Computer Hardware Warranty Upgrades:
Are they still worth it?
By Joshua Feinberg

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

Deskpro EXS Intel Celeron 800/100MHz Desktop -- $959 U.S.

Cost to upgrade to 3-year parts/labor on-site warranty -- $69 U.S.

Dell

Dimension 2100 Series Intel Celeron Processor at 900 MHz -- $888 U.S.

Cost to upgrade to 3-year parts/labor on-site warranty -- $99 U.S.

Gateway

Professional V950c - $1,048 U.S.

Cost to upgrade to 3-year parts/labor on-site warranty --$199 U.S.

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.

The Bottom Line

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.

Copyright (C) 2001, KISTech Communications Corporation, Used by Permission

Joshua Feinberg is an internationally recognized small business technology expert, consultant, columnist, author, keynote speaker, and trainer. He is a published Microsoft Press author, as well as the creator of and two-year veteran writer of the Microsoft Direct Access "VAPVoice: Notes From the Field".
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