Computer 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 and Finance Foundation. 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. After the economic downturn of the early-2000s, the leasing industry began to rise again, as companies rediscovered the advantages of leasing equipment.

According to a Dun & Bradstreet Market Solutions report, there were 1,208 establishments engaged in computer renting and leasing in 2008. Combined, they employed 9,932 people. Equipment leasing industry revenues totaled 2.1 billion in 2008. Computer rental and leasing employed 82 percent of workers and generated 85 percent ($1.79 billion) of industry revenues. The remainder of the industry was made up of computer hardware rental or leasing and computer peripheral equipment rental and leasing.

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, 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 earned smaller margins when the prices were low. The key to survival for these rental firms was 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 and Finance Association of America (ELFA). ITRA was formed in 1998 by the merger 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.

The ELFA, which was organized in 1961, helped introduce information-sharing among its members. As a nonprofit trade association, ELFA worked with Dun & Bradstreet to create a database with credit histories of lessees while also tracking industry statistics and creating educational programs for members. ELFA is a nonprofit organization headquartered in Arlington, Virginia, representing more than 800 member companies that 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, while 30 percent 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 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 10 years.

Leasing made sense for many businesses partially because lease payments were fully deductible for tax purposes, while sales taxes and interest payments made when purchasing equipment were not deductible. In 1986, the Tax Reform Act removed the investment tax credit while stretching out depreciation schedules. However, 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.

The equipment leasing industry continued 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 was growing. Although the cost of computing equipment continued to fall, the issues of maintenance and support were significant, and lessors were 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 predicted that more than $6 billion worth would 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.

The straight math for leasing PCs did not necessarily make sense when compared to outright purchase or purchase on credit. With the decreased cost of purchase, the industry needed to continue to provide the extras of reliable support in order to maintain their markets. By the early 2000s, personal computers, as well as workstations, constituted the largest equipment leasing industry sector, with $9 billion in 2002, while mainframe and servers generated an estimated $7 billion. Although both industry sectors were affected by the sluggish economy, the leasing of mainframe and servers from the lack of executive spending were hardest hit.

Global Insight, Inc. tracks the economic and financial conditions of various industries. The company was commissioned by the ELFA and published The Economic Contribution of the Equipment Leasing Industry to the U.S. Economy. This study, released in 2004, found that from 1997 to 2002, information technology (IT) equipment leases contributed $122 billion to new job growth and the U.S. economy. In fact, the study also cited that the IT represented the largest economic contributor within the equipment leasing sector. The same company released another study in 2005, which reported that equipment leasing accounted for between $75 billion and $315 billion in GDP each year between 1997 and 2004, in addition to the creation of millions of jobs. The total market was valued at $220 billion in 2004.

According to R.S. Carmich & Co., a marketing research and management firm, the average annual growth rate from 1998 through 2002 for the IT industry was 1.5 percent. From 2003 through 2005 the average annual growth rate was estimated to climb 6.5 percent, or $28 billion. Dun &Bradstreet reported that the 915 establishments in the computer rental and leasing industry earned over $2 billion in 2006 revenue. All but 20 percent of U.S. companies leased equipment according to 2006 reports. That year, $229 billion was spent for equipment leasing, which allowed companies greater flexibility than purchasing equipment, and allowed for regular upgrades of costly and rapidly changing technology.

Current Conditions

While the industry remained stable through the mid-2000s, in 2008, the collapse of the subprime lending market, the weakening of many banks, and the resulting credit crunch led to uncertainty at best and upheaval at worst in the IT leasing sector. According to ELFA's 2008 annual industry report, one industry insider complained, "Two years ago we were awash in liquidity. Today, it is a desert." As evidence, credit approval ratios as a percentage of all decisions submitted (year over year comparison as tracked by ELFA) hovered around 65 percent in the first half of 2009. Comparatively, approval ratios were about 10 points higher during the first half of 2008, at approximately 75 percent, about 78 percent for the same percent in 2007, and above 80 percent for the first half of 2006.

Although the biggest players were expected to weather the storm, smaller firms or those with less access to financing for its customers were struggling through tough times during the late 2000s. ELFA warned, "Independent players lacking the track record and portfolio quality to obtain traditional bank credit may be forced to further deleverage their balance sheets, reducing their ability to drive either volume or returns. Unless funding opportunities improve, their long-term survival has to be in question." As a result, the industry was expected to contract even more by the end of the decade as all sectors slowed down and the weakest players left the marketplace or were absorbed by stronger firms.

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 pre-owned computer systems. Some also provided extra services, such as systems integration, installation, and maintenance.

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.

Most major computer manufacturers, such as Dell, Hewlett-Packard, and IBM, as well as some large conglomerates such as GE Electric also dealt in leasing and remarketing. For example, Armonk, New York-based IBM Corp., with $103.6 billion in 2008 revenues, has a financing division, IBM Global Financing, that deals internationally in computer leasing and financing. IBM Global Financing serves over 125,000 customers in over 40 countries. HP Financial Services is Hewlett Packard's leasing division, and General Electric operates its leasing activities through GE Commercial Finance.

Workforce

The companies in the computer rental and leasing industry had a combined total of 9,900 employees in 2008. The total number of employees in the industry continued a downward spiral during the first half of 2009 as the industry continued to contract.

Changes in state and federal tax codes affected salespeople in the rental and leasing business, who need 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.

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 was also a driving force in the need for current computing power, though much of this technological need was being outsourced by smaller companies who contracted for Web hosting and online shopping cart services rather than maintaining the hardware and software in-house. However, these Web-based services, which are often offered business to business, required companies to update employee desktop computers to support the client software needed for access.

Service on computers and peripherals was done increasingly by remote, 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.

As computer technology continued to evolve, data security remained a concern. Leasing companies were faced with the liability associated with recycling leased equipment. All information from the previous lessee had to be completely erased from the hard drive--not just reformatted--or easily available information restoration programs could tap into sensitive data that remained on the computer, such as bank account information and social security numbers.