SIC 7377
COMPUTER RENTAL AND LEASING



This industry consists of establishments primarily engaged in renting or leasing computers and related data processing equipment on the customers' site, whether or not also providing maintenance or support services. This industry does not include establishments engaged in both manufacturing and leasing computers and related data processing equipment. Establishments primarily engaged in finance leasing of computers and related data processing equipment are classified in SIC 6159: Miscellaneous Business Credit Institutions. Establishments primarily engaged in leasing computer time are classified in SIC 7374: Computer Processing and Data Preparation and Processing Services.

NAICS Code(s)

532420 (Office Machinery and Equipment Rental and Leasing)

Industry Snapshot

Companies in this industry bought, sold, and leased new and used high-technology equipment. These companies included maintenance companies, refurbishment/reconfiguration firms, transportation companies, financial institutions, original-equipment-manufacturer (OEM) finance companies, software distributors, and industry consultants.

The success of computer rental and leasing companies evolved from the strong urge among U.S. industries to remain on the cutting edge of technology. While many companies wanted to upgrade their computer equipment, few were ready to invest the necessary money up front, and many decided instead to turn to rental and leasing companies. By leasing equipment, companies could experiment with new computers and peripherals, upgrading as they felt necessary.

Sales volume in the computer leasing and remarketing industry was between $15 billion and $25 billion annually in the early 1990s. By the late 1990s, equipment leasing had grown to a $183 billion industry, according to the Equipment Leasing Association. The second half of the 1990s proved to be a profitable environment for the computer leasing industry, despite dramatically reduced purchase prices of new computers. Some computer leasing companies responded by adding services to their leases, such as computer maintenance and insurance.

Organization and Structure

The two main types of leases used in the industry were finance leases and operating leases. In direct finance leases, which were excluded from this industry classification, the lessor provided the financing. In leveraged leases, other investors provided debt financing. Operating leases were considered the best option for companies trying to avoid depreciation deductions. In an operating lease, the lessor owned the equipment and took the depreciation, so the user incurred no liability. The cost of leasing was considered an expense on a company's income statement but did not show up on its balance sheet. There were four typical lessors: banks, captives (usually manufacturers' subsidiaries), independents, and financial services organizations.

Other kinds of leases included the purchase option lease, in which a business owned the equipment but did not carry the balance-sheet debt; the sale-leaseback, in which a company sold its own computer equipment to a lessor to remove it from the balance sheet and then leased it back; and the dollar-out lease, in which the business could acquire the equipment at the end of the lease for one dollar. In some cases the purchase price was determined at the end of the lease based on the fair market value of the equipment at that time, and in other cases the price was determined at the lease negotiation.

Computer rental and leasing companies selected their clients carefully. They considered credit ratings, as well as the type of company they were dealing with, before structuring the lease. Some lessors required several payments up front. Others took their first payment upon delivery of the equipment. They also offered various levels of service that accompanied the lease. The industry is tied to the client's ability to obtain credit approval and money lending institutions' willingness to fund computer leases. This ability fluctuates with the economy.

Rentals were attractive to corporate buyers who were not ready to commit to a purchase or a long-term lease while personal computer (PC) prices were falling. On the other hand, rental rates needed to reflect the cost of PCs, and rental firms suffer smaller margins when the prices are low. The key to survival for theses rental firms is service. Many offer delivery, installation, and maintenance along with the rental.

Some companies rented or leased computers until they decided what kind to buy. Others rented or leased in order to save enough money to buy equipment. Still others used rental or leasing as a way to upgrade their existing computer systems without the immediate output of money. Monthly payments for leased equipment were usually lower than monthly payments on loans taken out to buy computer equipment.

With high-tech equipment, companies kept an eye on evolving technology by leasing computers and trading up when they were ready for the latest development. The drawback of leasing was that it cost more in the long run and did not provide companies with ownership of new computer equipment. Vying for customers, companies in the computer leasing and rental industry approached the twenty-first century with attractive rates as well as promises of service and support.

Two associations of companies involved in the U.S. computer leasing industry were the Information Technology Resellers Association (ITRA) and the Equipment Leasing Association of America (ELA). ITRA was formed in 1998 by the merging of the Computer Dealers and Lessors Association (CDLA) and the Digital Dealers Association (DDA). The CDLA was created in 1981 from the Association and the Computer Dealers Association. The member companies signed a Code of Ethics that was backed up by a standing committee formed in 1974. ITRA advertised on behalf of its member companies, emphasizing their flexibility, concern with ethics, and ability to save clients money.

ELA, which was organized in 1961, helped introduce information-sharing among its members. As a nonprofit trade association, ELA worked with Dun & Bradstreet to create a database with credit histories of lessees while also tracking industry statistics and creating educational programs for members. ELA is a nonprofit organization headquartered in Arlington, Virginia, representing more than 800 member companies, which provide a variety of asset-based financial products, primarily equipment leasing.

