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Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Geoff Nunn who wrote (46660)	6/8/1998 1:48:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 176388

Geoff, thanks for an excellent economics lesson! I agree in general terms with your analysis, and as you know, I've argued from the financial perspective that falling component prices is not bad for Dell because of its efficient inventory systems. I think that there is one negative side to declining ASPs that we haven't discussed. In the case of of falling prices for PCs we would expect demand to increase due to elasticity. But that rapidly increasing demand would create the requirement for additional capital expenditures in the form of plant and equipment. Now I understand the economic mantra that in the long run all expenses are variable, but wouldn't you agree that the down side to falling ASPs will be the capital and systems strains they put on the existing infrastructure? TTFN, CTC TTFN, CTC

To: Geoff Nunn who wrote (46660)	6/8/1998 2:03:00 PM
From: Lee	Read Replies (1) \| Respond to of 176388

Hi Geoff,..Re:<<I would agree with you that PCs are a commodity.>> Excellent post and you made many valid points, especially the value added point which, in the case of Dell, translates to ROIC far and above industry average. But I can't agree with your assertion that PCs are a commodity. I think Chuzzie pointed out that oil and sugar are commodities, although Websters says that it could be any article of commerce, or any useful thing. When one thinks of commodities, the most apparent point of a commodity is the lack of differentiation. Since you pointed out the very obvious differentiation Dell delivers in their products, I think you may have invalidated your point. But, apart from the product, Dell delivers service, business savvy, and shareholder value which is unequalled in it's business environment. Just MHO. Regards, Lee

To: Geoff Nunn who wrote (46660)	6/9/1998 1:20:00 AM
From: Bilow	Read Replies (4) \| Respond to of 176388

Hi Geoff; Thanks for the kind reply. Regarding the correlation between ASP and profits: You are right, I did not show logically why low ASPs are associated with low profits. Okay. Some of this is intuitive to those who have seen it happen in the marketplace. Here goes: (1) As the amount of engineering in a product decreases, the value added decreases. Now increasing the integration level means that the engineering going into the chip increases, while the engineering performed by the box maker decreases. Fewer connections, less integration. Part of the reason for the decreased profit margin is the lower barrier to entry that this simplification brings about. Typically the chip house makes a sample kit giving schematics and a sample board to send to engineering houses. Then the engineers get to do nothing much more complicated than choosing the right bypassing capacitors. In other words, a lot of what Dell currently does to design a computer will shortly be obsolete for low end computers. The replacement will be much simpler. (2) Highly integrated products are more difficult to distinguish in the market place. That is, they tend to be more similar to each other, distinguished only by price. One of the unfortunate effects of higher integration is fewer choices by the designers. For instance, when the graphics card is integrated into the processor, everybody who uses that processor gets the same graphics card. (Note that my belief on the future of graphics is the ultimate "dumb frame buffer", no separate graphics memory at all. The reason for this is that the required bandwidths for graphics are not increasing as fast as the available bandwidth of memory.) When I designed graphics cards in the high end PC graphics business, this was problem of product differentiation was something we talked a lot. It is a real problem. (3) This is not a case of just component costs going to zero. This is a case of design effort going to zero and product differentiation being reduced. These will cause the market to be much more price driven. Sure lower component prices would be great for Dell. But that isn't all that happens. At the same time, the sales prices drop correspondingly. It happened before when Intel et al, came out with single chip processors. Component costs fell, computer prices fell, and the old computer giants fell. (4) The reduced engineering effort and the effective standardization of computers will attract more players into the market. The companies that concentrate on low end high volume electronics equipment will come into the game, and they never, never, never build to order. Everybody gets the same thing. Its a lot cheaper that way. Actually, I don't think PCs are a commodity yet. I believe Dell's competitive advantage due to build to order is due to the ability to take advantage of quick changes in component prices. What I am saying is that component prices are going to drop to their floors, (which are a lot lower than people think they are,) and then stabilize. You don't see the prices of TVs dropping 50% per year. TVs are a commodity. You know how many you are going to sell, what you will sell them for. What goes into them, etc. And you know this stuff a long time before you deliver the product. This is not what Dell has been doing. Compared to the PC industry, the TV industry is boring. I think we are approaching the time when the PC industry also becomes boring. It would require a flight of fancy to imagine that profits would be unaltered by a radical change in the amount of integration. If so many square feet of factory floor can produce a larger number of computers per hour, then the value added in those computers will go down. This is the simple lesson of capitalist history. For example, suppose everybody's factory could produce four or five PCs for the effort currently used to produce a single PC. We agree that would produce a glut in the market? In fact, one might suppose that the manufacturers that were most efficient at producing one sort of product might not be the most efficient at producing the other. This is what has happened in the past, and if it hadn't Dell would never have had the chance to start that it did. The next big change in computers will allow new companies to start similar to the way Dell got its start. My guess is that those companies that will be the most efficient will be the ones that are vertically integrated, just as in other mature industries. Dell is not in a position to easily vertically integrate itself. HWP could make set top boxes a lot cheaper than Dell, cause HWP would be vertically integrated. -- Carl