it planned to use $25 million of that cash to expand into the Canadian and Chinese markets through 2010.
It makes sense, then, that Newegg's September 2009 filing turned a few heads, and perhaps seemed like the most sensible tech IPO to come along in some time (even if that's a very relative statement). Newegg was an established, profitable business, even if the profits were tight, and a familiar name among the tech-savvy. What happened next was, well, nothing much. Newegg swapped CEOs without much comment or notice, though the announcement carried a thumbs-up from their largest outside investor, Insight Venture Partners. Then, in May 2011, Newegg quietly dropped IPO plans, stating that it had decided not to go ahead with the stock sale, but providing no detail.
What happened? The internal factors are unknown. From the outside, one could guess that the industry that Newegg operates in shifted under its feet. The markets for traditional desktop and laptop systems hadn't shrunk much, but might have become as uncertain as the economy itself, depending on who you ask. Amazon, Newegg's main competitor in the online-only retail space, certainly hasn't stopped growing and gaining new angles. And more and more demand and attention shifted away from component-based systems to smartphones, tablets, razor-thin laptops and netbooks, and even the nascent but intriguing Web-only Chromebooks. All of these alternatives to what we know as the personal computer are difficult, if not nearly impossible, to upgrade or repair with Newegg components.
But weep not for Newegg as you knew it. These days, it's the "basket" that often provides the profit margins so scarce in the PC market. Danielle Levitas, group vice president for consumer and PC research at IDC, notes that for every $1 spent on a PC purchase, an additional $0.85 is spent on accessories and related services, including broadband and support services. That figure holds fairly close for phones, which usually entail additional cases, batteries, headphones, and pre-packaged extended warranties. Tablets, Levitas wrote in an email, are still a young market, but keyboards, conversion dongles, and a small but lucrative service market provide substantial new streams of revenue.
They're important streams, too. Modern PCs are priced in such a way as to make them replaceable every few years for the most avid (and usually Newegg-aware) customers, and Apple successfully holds onto a great deal of its own "basket" dollars through its halo effect (which is very real). So although Newegg's sales rose from $982 million to $2.1 billion in 2008, more than doubling, their profit margins were at 1.4% in 2008. By comparison, Amazon's mean profit margins in 2008 were 3.3% on $19.7 billion in sales, and notched up to 3.4% in 2010.
But for its part, Newegg doesn't see itself as a "basket" seller, or even directly competing with Amazon in its core business. That business is "helping advanced PC builders and DIY IT professionals," according to Scott Meaney of DBA Public Relations, representing Newegg. "We still offer a wide variety of computer components for the DIY market," Meaney wrote in an email response to questions. "We bundle parts together into SuperCombos to make PC building easy. As the market has changed, we have definitely expanded our scope ... but this doesn't mean we're shifting our attention."
This year, that scope-expanding has included discount textbooks (through a partnership with Valore.com), an inaugural will-call pickup location in Los Angeles, and somewhat aggressive ads parodying a certain blue-and-gold competitor. Newegg even released a smartphone app, Newegg Mobile, that lets customers scan gadgets and accessories in brick-and-mortar stores and see what they go for, and how they're reviewed, on Newegg.
The golden age of case-modders, custom PC builds, and penny-pinching on (seemingly) humongous hard drives has passed. The competition for the impulsive gadget dollar is growing ever stronger. Where Newegg still holds an advantage is in its extensive, often obsessive reviews of everything you can buy on the site. The bass delivery on an $8 pair of headphones gets as much attention as the microsecond timings on a $320 solid-state hard drive. Newegg provides, in other words, a sort-by-relevance version of the knowing hand on the shoulder I was lucky enough to receive.
Which is a good position to be in. Web shopping, like Web searching on the whole, is incorporating and internalizing reviews and shared recommendations generated by actual people at a rapid pace. Aggregate reviews are summated at the top of some search results, and human-generated links, through just the bit.ly URL shortener alone, are causing at least 8 billion Web clicks each month. Having a huge trove of review data, buyer preferences, and a reputation as a kind of cantina for the hardware cognoscenti is nearly invaluable these days. Whether Newegg can further capitalize on that value, while it sells everything from video cards to VGA cables, remains to be seen.
This article, "Can Newegg survive the post-PC future?," was originally published at ITworld. Read more by Kevin Purdy and follow ITworld on Twitter and Facebook for the latest IT news, analysis and how-tos.