Background and Development

Rental and leasing had a continuous history from ancient times through the present. In the 1980s, leasing grew twice as fast as business. According to a CDLA survey conducted in late 1994, 70 percent of computers and peripherals were leased versus 30 percent which were purchased. These included desktop computers, large and small servers, and telephone systems.

The rapid rise of technology after World War II caught many businesses unprepared. In 1956, after the U.S. Justice Department decided a complaint against IBM, a Consent Decree paved the way for companies to purchase IBM machines that would be leased to users. IBM had previously rented its own equipment to businesses and received the equipment back at the end of the rental term, which prevented a secondary market from developing. The Consent Decree was still in effect in the 1990s, and it offered maintenance to IBM owners, replacement parts, and training for independent companies.

Equipment leasing and remarketing reported industry-wide volumes of $138 billion in 1998. As a rule, the computer rental and leasing industry was strongest when the computer industry was healthy and strong. When the economy suffered, so did this industry. Like the retail computer industry, the rental industry went through a period of consolidation. Some smaller leasing companies specialized in particular products, services, and support, marketing themselves as being knowledgeable and quick. Some offered special equipment for their customers.

In 1992, computers replaced aircraft as the most frequently leased item in the United States. According to Equipment Leasing magazine, total new business for the second quarter of 1999 was $7.2 billion, up 4.3 percent from the previous year. Computer leasing companies either leased their merchandise directly or arranged the lease and provided some or all of the financing. Many different lease terms were offered, although most customers chose three-to five-year leases for computers, computer peripherals, and related equipment. By comparison, furniture was often leased for as long as ten years.

Leasing made sense for many businesses partially because lease payments were fully deductible for tax purposes, and sales taxes and interest payments used when purchasing equipment were not deductible. In 1986, the Tax Reform Act removed the investment tax credit while stretching out depreciation schedules. But companies unable to use their depreciation were able to transfer tax benefits to lessors in exchange for reduced equipment costs. For tax purposes, leases were required to be short enough so that 20 percent of the estimated useful life of the equipment remained after the lease term. Options to buy the equipment at the end of the lease were required to specify how the price would be determined after the lease was over.

Current Conditions

The equipment leasing industry is continuing to enjoy growth into the twenty-first century. With the growth of e-commerce and e-tailing, the need for current technologies in the workplace is growing. Although the cost of computing equipment continues to fall, the issues of maintenance and support are significant, and lessors are often bundling training, software, maintenance and support into their contracts to make leasing more attractive. A Gartner Group study quoted in Information Week stated that $4 billion in desktop PCs were leased in 1998 and predicts more than $6 billion worth will be leased in 2002.

In the mid to late 1990s, computer equipment manufacturers and computer leasing and remarketing firms had a symbiotic relationship. By working together, each tried to maximize its success, but the first step to a successful relationship was for manufacturers to develop policies and practices that permit and maintain healthy secondary markets in their equipment. ITRA (previously the CDLA) played the role of watchdog to ensure that the computer leasing and remarketing industry had a strong, unified voice through effective working relationships with major manufacturers of computer and telecommunications equipment.

Industry relations between computer equipment manufacturers and computer leasing and remarketing firms evolved with the industry, according to ITRA. As the companies focused on a greater diversity of equipment, they also established working relationships with a number of manufacturers. Independent computer dealers and lessors provided a valuable service to the end user and a steady source of additional sales and maintenance revenue for the manufacturer.

Roberta Furger, in a 1998 article in PC World , suggested that the straight math for leasing PCs didn't make sense when compared to outright purchase or purchase on credit. With the decreased cost of purchase, the industry may well need to continue to provide the extras of reliable support in order to maintain their markets.

Industry Leaders

Many of the industry's firms were small and operated by entrepreneurs, while a handful of larger firms dealt in equipment leasing worldwide. Most leased both new and used computer equipment and remarketed preowned computer systems. Some also provided extra services, such as systems integration, installation, and maintenance.

Most major computer manufacturers, such as Dell, Hewlett-Packard, and Compaq, also dealt in leasing and remarketing. However, since those companies were also engaged in manufacturing, they were classified separately.

Comdisco, Inc., formerly a computer leasing leader with revenues of $4.159 billion, was the largest company in the industry in the mid 1990s. In 1999, Comdisco restructured and sold its mainframe leasing to IBM. Comdisco is now focusing on providing high tech e-services to corporations.

Larger lessors were able to create leases that included computer equipment as well as other supplies, while specialty lessors were able to help their clients choose appropriate equipment by suggesting such options as combining new and used equipment to save money.

