Dell's All-Out Assault on Prices Could Have a Huge Payoff
By Jim Seymour
Special to TheStreet.com
5/15/01 12:40 PM ET
Tero Kuittinen, our resident wireless-industry guru, made some wise observations about the risks of sharp cost-cutting in a RealMoney.com Columnist Conversation post this morning.
Following-up on my column earlier today about the problems at Silicon Valley Group (SVGI:Nasdaq - news - boards) and the extent to which those problems arise from a general overcapacity in the semiconductor business, Tero worried aloud about whether the actions of tech players such as Dell (DELL:Nasdaq - news - boards) and Palm (PALM:Nasdaq - news - boards) in sharply cutting prices will produce a situation where even the last man standing looks out over an almost profitless landscape.
That's always a risk when one company decides to launch a scorched-earth campaign. And we should be clear here that in Dell's case, that is exactly what's going on. General Sherman -- oops, Michael Dell! -- has said very clearly that he thinks this is the right time to steal market share from his competitors -- and that he thinks Dell's low-cost model gives him room to do just that.
Sometimes we see strategies such as this backfire, and often in exactly the way Tero describes. You can put the hurt on your competitors -- and thus also on yourself -- so much that you wind up winning the battles but losing the war. You wreck the overall profitability of your company, commoditizing your market -- and sometimes, making yourself vulnerable to very low-cost producers in Asia, who then sneak in under your prices and do to you what you so gleefully did to your former competitors.
But in the case of Dell and the PC industry, I think Dell's scorched-earth policy on prices -- becoming more evident every day -- is probably an example of "good" buying of market share, as opposed to "bad" buying of market share.
Dell has a chance here not likely to be seen again for years to increase market share, then, probably, creep margins back up after it has inflicted enough pain on Compaq (CPQ:NYSE - news - boards) (especially), and Hewlett-Packard, (HWP:NYSE - news - boards) IBM (IBM:NYSE - news - boards) and Gateway (GTW:NYSE - news - boards) (to a lesser extent).
True, in the PC business it's very hard to reverse pricing trends, bumping 'em back up. But with all of the generational changes coming in PC hardware, I think Dell will have opportunity aplenty to edge margins back up in small ratchets after it's hurt others enough. (Sorry, I know that doesn't sound very nice, but that's the way it is. Making business [war], not love, etc.)
I think H-P, currently a winner at discounted retail sales of PCs (think Best Buy (BBY:NYSE - news - boards)), is a serious candidate for simply withdrawing from the PC business if the pain gets bad enough. Compaq certainly won't withdraw, but Dell can hurt Compaq's gross margins badly over the next few quarters, making CEO Mike Capellas' tenure even more difficult -- and rocky. IBM is unlikely to leave the PC business for strategic reasons, but Gerstner has said some strong things lately about not chasing low-return businesses down the drain. And Gateway, while unlikely to do a Micron (MUEI:Nasdaq - news - boards) and just give up on the PC business, doesn't need any more pressure than it's already dealing with.
Dell, meanwhile, has the component volume, distributed production, J-I-T manufacturing and direct (no middleman costs) sales model necessary to still do pretty well when, as is inevitable, its own margins go through a Honey, I Shrunk the Kids! cycle here.
Dell now has the market lead in both PC and server volume -- in units, please note, not in revenue -- and if it can keep growing that edge, the payoff a few quarters out, from even greater dominance, could be huge.
A little scary... but not as scary for Dell holders as for those of the competition, especially Gateway and H-P.
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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour had no positions in the stocks mentioned in this column, although positions can change at any time. Seymour does not write about companies that are, or have been recently, consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites you to send your feedback to Jim Seymour . |
