Rudedog-
(Don't know if this is what you and Chuzz were referring to, but I am going to post anyway, and would like your opinion...)
From the Wall Street Journal, 7/14/98
"Compaq says cheaper PCs Profits Rise"
<<Compaq Computer Corp. said its cheapest computer is now its most profitable consumer personal computer, a surprising change in an industry where low prices have long been associated with slim profits.
Accelerating sales and a sharp drop in costs pushed the margin on Compaq's $899 computer, which is also its biggest seller, above its more expensive consumer PCs, said Rod Schrock, vice president of Compaq's consumer division. The big misconception is we make a lower margin in the sub-$1000 market, Mr. Schrock said. For the consumer business, those are the most profitable desktops....
...Mr. Schrock wouldn't be more specific about consumer profits, but said the low-cost system took off this spring as huge sales and tight inventory controls allowed the Houston-based Compaq to spend less on price guarantees to stores. If the price of a model falls after Compaq has shipped it to a store, Compaq pays the stores the difference in price.
In addition, Compaq benefits when component prices fall faster than selling prices, as they recently have. Mr. Schrock said Compaq is paying 42% less for home PC components now than it was a year ago. But the average selling price for a store-bought PC is down 18%, according to ZD Market Intelligence, a La Jolla, Calif., market-research firm.>>
I guess this article could launch quite a few different discussion points, but what strikes me is the reinforcement this article gives, if true, to something MD (and most Dellheads on the thread) have always stated: ASP's are irrelevant to making money, or maximizing profit! What is relevant is (1) that the price paid for components inside the box you're selling (and the box itself) are falling at a faster rate than the overall price cut(s) of the unit (2) that a computer maker needs to pay as little price protection as possible to a third party distributor (Compaq, supposedly with the sub-1000 last quarter) or even better, no price protection to a third-party (Dell), (3) Inventory control needs to be tight as possible...(4) Production should equal out of channel sales, (or sales to the end-user)
Dell's model is clearly superior in these four points....According to this article, Compaq made money on the sub-1000 line because they better executed these four key points (although not as well as Dell does on a daily basis WITH all product lines)....Maybe the investment world should listen a little more to Tom Meredith when he states that falling ASP's are nothing to fear..........the important things are the 4 aforementioned points....get those right, and you will make a little, or some money (Compaq) or a lot of money (Dell) depending on how best your model answers these 4 points......The "so-called" computer analysts need to get off the emphasis on ASPs (without this other data).....It clearly wrong, and, yes, even deceptive to correlate falling ASP with profitability for ALL players in the industry......the problem is not falling ASPs, the problem is their (computer industry players') models (and the execution thereof)..
One question for you: I read recently where IBM is hyping that they are going to "all-out" attack Dell in the corporate space concerning the TCO argument...that their salespeople have not done a good enuff job in showing where IBM is a better value in the long-run.....
(To me this sounds like a sorry PR attempt: if IBM had had a TCO advantage, their sales reps would have figured it out by now, and would have pushed it in their sales pitchs..given their livelihood depends on winning sales....I find it hard to believe that someone in the organization woke up one day and realized, "wow, we have this TCO advantage, but we don't tell our customers")
What possible truth (or angle) could IBM be getting at here? Any ideas? |
