Re: Nice view from Motley Fool this eve
Look at Dell's (Nasdaq:DELL - news) announcement with IBM (NYSE:IBM - news) today. Part of the Dell story that is still intact is the expansion of the products the company manufactures. The richening of the company's product mix to include things other than PCs -- servers, workstations, and what now looks like even higher-level enterprise computing systems such as storage systems -- has accounted for its increasing returns to shareholders and its avoidance of some of the negative price inflation in plain vanilla PCs. So when you look at Dell or Gateway (NYSE:GTW - news) or Micron Electronics (Nasdaq:MUEI - news) , the direct PC manufacturers, there are the economics of being a precision manufacturer as well as the option to get into other product categories.
Another part of the economics of direct PC companies come from being the distribution and retailing channel. Compaq (NYSE:CPQ - news) might be a manufacturer, but it deals extensively with indirect distribution, acting as its own retailer/distributor for a tiny fraction of sales. Part of the value that the distributors and retailers have captured for themselves is captured in the economics of the direct PC companies. Gateway has enhanced its value by going after the bricks-and-mortar retailing model with its Gateway Country stores. With 75% of the PC market still buying computers that way, that's a pretty fat target. So this is where the company is seeing some attractive incremental returns, and this is where it's investing. Both Dell and Gateway are also going after the Web-based retail market for things other than PCs -- software, peripherals, accessories, and services. These are not trivial opportunities -- they are moves intended to capture market share from less efficient and less well-financed competitors.
For Dell, some of the excess returns come from being a service company in addition to being just a plain vanilla manufacturer. You might ascribe that to its "brand value," but its superb logistics support and delivery of customized boxes (taking the value from value-added resellers, or VARs) is what differentiates it and creates extra return. So when you look at a company like a Dell, it is part electronics manufacturer, part retailer, part distributor, and part value-added reseller. Micron wants to get there too. The more service it can put into its business, the more its business can look like Dell's. Then there's also the option to get into other market segments and richen the product mix and increase operating dollars on a capital base that is not expanding as rapidly.
Finally, because there are so many services being developed that are complementary to the PC, the PC product cycle won't just die off. High bandwidth programming, IP-based telephony, and new applications to present information and interact in dimensions that don't look anything like what happens on today's PCs are all attracting tons of financial and human capital to develop them. You're not going to run these things on a 1998 PC, let alone the huge installed base of 386 Wintel machines that are out there.
In all, sure, the PC market is subject to discontinuous technology innovations and eventual maturity, but it's also run by people who are thinking about these things. The odds are that the PC industry is not going to die tomorrow or next year. Even if that were the case, the forward-thinking PC companies are going to reinvest their free cash flow to deal with it and go off in another direction. Depending on the company's cash flow, management, the date on which the competitive advantage period for the industry and certain companies ends, and the potential value of new market opportunities, there's value in the opinions available to today's PC companies. To what extent the market realizes this and values it appropriately is your call.
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