For many years, I recommended that small businesses always
buy the maximum extended warranty coverage with the purchase of a new
desktop PC, notebook, or server.
However, much has recently changed in the PC hardware
business. As a result, extended warranty coverage doesn't always make
financial sense. In this installment of Money-Saving Techniques, we'll
look at when to buy the extended warranty and when to consider
"self insuring".
For the purpose of this article, I looked at the cost of
upgrading from the included warranty to a basic 3-year on-site parts and
labor warranty.
My survey covered fully configured entry-level small
business desktop PCs, notebooks, and servers from three major PC
hardware vendors: Compaq, Dell, and Gateway. I gathered this information
from vendor web sites for U.S. small businesses. Prices were current as
of September 22, 2001.
Desktop PCs
Compaq
Dell
Gateway
Analysis
Let's assume each desktop PC drops in
"value" by 50% during the first year and then by 25% during
the second year.
So the Compaq PC, which you paid $959 U.S. for, will
be "worth" about $479 U.S. at the end of year one and about
$359 U.S. at the end of year two. So the "average" year
two/year three value is roughly $419 U.S.
Now is it "worth" $69 U.S. to protect a $419
U.S. asset? While 16% isn't a high percentage for this
"insurance", you need to consider the potential exposure.
The two most expensive items with most desktop PCs are
the hard drive and monitor. A high-end Intel Pentium processor can be much
pricier, but a processor rarely fails under normal operating
conditions. And most small businesses should be purchasing PCs
with relatively inexpensive processors, such as the Intel Celeron
900Mhz.
Purchasing either an entry-level 10GB or 20GB hard
drive, or a 17" monitor, on your own would cost around $125 U.S.
to $150 U.S. at retail stores. But again, that's purchasing a new
hard drive, or a new monitor. Most warranty coverage provides a
refurbished unit as the replacement part
Even so, you're really paying $69 U.S. to guard
against a $125 U.S. to $150 U.S. expense. It's highly unlikely that
both the hard drive and monitor would fail on a single desktop
PC during a 3-year period, especially if you have a fleet of 10 to 20
PCs or more. So, unless you're extremely risk adverse, save the
money and self-insure.
Compaq has the least expensive price for extending the
on-site warranty to three years. Dell charges $99 U.S. and Gateway
charges $119 U.S. This can be a fabulous profit center for the PC
vendors, but in most cases doesn't make small business sense for you!
Notebooks
Compaq
-
Evo notebook N150 w/ Mobile Intel Pentium III
processor 800MHz, 14"TFT -- $1,649 U.S.
-
Cost to upgrade to 3-year parts/labor (return to
depot) -- $99 U.S.
|
Note: This is the only product discussed in
this article that doesn't offer included or optional "on
site" coverage. |
Dell
-
Latitude C500 w/ Celeron Processor, 800MHz with
14.1in XGA Display (promotion includes free Palm m100 PDA) --
$1,745 U.S.
-
Cost to upgrade to 3-year parts/labor (on-site)
-- $298 U.S.
Gateway
-
Solo 5300 LS 2000 Deluxe w/ Celeron Processor,
800MHz with 14.1in XGA Display -- $1,802 U.S.
-
Cost to upgrade to 3-year parts/labor (on-site)
-- $109 U.S.
Analysis
With desktop PCs, inexpensive replacement components
are usually easy to buy and install.
However, with notebook computers, you have to contend
with highly specialized, expensive components.
So even if you assume that the notebook PC drops 50%
in value during the first year of ownership, and then another 25%
during the second year, the marginal cost analysis is quite different.
Consider the $298 U.S. Dell Latitude warranty upgrade.
While the cost of the warranty upgrade may be steep, the originally
purchased $1,745 U.S. notebook holds roughly an $872 U.S. value at the
end of year one, and a $654 U.S. value at the end of year two. So your
average cost of ownership for years two and three is around $763 U.S.
Now if you look at $298 U.S. for the warranty upgrade,
compared to $763 U.S. for the average year two/year three value, you
might fall out of your chair to see a 39% cost for the
"insurance".
However, the two most common notebook components that
may fail, a hard drive or an LCD panel, can be very difficult
to locate as replacement parts and pose some rather complex
replacement procedures for the uninitiated.
In addition, an out of warranty replacement estimate
for either of these two components could easily be more than
the value of the notebook.
So, if you have to incur an out of warranty repair on
a relatively new notebook, you'll be confronted with a cost estimate
bearing striking resemblance to extortion. And you'll need to decide
whether you want to resurrect the relatively new asset or resign
yourself to owning an 800Mhz paperweight.
Also, don't forget that notebooks get a lot more abuse
than desktop PCs. Even the most steadfastly meticulous road warrior
gives any notebook a real workout when running through train stations,
airports, and taxi queues.
So because of the high costs and difficulty of
locating replacement components, as well as the inherent
"jostling" of the device, adding extended warranty coverage
on notebook computers makes small business sense.
Servers
Compaq
-
ProLiant ML330 Intel Pentium 933/133, 18GBx2
(RAID1), DDS-4 Tape Drive -- $3,798 U.S.
-
Cost to upgrade to 3-year parts/labor on-site
warranty - $0 U.S.
Dell
-
PowerEdge 1400SC, Intel Pentium III 933MHZ, 18GBx2
(RAID1), DDS-4 Tape Drive --$2,739 U.S.
-
Cost to upgrade to 3-year parts/labor on-site
warranty - $0 U.S.
Gateway
-
7400 Server, Intel Pentium III 933MHZ, 18GBx2
(RAID1), DDS-4 Tape Drive -- $3,627
-
Cost to upgrade to 3-year parts/labor on-site
warranty - $0 U.S.
Analysis
The entry-level fully configured small business
workgroup servers from Compaq, Dell, and Gateway all include a 3-year
parts and labor warranty. As a result, there's really no decision to
make about extending the warranty.
If you did not have this warranty coverage, you
should be aware that both DDS-4 tape drives and RAID hard drive
controllers can easily each run $500 U.S. to $1,000 U.S. or
more.
In addition, because tape drives tend to be one of the
few components on a LAN with moving parts, and an unsealed casing,
tape drive replacements are a very common warranty service
item.
A few years ago, before hardware prices had dropped so
rapidly, it still made sense to purchase 3-year warranty options across
the board on desktop PCs, notebooks, and servers.
However, because of rapid price declines in desktop PCs
and related components, it rarely makes sense to pay extra for extended
warranties on entry-level small business class desktop PCs.
Notebooks are a whole different ball game. In addition
to getting a lot more wear and tear, notebooks have two components, hard
drives and LCD screens, that often fail and which can be both expensive
and difficult to replace, if not covered by a manufacturer's warranty.
With fully configured entry-level workgroup servers for
small businesses, there really is no decision to make regarding warranty
upgrades. Compaq, Dell, and Gateway all include a standard 3-year parts
and labor on-site warranty.
