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To: Geoff Nunn who wrote (31884)	8/30/1998 2:36:00 PM
From: rupert1	Read Replies (3) \| Respond to of 97611

Thread: On Sunday evening European sentiment appears to have undergone a significant change from Thursday. Russians, themselves, were never as agitated about the "crisis" as the American media seem to be, there is a sense that constitutional politics has survived and that whatever hardships that may be coming, in the short-term, the worst of the negative structural forces -e.g. currency devaluations and falling commodity prices - is past or about to pass. The fact that the communists in Russia are not entirely pleased with the national recovery plan should be bullish in the West; the communist will not be able to agitate the Russian masses. With the exception of Germany, where the old guard politicians gain some benefit from exaggerating the potential dangers from Russia to enhance their own prospects in the forthcoming elections, Europe is calmly and solidly behind Russia and its economic reforms. The UK and Austria and France are taking leading roles in building a European and American alliance. Indeed, there seems to be a very impressive international determination to help Russia. The focus might shift to Japan and Latin America. But it is hard to believe that Japan has not been woken up by now. Latin America will be a US responsibility if it shows strain. All of this is likely to build a consensus that the US will lower interest rates and that we may be entering an era of substantilly lower interest in the US. If this happens, the market will be undervalued, and as world economic growth recovers, so will the longer term prospects of the US market. I would think that the market will begin to recover on Monday, but the technical damage has been so great, that there will be selling into the rallies. The biggest test to the market will be earnings warnings, in the next few weeks, followed by tax loss selling before the end of October. I would be interested to hear what sentiment is like in the US on Sunday evening. Victor

To: Geoff Nunn who wrote (31884)	8/30/1998 2:56:00 PM
From: rudedog	Read Replies (1) \| Respond to of 97611

Geoff - 1. direct-channel distribution which eliminates the costs of using resellers. But the costs of using resellers don't impact GM since it is before any channel markup. The channel IS CPQ's customer. GM is a pretty reliable indicator of component costs in a MFG business. Channel related contra-revenue is important in looking at net income but not GM or component cost. Dell has a number of advantages inherent in their business model. but lowest component costs are not among them. They may have the highest base component cost of the big 4 (IBM, HP, CPQ and Dell). Not only does Dell buy with lower block volume, but they put a lot of the inventory burden on their suppliers. That's not a formula for getting the best price. I am basing this on discussions with Dell executives themselves, so I don't think I'm too far off base. 2. lower inventory costs I have pretty good evidence that CPQ's component costs are 9-10% lower than Dells. You're right, they then give up 6-7% of that in inventory carrying costs, but that still leaves them with 2-3% advantage at the component cost level. 3. More efficient cash management. No argument there, Dell is the best in the business at managing cash 4. Dell does not engage in costly, Rube Goldberg price-protection schemes. CPQ does CPQ used to give up on the order of 9% to the channels just in price protection. But they have decreased price protection from an average of 6 months in 97 down to 2-4 weeks, so the price protection contra-revenue should be between 1 and 2 percent now. Return policy is also much more restrictive today, pretty much limited to out-of-box failures. We'll have to see how this stuff pans out in 3Q and 4Q when the new policies start to impact the financials, but I don't believe that Dell has an advantage in the basic manufacturing model. BTO gives them an advantage in customer satisfaction and inventory carrying costs but works against them in other ways. These are business model tradeoffs, each has advantages and disadvantages depending on market conditions.

To: Geoff Nunn who wrote (31884)	8/30/1998 3:09:00 PM
From: FR1	Respond to of 97611

Geoff - You are covering the Dell side fairly well. I'm happy to see either one win. Actually, you missed some good points such as China factories just opening and Dell hiring in Texas at a ferocious clip, etc. I'll play the other side to make interesting conversation. Let's look at the CPQ good points. Before we start, I don't think analyzing yesterday's figures is much help. CPQ is going through a tremendous transition. Nobody will support the idea that yesterday's figures can be extrapolated to hold weight for the coming year. So let's just look at a few fundamental things: 1) Compare high-end equipment sales - CPQ has fiber channel systems for sale now, and all kinds of things from DEC for high-end hardware. DELL has no sizable presence in this market. 2) Compare low-end sales (sub $1,000) - Dell has none. Numerous times in the past Dell has said they recognize the market can not be ignored and they are going to do something about. They never do. Micro warehouse, PC Mall, CDW, all the cataloguers are featuring CPQ systems that are selling for $499. I saw Mike Dell comment on it and he said he doesn't like the margins of the low-end systems and prefers the high-end desktop systems. 3) High end desktop/laptop - Dell makes almost all of their money here. They are very efficient at assembling other people's components into boxes and getting the latest technology to you cheap. *Components:* CPQ makes a lot of chips, even CPUs, and this has got to make those components cheaper. I don't think DELL compares well in this regard. Dell feels the OEMs make the stuff cheaper - let them suffer the overhead. On the other hand, the OEMs are going to pass on their overhead to you in markups. You are also at the mercy of the OEM if there are shortages, major hardware problems, bankruptcies, etc. *Internet:* CPQ has just started turning its firepower and attention to direct Internet sales. It may take a while to get it right but there is no reason they can't match DELL. In fact, they should exceed Dell because they have more to sell. I look at DELL systems in their catalogues and look at CPQ. Very little difference. Dell may come out with something a month or two ahead of CPQ but that splash evaporates in a month or two. Everybody knows that. *Point of Purchase Sales -* Name me three chain stores that sell Dell computers. Name me one...aahhh forget it. If you want to make the argument that selling computers in stores is a money losing idea, then there would be no chain computer stores in the usa. Did Radio Shack or CompUSA file for bankruptcy this week? I must have missed it. Now let's go to the third world nations. Is Radio Shack and other chains moving into third world nations? Yep. Let's all take a guess at how many computers are going to be bought through the internet in third world nations. How about through nice, slick, direct mail ads? How many high end desktop computers will be bought in third world nations? Point of Purchase exposure is not to be ignored in the years ahead. *Summary:* Basically, I think Dell realizes all the above and has analyzed the situation. They have decided the only way out is to go up (because that is where the margins are). DELL is trying to present themselves as high-end vendor as you can see with their recent server offerings and publicly. A betting person might say that IBM and CPQ will really hammer them upstairs. They can beat them on hardware and beat them on support. I once owned a DEC and hated the prices but loved the fact that when there was a problem a DEC rep was at my site immediately and knew all the DEC hardware thoroughly. Problem solved in a flash plus the guy knew all the upgrades and new stuff. I once had a third party hardware support guy come out and can't tell you what a expense and mess it was. We are betting on the future. Who knows how it will all play out? - Not me. I'm betting on both but more on CPQ than DELL for the coming year. Franz