MicroAge, Inc.

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MicroAge, Inc.

2400 South MicroAge Way
Tempe, Arizona 85282
Fax: (602) 929-2444

Public Company
1976 Employees: 1,900
Sales: $2.9 billion (1995)
Stock Exchanges: NASDAQ
SICs: 7373 Computer Integrated Systems Design; 6794 Patent Owners & Lessors

MicroAge, Inc., a Fortune 500 company, is one of the nations largest resellers of computer equipment and systems. Offering customers over 20,000 products from more than 500 vendorsincluding such leading manufacturers as Compaq, Hewlett-Packard, IBM, Apple, and Microsoftthe company is one of the oldest distributors in the computer industry and is one of only two companies in the entire technology industry that has retained the leadership of its founders. In addition to its headquarters in Tempe, Arizona, the company has two distribution facilitiesin Tempe and Cincinnati, Ohiothat together incorporate more than 700,000 square feet, making it one of the largest and most comprehensive technology centers in the industry. Having survived the rapid technological changes that have defined the computer business throughout its history, the company has long played a major role in the evolution of information technology. Through its MicroAge Infosystems Services (MIS) branch network, the company provides large organizations throughout the world with systems integration services and distributed computing solutionsinvolving servers, desktops, notebooks, software, memory, and peripherals. Other services include integration, project management, global support and service, system installation, help desk services, software licensing and upgrades, Internet access, CD-ROM publishing, and financing programs.

Early History

MicroAge was founded in 1976 by a pair of Arizona bankers with an avid interest in the budding field of computer technology, Jeffrey McKeever and Alan Hald. Having taken computer classesthen called numerical analysiswhile at the University of Arizona, McKeever ran the Air Forces largest computer center in the Far East for three years, before taking a job with Southern Arizona Bank, where he met his future partner. After earning degrees from Rensselaer Polytechnic Institute and Harvard University, Hald also spent time in the military before moving to Arizona and entering the banking industry. The impetus for the company that would take just 16 years to surpass the $1 billion mark in sales came from a 1975 article in the computer magazine Byte, which described the latest in microcomputer kits, as they were known at the time. As the two put together their own microcomputer, they shared their vision of creating a business that would sell the machines. The following year, convinced that there was money to be made in the technology that was familiar to only a small number of hobbyists like themselves, they pooled their pocket capital and opened up a small store in Tempe called The Byte Shop, where they assembled and sold Norstan computer kits.

Although conventional business wisdom suggested that the hobby-computer store surge would be short-lived, the two sold enough of their $691 kits to generate $1.5 million in revenue that first year and expand to four locations. Having entered the market in its infancy, the founders of Arizonas first computer company took full advantage of the publics growing interest in the rapidly developing technology. They renamed their firm MicroAge and quickly established mail-order and wholesale divisions, while achieving sales of $8 million in their second year and $15 million their third. By 1979, the company had expanded to several stores and had grown to become the largest computer retailer-wholesaler in the United States.

Two years later, the computer distributor attempted to accelerate its growth by launching a franchise program. Their plans for continued national and international expansion, however, collided with the onset of a recession and a financially debilitating combination of high interest rates, increasing competition, and increasingly complex corporate structure. And in 1982, the company was forced to regroup, filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Ten months later, the company successfully exited bankruptcy and was ready to rebuild, having learned to temper its entrepreneurial zeal with a larger degree of fiscal responsibility.

Reemergence and Record Growth in the Mid-1980s

As MicroAge set out to rebuild its operation, it benefited from the increasing popularity of the IBM Personal Computer (PC). Introduced to the market in the early 1980s, the IBM PCs inspired confidence in the microcomputer as a powerful new tool for personal and business productivity. Realizing the tremendous potential of this rapidly evolving technology, the company began negotiating strategic partnerships with first-rate computer vendors such as Hewlett-Packard, sharing resources and ideas in an attempt to provide better products and services to its customers.

Such partnerships became increasingly important as the magnitude and scope of computer use entered a new era in the mid-1980s. At this point, individual PC islands began to appear frequently in the business environment, enabling people to discover the advantages of linking computers together, sharing ideas, information, and resources. This phenomenon spawned the next generation of computer technology: the PC local-area network (LAN). Together, MicroAge and Hewlett-Packard began developing products and services to help businesses and organizations use this technology to improve the efficiency and lower the costs of their operations.

