Islander, thanks very much for the information.
You quoted MD as follows:
we could do better than anyone in the sub 1k but profit is not in these units.
Very interesting. Among the top 5 firms, 4 entered this market and aren't making money, while the only one which didn't enter is the acknowledged efficiency champ, Dell. Hmmmm....
Last fall Jim Kelley contended the low-end market wasn't profitable. Events have proven him right. CPQ, HP and IBM are all losing money on their pc segments. They're subsidizing losses with profits from other segments. Each have admitted the losses, although they refuse to provide details concerning the $ amounts.
We know why CPQ and HP entered the sub zero market. Market share pure and simple. How IBM became drawn in isn't quite so clear. Anyway, what does this say about the competence and judgment of the managements of these firms? Each of them have rolled the dice big time to make $mm investments here. The assumption seems to be that if you target market share, profit will take care of itself. In most industries this isn't true. There is little evidence it's true here. Moreover, by creating a glut of product on the market, they have driven prices down to the point of shooting themselves in the foot. They've unwittingly made their normal, more remunerative segments less profitable. You really have to wonder if they did their homework.
In my opinion these 3 companies have blundered big time, and will eventually be forced to take write-offs on these investments. If Dell grows at 4 times the market rate, this is going to put tremendous pressure on prices in the high-margin segments. Anyone who understands the magic of compound growth can figure this out. This means lower returns for IBM, CPQ and HP in segments which at the moment are profitable. If they suffer reduced profits on servers and workstations, it will be interesting to see how much longer they continue subsidizing their misadventures in the low-end market. The prevailing assumption that the problems these 3 are encountering are only temporary is quite naive IMO
All just my very humble opinion.
Geoff |
