Stockman: You might just made the right decision. Dell is targeting higher priced computers and let those sub-$1,000 be the food for CPQ, Packard Bell, Acer and the like. Here is an article from today's Investor's Business Daily.
HONK HONK HONK
New Territory For Dell - Upscale Computer Maker
Date: 6/24/98
Author: Nick Turner
Sub-$1,000 personal computers are grabbing the spotlight, but market
shifts have left an unexpected name atop a lonely perch at the business PC
market's high end - Dell Computer Corp.
Dell staked its claim in the PC world in part by offering lower prices
through a unique direct-sales plan. It still does that, but mostly at the upper
end of the market on more- elaborate PCs, leaving it with higher prices
overall. And since bucking industry trends appears to be paying off for
Dell, don't expect the company to change its game plan soon.
''Our strategy is to focus on high-end PCs,'' said Susan Rabino, director of
marketing for OptiPlex, Dell's business PC line. ''We really do believe they
provide investment protection and longevity.''
PC makers would rather that companies buy top-of- the-line models, but
they feel compelled to offer budget machines. These economy lines start at
$699 and are promoted aggressively.
Meanwhile, Dell has not followed its competitors that far down. It has the
industry's highest average selling price, market watchers say. Its per-unit
revenue was $2,500 in its most recent quarter, according to Dell's financial
statements. That's down only $200 from a year ago.
Analysts say the Round Rock, Texas-based company still offers a
price-performance advantage when compared with other PC makers. It's
just that the company is shying away from the cheaper configurations its
competitors offer.
Compaq Computer Corp., the No. 1 producer of PCs, was quick to join
the sub-$1,000 PC frenzy in '97. Compaq also flooded the market with
excess inventory earlier this year, triggering fierce price wars. Hewlett-
Packard Co., IBM Corp. and others suffered.
Even Intel Corp., which always has pushed buyers toward the latest and
greatest microprocessors, hedged its bets in April by offering a low-budget
chip. Analysts say the arrival of sub-$1,000 PCs took the Santa Clara,
Calif.-based company by surprise. Instead of slashing prices on its
higher-end chips, Intel introduced Celeron, a stripped- down version of the
Pentium II.
So Dell may now be the loudest and most convincing voice in support of
high-powered PCs.
''Dell is as effective - or even more effective - as Intel in getting people to
buy at the high end,'' said Roger Kay, an analyst at International Data
Corp. in Framingham, Mass.
Dell officials see several trends helping their cause, including the Year 2000
problem. In '99, companies will be focusing on fixing their large computer
systems, says Dell's Rabino. They're buying PCs now that won't require
upgrading for a while.
That doesn't mean PC sales will drop off next year, Rabino says. But no
one knows what portion of information technology budgets will be directed
toward the Year 2000 problem.
Higher-end machines also can provide lower total cost of ownership, Dell
officials say. If PCs are less expensive to manage and maintain, the initial
purchase price is inconsequential.
Companies want ''headroom,'' Rabino says. They want their PCs to last
several years.
But that's less of an issue these days, analysts say. Software doesn't
continually push the hardware limits anymore.
''In the short term, we don't see computing-intensive applications that are
going to be used in the mainstream,'' said Charles Smulders, analyst at
Dataquest Inc. in San Jose, Calif.
Dell officials say users are testing the limits of other components. Hard-disk
drives are filled quickly by large multimedia files, Rabino says.
Dell also is banking on Microsoft Corp.'s forthcoming operating system,
Windows NT 5.0. The new software will demand powerful PCs, Rabino
says.
To run NT effectively, she says buyers will want a processor running at
400 megahertz, a 4.3-gigabyte hard-disk drive and 64 megabytes of
memory.
One of Dell's main advantages is its direct-selling model. It has allowed the
company to achieve greater efficiency than Compaq and others, something
that indirect sellers are trying to match. Compaq, IBM and HP are
streamlining their supply chains and trimming inventory.
Dell will be hard to catch. It turns over its inventory about once a week.
Competitors would be happy to do that half as often.
In its first fiscal quarter, ended May 3, Dell reported net income of $305
million, up 54% from $198 million in the prior year. Earnings per share rose
63%, from 27 cents to 44 cents. Sales grew 52% to $3.92 billion, up from
$2.59 billion.
What's more, Dell's margins are increasing steadily. Its gross margin was
22.3% last quarter. That's up from 22% in the previous quarter and 21.6%
in the year-ago period.
Efficiency is a big part of the Dell success story. So is the fact that it sells to
large corporate customers. They tend to buy higher-end systems.
So, is Dell's higher average selling price a result of the fact that it targets
large businesses? Or is Dell doing a better job at convincing buyers that
they need high-end merchandise?
''It's a little of both,'' said IDC's Kay.
Dell has begun selling some cheaper models. Earlier this month, it
introduced a model with a Celeron processor. Still, it's not in the
sub-$1,000 category - it costs $1,077, without a monitor.
And cheaper devices are unlikely to represent a big chunk of sales. One of
Dell's biggest strengths is its ability to customize PCs. At the lower price
levels, there's less room to do that.
New peripherals such as digital-video-disc drives and flat-panel monitors
could also boost the price of PCs. But Dell doesn't try to sell higher-end
systems with gimmicks, says the company's Rabino.
''We don't talk in terms of bigger is better,'' she said. ''We use data to have
them see the economic value of more-powerful PCs.''
(C) Copyright 1998 Investors Business Daily, Inc.
Once again HONK HONK HONK Triple digits here we come
Good Luck to All.
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