MicroAge demonstrated its position of leadership in LAN technology by launching an aggressive new marketing strategy in 1985. Having grown to a 149-store computer chain, the company established an industry first by opening up an 8,000-square-foot test store in Tempe that was equipped and wired to demonstrate networks, multiuser systems, and the latest in telecommunications technology. The new facilitywhich included products such as multiuser systems, personal computers, voice/data workstations, and telecommunications products gave MicroAge the ability to let customers see for themselves how various systems operate, instead of just listening to the claims of a salesperson.

That same year the company, in an attempt to keep pace with the rapid development of technology, became the first computer retailer to initiate an in-store satellite television network. Designed to keep its employees abreast of the latest information on advanced technology, the satellite TV service, called the MicroAge Communications Network (MCN-TV), became an easily accessible and cost-effective medium for both employees, through training seminars, and for customers wishing to learn more about various computer systems. What is more, leading vendors such as IBM, AT&T, and Compaq strongly supported the new communications channel, recognizing it as a viable way to provide information to MicroAge technicians and salespeople.

Innovations such as these, combined with the exponential expansion in the market for computers, proved to be a favorable combination for the company. Between 1984 and 1985, the number of MicroAge stores skyrocketed from 36 to 178, while sales more than tripled, from $42 million to $142 million, and profits jumped from $804,000 to $3.8 million.

While the company continued to enjoy considerable success through the remainder of the decade, it did so in the face of an increasingly competitive computer industry that quickly evolved into one of the highest velocity and thinnest margin businesses around. As McKeever told Leslie Brokaw of Inc. magazine, If you dont figure out how to improve what you do each year, youre going to be out of business fairly quickly. Operating in an environment that saw gross profits dwindle to 5 percent, MicroAge found it necessary to come up with a new strategy for growth to continueeven if that meant replacing its own ideas.

Until as late as 1989, MicroAge operated its franchises on a royalty system, requiring each franchise to pay a percentage of its total sales to the company. Under the royalty programone of the most expensive in the industrystore owners purchased products from the company at cost plus a markup of approximately 5.9 percent and then paid the corporation an additional 5 percent of all revenues, with 1 percent earmarked for advertising. With the rapid growth of the competition, especially from resellers such as Connecting Point of America and Intelligent Electronics who were offering their dealers less expensive rates through a cost-plus program that allowed dealers to pay a markup only on the equipment and services they bought, MicroAge decided to make a change. In one fell swoop, the company eliminated its royalty franchise system, eliminating the source of approximately half of its gross margins and forfeiting $100 million in outstanding royalty payments, simply to change to a cost-plus program. Under the new system, called MicroAge 2000, storefront owners paid MicroAge a mark-up fee of between 3.9 and 8.5 percent, an enticing offer for many independent stores. With the new franchise model in place, MicroAge became the first cost-plus reseller authorized by the top three PC makers: IBM, Apple Computer Inc., and Compaq Computer Corporation. And it was now able to compete for new franchises more competitively and enjoy more rapid growth. In just over three years, the company expanded from 600 to 1,500 locations, while seeing its revenue jump from $364 million to over $1 billion.

Company Perspectives

Our mission is to develop satisfied clients by providing quality sales and services of information technology solutions through an international network affranchised, company-owned and affiliated reseller locations. MicroAge values: add value to everything we do; respect our relationships; act with integrity; make things happen; do it right the first time; have fun.

The 1990s: Meeting the Needs of the Information Superhighway

As MicroAge entered the new decade, it also found itself in a new era of technology, with the LAN giving way to the information superhighway. No longer was it enough for companies to move information to various places within a company, it now became necessary for informationmore informationto be moved over a wider geography, and to diverse populations of users using different computer systems. MicroAges continued success would thus be dependent upon its ability to integrate these converging technologies. In 1990, the company attempted to better serve this need by initiating its Quality Integration Center (QIC), a systems integration facility that takes raw materialsservers, workstations, software, and other componentsand creates specialized, network-integrated solutions for businesses and organizations. With the ability to integrate more than 500 different vendor products, the QIC has earned the highest international quality standardthe ISO 9002a certification vital to high-quality computer manufacturers such as Compaq.

Although sales for the nations oldest major reseller continued to grow steadily, the company experienced a drop in earnings during the early 1990s. As more and more smaller manufacturers entered the computer industry, offering lower-priced PC clones, the sale of brand-name PCs declined, weakening business for traditional resellers such as MicroAge. Finding itself shipping more boxes but making less money, the company reported a drop in profits for the first time in several years in 1991. The company also suffered from a boom in the mail-order computer and computer superstore industry, which significantly altered the market share distribution of the computer business. While retailers, such as MicroAge, controlled 60 percent of the market during the 1980s, their share dropped to 30 percent by 1992.