IBM Corp., based in Armonk, New York, with 1999 sales of over $87 billion, has a financing division, IBM Global Financing, that deals internationally in computer leasing and financing. Symix Systems, Inc., based in Columbus, Ohio, recently partnered with IBM Global Financing and EAB Leasing Corporation's Softech Financial division to offer a comprehensive technology leasing program, according to a September, 1999, Symix press release.

Other industry leaders included General Electric Capitol Information Technology Solutions, located in Stamford, Connecticut; El Camino Resources International, located in Woodland Hills, California, with 1999 sales of $668 million; GENICOM Corporation, located in Chantilly, Virginia, with 1998 sales of over $452 million; and Leasing Solutions, Inc., located in San Jose, California, with 1998 sales of nearly $300 million.

Workforce

The major companies in the computer rental and leasing industry had a combined total of 9,647 employees in 1997. The total payroll for the 972 establishments doing business in the industry was $604 million, according to the U.S. Census County Business Patterns. In a 1999 article in Equipment Leasing , it was indicated that the total number of employees in the industry is leveling off after several years of growth, most likely due to an increase in acquisitions and mergers which have consolidated the work force.

Changes in state and federal tax codes affected sales-people in the rental and leasing business. They needed to understand the tax implications of their leases for potential customers. Customers served by this industry were also more knowledgeable about the equipment itself and looked for rental and leasing companies that offered equipment plus several lease options and a high level of service.

America and the World

The U.S. market for rental and leasing of computer equipment was quite self-sufficient. While few of the leasing companies not affiliated with computer manufacturers had a large presence overseas, there was very little competition from foreign firms. In fact, the only leasing business run by European or Asian companies came from several large banks. New business opportunities for U.S. firms in Canada and Mexico have also resulted from the passage of the North American Free Trade Agreement (NAFTA).

Research and Technology

The computer rental and leasing industry was vitally connected to technology, and only the companies that remained on top of the most recent trends and industry changes were successful. Automated reservation systems were used effectively by even the smallest computer leasing or rental companies to avoid delays or inventory problems for customers. Companies in the industry spent money and time developing protocols for leasing such technologies as Internet servers and parallel-processing mainframes.

The rapid growth of e-commerce is also a driving force in the need for current computing power, though much of this technological need is being outsourced by smaller companies who contract for web hosting and online shopping cart services rather than maintain the hardware and software in-house. However, these web based services, which are often offered business to business, are requiring companies to update employee desktop computers to support the client software needed for access.

Service on computers and peripherals is increasingly done remotely, via dial-in diagnostic tools, Internet connections, and automated web-based support centers. This type of troubleshooting service saves the lessor and the lessee the expense of sending someone out personally. As service becomes more central to the financial success of computer lessors, the prices of hardware and software continue to drop. Therefore, the lessors are also expected to lease lower-priced items more frequently.

Further Reading

"1994 Survey of the Computer Leasing & Remarketing Industry." Information Technology Resellers Association , 1999. Available from: http://www.itra.net .

Comdisco Company Web Page , 1999-2000. Available from: http://www.comdisco.com .

El Camino Resources International, Inc. Web Page. Available from: http://www.elcamino.com .

Equipment Leasing Association Web Page. 2000. Available from: http://www.elaonline.com/ .

Funger, Roberta. "Look Before You Lease". PC World . March 1998. V. 16, N.3 P 33-36.

GE Capital Information Technology Solutions Web Page. 2000. Available from: http://www.gecits.ge.com/ .

GENICOM Corporation Web Page. 2000. Available from: http//www.genicom.com .

"IBM to Fund E-Business Leases." Information Week , 13 December 1999, 34.

"Industry Overview." CDLA , April 1997.

Information Technology Resellers Association Web Page. 1999. Available from: http://www.itra.net/ .

International Business Machines Corporation Web Page. Available from: http://www.ibm.com .

Mclean, Bethany. "Comdisco: From Computer Leasing to Venture Capital." Fortune , 22 November 1999. V. 140, N. 10, P. 408-410.

"Mixed Results: Report Shows Rise in Portfolio Growth, Decline in Credit Approval." Equipment Leasing , October 1999. V. 18, N. 10, P. 5.

Muhammad, Tariq K. "Rent-a-server: the Latest Trend in Business Software." Black Enterprise , December 1999. V. 30, N. 5,P. 48.

"Symix Introduces Midmarket-Focused Leasing Program to Support Customers' E-Business, ERP Advancements." Symix press release, 29 September 1999. Available from: http://www.ibm.com/finance .

U.S. Department of Commerce. Census Bureau, 2000. County Business Patterns . Available from: http://tier2.census.gov/cbp/index.html-ssi .

"Who Are They, What They Do." CDLA , April 1997.



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