Dell puts profit first by ending IRS deal
Does move signal end of PC giant's price war? Not likely, experts say
By John Pletz
AMERICAN-STATESMAN STAFF
Monday, August 12, 2002
For nearly two years, Dell Computer Corp. has been on a search-and-destroy mission to cripple its competitors and grab as much market share as possible in the personal-computer business.
Dell slashed prices and dared competitors to follow, knowing they would lose money if they did. Some wondered whether Dell was going for market share at any cost.
Apparently it isn't.
A few months ago, Dell drew the line on a bid it successfully made to the Internal Revenue Service in May 2001. After selling about 41,000 desktop and notebook computers to the agency, Dell walked away in April from an order for another 23,000 machines. Dell said it no longer could make money at the prices it bid -- $850 for desktops and $1,475 for laptops.
Reseller PlanetGov Inc. now has turned to Hewlett-Packard Co. to fulfill the rest of the IRS order. H-P said last week it will provide 23,000 computers for about $35 million.
Not surprisingly, Dell and H-P offer different versions of what happened.
Dell said it signed on for an initial order to supply 27,000 machines, with an option for another 17,000 machines. It took that option but walked away from another extension for the remaining 23,000, spokeswoman Amy King said.
H-P and PlanetGov, however, paint a different picture, saying Dell committed up front to provide all of the more than 60,000 machines and then backed out.
The IRS declined to comment.
"Under this scenario, the cost structure . . . was too much for (Dell) to withstand," said Brian Nightingale, a senior vice president for PlanetGov, which is based in Chantilly, Va. "They made the bid at a time when Dell was more interested in the revenue side than the profitability side. Now they're looking more toward profits. To Dell's credit, they did fulfill over 41,000 units at that aggressive price . . . but they made a conscious decision to say we can't do it anymore."
That could be a good sign for investors who have questioned whether Dell has been willing to sacrifice too much revenue and profit for increased market share.
There are hints of improvement. Dell will report strong earnings Thursday at a time when many computer companies, including IBM Corp., Intel Corp. and Advanced Micro Devices Inc., have posted weaker-than-expected results. Dell announced last month that its second-quarter profits would be 19 cents a share, a penny better than it had forecast.
Andrew Scott, an analyst at Needham & Co., however, said the IRS deal is more likely an isolated situation than a sign of a truce in the price war.
"They don't seem to be easing up on price at all," he said.
The question is how H-P, which spends 25 percent of its revenue on operating expenses, compared with 10 percent for Dell, will make money where Dell could not. H-P said it wouldn't lose money on the deal but won't discuss specifics. The company couldn't say enough, however, about how badly it wanted the IRS as a customer.
"The IRS is a substantial user of information technology and one of the largest government agencies," said spokesman Pat Gallagher. "It's an agency we've worked very hard to cultivate. But we're not going to do (a deal) at the expense of losing money in the business. This was not done for bragging rights."
Dell said the deal was just one of many pieces of business with the IRS, and it will continue to supply the agency with computer equipment.
"We have done business with the IRS for a long time, and we'll continue to do business with them," King said.
jpletz@statesman.com; 445-3601 |