Beginning in 1993, though, corporate computer buyers, which benefited from price wars and reduced prices by the big threeApple, IBM, and Compaqagain turned to brand-name retailers for their computer solutions. MicroAge, having developed a specialized business networking division, called MicroAge Infosystems Services (MIS), in 1992, did its best to take full advantage of this shift in the market. The highly regarded MIS division helped the company to answer the increasingly complex networking needs of Corporate America and return the company to the path of record growth. And in 1993, the company generated more than $1.5 billion in sales and, more importantly, $10.5 million in profits, a twofold increase from the previous year.

The Mid-1990s and Beyond

In 1994, in anticipation of future changes in the industry, the company reorganized itself into separate businesses to better meet the diverse needs of its customers. MicroAge Computer Centers and MicroAge Technologies were established to serve franchised resellers and market to Value Added Resellers (VARs), respectively. MicroAge Product Services was given the responsibility of distribution, logistics, technical, and outsourcing services, while MicroAge Channel Services was set up to provide purchasing and marketing services for resellers and vendors. Finally, MIS retained the duties of coordinating and servicing large-account marketing in conjunction with franchised resellers.

Operating in an industry marked by constant flux and ever-increasing competition, MicroAge attempted to diversify its operations in the mid-1990s to separate itself from its smaller competitors with less resources. Taking advantage of its size and low-cost structure, the company began placing more emphasis on its outsourcing businessthat is, performing duties such as technical service, inventory management, and logistics management for other resellers and vendors. Such opportunities have enabled the company to further leverage its low-cost structure and further expand its business. As the winner of several service awards from Computerworld and Datamation magazines, the company, which was one of only five chosen to support the nationwide introduction of Windows 95, has developed the reputation for excellence and the economies of scale needed to make such ventures profitable.

After having posted 36 consecutive profitable quarters and nearing the $3 billion mark in sales, MicroAge looked toward the second half of the decade and the dawn of the 21st century, hoping to benefit from several new developments in the industry. First, the corporate demand from information technology appeared to be strengthening as companies made plans to upgrade their existing systems to take advantage of new 32-bit operating systems and applications. Second, manufacturers such as IBM have suggested that they will outsource more joint manufacturing and light assembly work, representing the potential for more work for the companys 133,000-square-foot Quality Integration Center, which has tested and configured more than 10,000 complete systems each month. Finally, MicroAge, as one of only four suppliers chosen to participate in IBMs Electronic Purchasing Service Program, has expected to derive much of its future business through electronic linkages with its customers. With its balance sheet as strong as it has ever been, the company claims to be in a favorable position to navigate the next wave of the Information Age and add to its streak of profitability along the way.

Principal Subsidiaries

MicroAge Computer Centers, Inc. (MCCI); MicroAge Infosystems Services, Inc. (MIS); MicroAge Solutions, Inc. (MAC).

Principal Divisions

MicroAge Channel Services (MCS); MicroAge Computer Centers (MCC); MicroAge Data Services (MDS); MicroAge Logistics Services (MLS); MicroAge Technologies (MAT).

Further Reading

Amst, Catherine, Joseph Weber, and Kathy Rebello, A Surprise Lift for Computer Retailers, Business Week, October 19, 1992, pp.6364.

Brokaw, Leslie, Flexible Fliers, Inc., December 1995, pp. 8285.

Faletra, Robert, MicroAge Replacing Royalty Plan with Cost-Pius Franchise Program, PC Week, June 12, 1989, p. 74.

, PC Service from Third Parties Is on the Rise, PC Week, November 13, 1989, p. S19.

Fisher, Susan E., Reseller Outlook Remains Gloomy, PC Week, October 21, 1991, p. 243.

Humphrey, Charles, MicroAges Apple Affiliates Program Changes All the Rules, PC Week, April 17, 1989, p. 92.

Kuzela, Lad, Alan Hald Mixes Dreams, Reality, Industry Week, March 31, 1986, p. 84.

Littman, Jonathan, MicroAge Wires Store to Demonstrate LANs, Other Multiuse Systems, PC Week, July 16 1985, p. 112.

Loge, Peter, Halds Vision Kicked Off MicroAge, The Business Journal-Serving Phoenix & the Valley of the Sun, June 16, 1995, p. 18.

Luebke, Cathy, MicroAges Jeffrey McKeever Thrives on Role as Innovator, The Business Journal-Serving Phoenix & the Valley of the Sun, May 6, 1991, pp. 2829.

Whitmore, Sam, MicroAge to Broadcast PC-Related TV Shows in Retail-Chain Stores, PC Week, September 10, 1985, pp. 13940.

Jason Gallman