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Technology Stocks : DELL Bear Thread -- Ignore unavailable to you. Want to Upgrade?

To: Geoff Nunn who wrote (1935)	9/20/1998 10:30:00 PM
From: Bilow	Respond to of 2578

Hi Geoff Nunn; Thanks for the post. Interesting article, but the evidence the author cites actually supports the opposite case. He writes: Horizontal firms like Intel that dominate one element of goods production do well. Vertically integrated firms like General Motors are not doing well. This is a comparison between companies in two completely different industries, one in a growth industry, the other in a more stable industry. And Intel is an unusual case, (and one that is rapidly changing to Intel's detriment.) He writes: With the exception of the somewhat artificial pricing in horizontal segments led by near- monopolists (Intel, Microsoft), pricing in the vertically disintegrated computer business is competitive and efficient. It's pretty obvious that Intel is doing well because of its "near monopoly" rather than any general advantage that horizontal integration would provide. For every example of a horizontally integrated winner like Intel's, there are several cases of the horizontally integrated losers they out competed. (I.e. Zilog, Fairchild, AMD, etc.) These are just the companies that lost the competition to get the "near-monopoly" position. These sort of positions have to be guarded with patent and or copyright law, if they are to last over the long term. The notes on how companies can hide lousy design, engineering and accounting to ensure their demise is true, but this has always been the case with vertically integrated companies. Despite this, these behemoths have grown to dominate many industries, particularly those that have reached a certain maturity. It is my suggestion that the maturity of the personal computer industry is approaching. I agree that during the time in which things are rapidly changing, it is highly unlikely that a single company will be in control of all the efficient answers for all the many parts of a complicated machine. That has been the condition of the industry for the last 30 years, and this gives an advantage to the horizontally integrated companies that manage to supply a part of the solution. I believe that MSFT will continue to have a very good "near monopoly" in the software industry, but that INTC's position is will continue to degrade. Dell, unfortunately, does not have any sort of a near monopoly in any part of the computer, and so, unlike MSFT, is not in a good position to extract high profits for the next 10 years. It is obvious that, if a company manages to gain enough of an advantage on its competition to get a lock on a product, then it will make good money. Vertically integrated companies typically compete in mature industries where this is no longer possible. For this reason, a snapshot of the stock market will almost always find that the fastest growing companies are small companies, and are horizontally integrated. But in a mature industry, the vertically integrated businesses out compete the horizontal ones. IBM, the company that is still a massive part of the computer industry is, in fact, highly vertically integrated. The history of industry is horizontally integrated companies eventually being replaced by vertically integrated companies. This has not changed. I see no reason why it should change in the next century. Lets take a look at the size of IBM versus DELL right now. IBM sales per year: $78.8B DELL sales per year: $15.2B IBM profits per year: $5.94B DELL profits per year: $1.18B (Numbers from YHOO.) It is clear that IBM is still a lot bigger than DELL, and makes a lot larger profit. -- Carl

To: Geoff Nunn who wrote (1935)	9/24/1998 12:44:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 2578

Hi Geoff, Very interesting concept, but one that makes a lot of sense. Remember the craze for conglomerates in the 60's? I suppose the argument for them was that it afforded investors a kind of built-in mutual fund. But an investor could accomplish the same thing by buying a basket of stocks, but that basket could have several advantages over the conglomerate: each company could be more focused, and the acquisition price would be much lower. It seems to me that vertical disintegration offers certain advantages as well. Primary among them is that it allows a much greater focus, and avoids a common problem with vertically integrated companies: transfer prices. The article points to noncompetitive high pricing at companies like IBM, but a more typical case might be setting unreasonably low costs, which was the case for traditional manufacturing businesses. The amorphous nature of cost accounting allows wide latitude in transfer prices, so when comparing internal costs to the cost of buying a component from an outside vendor, accountants would tend to underestimate internal costs as a result of their natural bias. Regardless of how costs are shifted, vertical disintegration fosters a focus on market pricing and costs. This is one of the great strengths of Dell, although many bears mistakenly cite this as a weakness. TTFN CTC