Dell looks out for No. 1
By Michael Kanellos
Staff Writer, CNET NEWS.COM
August 18, 1998, 11:10 a.m. PT
update With its strong market growth, stable
margins, and growing brand name cachet, Dell
Computer appears to have a chance to take the
No. 1 position in the U.S. PC market, although
observers caution the window of opportunity will
stay open for only so long.
"They are like Compaq was three years ago against
IBM. They are the company that can do no
wrong," said Scott Miller, an analyst with
Dataquest. "The question is how badly do they
[Dell] want to be the leading PC company. They
will have to spend money to do it. The opportunity
is that they are close enough to make it worth
shooting for."
But it's the "how badly" part that is the rub. To
continue to grow much faster than the market, Dell
will likely have to move beyond its Fortune 500
customer base to less lucrative markets such as
small office consumers, said Phil Rueppel, an
analyst at BT Alex Brown. Dell will also make a
push for overseas markets. In the end, unit sales
may increase, but average selling prices, and the
profit per machine, may come down.
"Mathematically, it is unsustainable," said Rueppel
of Dell's current growth and price trends.
Interestingly enough, the company's growth
trajectory comes at a time when the average price
of a Dell PC is still higher than those from
competitors. Dell's average selling price dropped
from $2,500 in the first quarter to $2,350 in the
second quarter, mostly because of declining
component costs, according to Ashok Kumar, an
analyst with Piper Jaffray.
Still, that compares favorably to an average selling
price of $2,200 for HP and Gateway systems and
$1,800 for Compaq, which was effected the most
by inventory problems. Other analysts roughly
confer on these figures.
Adding insult to injury, Dell's gross margins stands
at a relatively high 22.3 percent, Kumar said,
because of its build-to-order manufacturing
capabilities.
A concerted, albeit expensive, marketing push
could vault Dell past Compaq to become the chief
supplier in U.S. PCs, said Dataquest's Miller. But is
that really a goal anyone wants to aspire to?
"Once you get there, the question is what do you
do next," Miller added. "It's real fleeting."
The economics of the
PC industry could make
this something of a
Pyrrhic victory, Miller
and others noted. Prices
are expected to
continue to decline in the PC industry because of
component price declines. While component-driven
price declines do not impact computer vendors'
gross margins, lower-priced PCs mean that
vendors have to sell more computers to maintain
revenues and profits. Dell, which mostly sells to
large Fortune 500 companies, can expect to see
lots of competition in these accounts.
Dell also will begin to feel heat in the near future
from the build-to-order initiatives from Compaq,
IBM, and HP. All three companies have been
working on revamped manufacturing and
distribution initiatives that will allow the companies
to mock Dell's ability to build computers only after
customers order them. The systems cut costs by
essentially cutting out costs associated with
inventory. All three companies are expected to
begin to show financial gains from these programs
in six to nine months, according to various sources.
At that point, some of Dell's current advantages
should be shaved.
To get around the pricing issue, Dell will try to shift
more of its product mix to notebooks and servers,
with an increasing emphasis on high-level enterprise
servers, said Kumar. Right now, 80 percent of
Dell's unit sales come from desktops.
Still, competition will remain intense. "The pricing
pressure is severe. There are no two ways about
it," the analyst added. "The music has to stop
somewhere."
"I've been a supporter of the Dell business model,
but that doesn't mean they are going to be able to
segregate their market from the rest of the
industry," said Rueppel. "In the future, they are
going to have to lower their average selling prices."
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