SNS in the News - January 14, 2002

Take no prisoners

Paul Andrews
14 January 2002
U.S. News & World Report

Greg and Sarah Kaplan, a young San Francisco professional couple, ought to be Dell Computer's kind of folks. Their Pentium 100 cannot run the latest upgrades of many Windows programs, let alone handle digital music and video. Both employed--he a bond portfolio manager, she an architect--they have had an upgrade budgeted for some time.

Yet something keeps holding them back. Nothing new in the PC world grabs their imagination: "The last time we used it much was to look for an apartment online," says Greg. Both are intensive PC users at work, but "the last thing either one of us wants to do when we get home is sit in front of a computer," adds Sarah.

For Dell Computer, and the PC industry in general, the Kaplans symbolize both the opportunity and the challenge for 2002. The $32 billion Round Rock, Texas, direct-sales giant estimates that 164 million PCs worldwide are now three or more years old. The industry leader with 14 percent global and 25 percent U.S. market share, Dell speaks buoyantly of pent-up demand. But the PC business is just emerging from its worst slump ever, with a 12 percent drop in third-quarter sales contributing to its first year-to-year sales drop since the antediluvian 1986.

Pinching pennies. While the carnage has left Dell as the only manufacturer turning a profit, its revenue is being pinched by sagging PC prices--down an average of $50 per unit in the third quarter of 2001 alone. Even optimistic analysts are pushing out rebound forecasts to 2003. "Companies are holding on to their PCs longer," says Gartner analyst Mark Margevicius. "We now expect a replenishment cycle every four years, instead of two to three."

What's wrong? Some point to saturation--PCs are in every sector of business and in 2 of every 3 U.S. homes, some of which have multiple machines. Others say the Internet has taken the steam out of software upgrades. To hold market share, and indeed to grab it while rivals struggle to stay afloat, Dell has slashed prices to the point of reducing profits. CEO Michael Dell talks of reaching 40 percent market share, largely at the expense of competitors like Gateway, Hewlett-Packard, and Compaq.

The take-no-prisoners strategy is being waged on several fronts:

Consumer PCs. With a base price of $599, the SmartStep 100D aims to compete with retail-chain sellers and boost Dell's consumer sales, which account for just 15 percent of its revenue.

Laptops. Once a weak sister to desktop sales, Dell's notebook shipments jumped 18 percent in the third quarter--compared with an industry drop of 6 percent--bringing its worldwide market share to over 15 percent for the first time. Dell shrewdly foresaw portables replacing desktops for big business customers. One added potential benefit is that laptops often need more frequent replacement than desktops because they wear out faster.

Enterprise services. Perhaps most significant, Dell is becoming a "soup to nuts" corporate provider of all-important back-end network servers, data storage, and support, an arena dominated by IBM, Sun Microsystems, and others. Aiming to be "the one throat to choke," as Gartner's Margevicius puts it, Dell may start selling computers via a monthly subscription service that includes automatic support and replacement.

Monopoly. Dell's relentless low-balling may eventually spell doom for competitors Gateway and Compaq, whose merger with Hewlett-Packard looks increasingly shaky. "A lot of people fear a Dell monopoly," says Margevicius. Among them: mighty Microsoft, which would see its ability to negotiate manufacturer software deals threatened by a single dominant vendor. "Michael's 40 percent scares me," said one Microsoft insider on condition of anonymity.

Although aggressive, Dell's strategy is far from a lock to succeed. Corporate players like IBM, which Dell partners with to provide support services--posing an inevitable channel conflict--have the resources to battle Dell and are more-trusted names in the field. Cost-paring layoffs of 4,000 workers in recent months may hinder Dell's service reputation, which was found wanting in a PC World survey of 27,000 readers.

And Dell's storied focus on traditional PC boxes may leave the company vulnerable to market shifts, especially the one to hand-held and portable devices. So far Dell has shown no interest in competing in this arena. "The market just isn't there yet," says a Dell spokesperson.

The bigger question may be whether Dell can lead the PC market back to a semblance of its glory days in the '90s. Some doubt Dell is creative enough to think "outside the box" and leverage PC technology with emerging entertainment, voice, and video applications.

To recapture the growth rates of yesteryear, PC makers may need to challenge TV and telephone markets with clever design and content partnerships that go far beyond Dell's "cheaper, faster" approach of the past. "Dell is either unwilling or unable to play a role in the design of the personal computer," says Strategic News Service publisher Mark Anderson. "It's just not in the company's DNA."

For now, though, Dell is happy picking off as many PC buyers as possible. By spring, the Kaplans expect to upgrade, partly so their home PC is compatible with their workplace computers. "There are just too many things our PC can't do anymore," says Greg. As for replacing their aging Gateway, he notes, "the top of our short list is Dell."