Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Chuzzlewit who wrote (48245)	6/19/1998 8:23:00 PM
From: Geoff Nunn	Respond to of 176387

Chuz, Let me suggest a possible instance whereby switching costs may be high for corporate Wintel users. If there is considerable virtual integration between the commercial end-user and the boxmaker, e.g. Boeing's relationship with Dell, it seems to me switching may be quite costly for both parties. I can't provide any evidence to support this, it's just my impression from reading the Dell interview in HBR. Dell gives any number of examples which suggest the relationships Dell is forging with both its suppliers and end-users have a long term focus. If we grant a situation where switching costs are high, and brand loyalty is high (Apple customers), I can see how growing market share would be beneficial if there are economies of scale. In fact scale economies would help you in any case. Otherwise , if Apple is selling below costs, I'm having trouble seeing how greater market share benefits them. If you expand production, don't you just lose more money? I define selling below costs as selling below marginal costs. On your point about predatory pricing being ineffective when entry barriers are weak, I couldn't agree more. Thanks for your thoughtful comments. Geoff

To: Chuzzlewit who wrote (48245)	6/20/1998 8:53:00 AM
From: Geoff Nunn	Read Replies (3) \| Respond to of 176387

Hi Chuz, There seems to be an article of faith among corporate CEOs - here as well as in Asia - that if a manufacturing firm becomes bigger, it will benefit from economies of scale. As I'm sure you know, economies of scale means per-unit costs decline when you produce in larger volume. It seems doubtful to me that substantial scale economies exist in pc manufacturing. I haven't studied the issue and my view is only impressionistic, but I base it on the following: 1. In industries where great scale economies are present, small firms are at a cost disadvantage and cannot compete. An example is the auto industry. Firms like AMC and Studebaker, which long ago became defunct, weren't necessarily mismanaged, they were simply too small to reach minimum efficient scale. In industries where substantial scale economies exist, there will be high concentration and relatively few firms. 2. In pc manufacturing it is true that the industry is becoming more concentrated. Yet the fact remains that a lot of smaller firms still exist and aren't so easily pushed aside. This becomes apparent in reading John Rosser's post on PC Magazine's newest ratings of PC companies. The following portion is noteworthy (sorry, John, for taking liberties with your nice post.): ----------------------------- Desktops A: Dell Hewlett-Packard IBM B: Compaq Digital Gateway Micron Midwest Micro Quantex Sony C: Apple CompuAdd DTK Everex NEC Toshiba Unisys ZEOS D: Acer AST AT & T CompuDyne Packard Bell Tandy Zenith Data Systems Notebooks: A: Dell Gateway B: IBM Micron C: Acer Apple Hewlett-Packard Hitachi NEC Toshiba D: AST Compaq Texas Instruments WinBook Zenith Data Systems -------------- What's interesting is the large number of firms represented, some of them with only meager market share. Bear in mind too that the list is by no means exhaustive. If substantial scale economies existed, the smaller firms would probably have disappeared a long time ago. Of course, we don't know how many of them remain profitable. Some may be hanging by a thread. Come to think of it though, the largest firms - with the exception of Dell - aren't exactly burning up the track either. The conclusion I draw is that in PC manufacturing, firms with fairly great disparities in size can coexist. Using the jargon of economics, the long run average cost curve for the industry seems to be flat rather than downward sloping. Time will tell if this conjecture is warranted. Geoff P.S. Thanks for all your great posts on the ASP issue.