Dell founder sees industry shakeout
ahead
By Ken Popovich, eWEEK
January 22, 2001 5:38 PM ET
Dell Computer Corp. vowed today to remain on the
offensive in an ongoing PC price war, sacrificing profits
in a bid to gain market share -- a strategy that the
company's founder admitted could ultimately kill off a
competitor.
"I think that there will certainly be some consolidation
and competitive shakeout," Michael Dell said today in a
conference call with analysts after the computer maker
warned that its fourth-quarter earnings would fall short of
projections.
Dell's prediction is similar to one issued earlier this
month by Bear Stearns analyst Andy Neff.
"This is an industry which needs consolidation. There's
over-capacity, somebody has to leave," Neff said at the
time. "I think that two of the top 10 PC makers will exit
the market this year."
Although Dell's aggressive low-price strategy has
pushed gross profit margins below traditional levels,
Michael Dell contended that current "profitability levels
are quite respectable."
Too focused on market share?
But some market analysts criticized Dell's actions as
risky, saying that lowball pricing could do more harm
than good.
"I've got to question the merits of its aggressive pricing
stance," said Rob Cihra, a market analyst with ING
Barings in New York. "I think that they are being too
focused on market share and not on the broader
picture."
While Dell said it has won over new customers through
its aggressive pricing, Cihra said the strategy can
potentially undermine profits throughout the PC
industry.
"It hurts everybody," he said. "It remains to be seen
whether just gaining share through lower pricing and
profit margins is really a smart strategy."
Although Dell executives didn't release specific financial
figures today, they said that their profit margin have
recently fallen 3 percentage points. Cihra said that
probably brings Dell's profit margins down to about 18
percent, well below the 21.3 percent the company
recorded the previous quarter.
Others admittedly were caught off guard by Dell's
admission that it is making less money overall on the
products it sells.
"Like everybody else, we were expecting a revenue and
earnings miss ... but I definitely didn't expect margins
to take as big a hit as they did," said Richard Chu with
S.G. Cowen in Boston. "I'm concerned that it is more
than a temporary drop."
Chu said he didn't understand why Dell needed to
sacrifice profits to remain price-competitive, especially
since the company's direct-order business model has
been touted as being more efficient than its
competitors, enabling Dell to offer lower-cost systems
in the first place.
"Their model should allow them to cut prices and gain
market share without giving up margins, particularly in a
market where component costs are coming down and
competitors have channel inventories," he said.
A 'challenging environment'
Dell's founder agreed that several of the company's
competitors are struggling to rid themselves of unsold
computers, the result of an unexpected drop in
consumer demand during the normally strong holiday
season.
"The largely indirect-based competitors will be faced
with quite a challenging environment going into the first
half of the year with an excess of inventory -- and
perhaps the wrong kind of inventory," Dell said, noting
that PC makers may have trouble selling older Pentium
III-based systems now that newer Pentium 4 PCs are
available.
"We think it gives us a great landscape with which to
continue the strategy we're on," he said.
Dell's earnings warning follows a recent spate of
cautions issued since Thanksgiving, when Gateway Inc.
first disclosed that a dramatic drop in year-over-year PC
sales would result in a revenue shortfall.
Two weeks ago, the San Diego-based computer maker
reported fourth-quarter earnings well below projections
and announced a series of cost-cutting moves,
including plans to lay off more than 3,000 employees.
On Tuesday, Compaq Computer Corp. will release its
earnings after the stock market closes. The company
warned investors in December to expect lower profits
due to sluggish PC sales and a worsening global
economy. |
