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

To: Geoff Nunn who wrote (1962)	9/26/1998 3:00:00 PM
From: Bilow	Read Replies (1) \| Respond to of 2578

Hi Geoff Nunn; About the difference between conglomerations and vertically integrated companies... Conglomerations were never a success. Vertically integrated companies have been and will continue to be the market dominating companies in most markets dominated by stable technology and price competition. Right now, IBM has 6 times the sales of DELL. Profits are about the same as DELL, as a percentage of sales. You say that IBM is dis-integrating vertically. I agree that there have been some trends in the personal computer market over the last 20 years that have caused this. Particularly, the fast movement of technology makes it harder for a vertically integrated company to be in possession of efficient manufacturing for all the components to its product. I suggest that this trend is turning. Where the trend is most important is in the processor. The processor is currently the most expensive part of the computer. Incidentally, you mentioned that IBM used to manufacture its own memory chips. It still does, I've used them: (LINK TO BE PROVIDED LATER) It is the integration of processors and memory that will finally reduce the personal computer market to a pocket calculator market. This will not happen for 10 years or so, but by that time the vertically integrated companies will be the only ones that will still be selling a product. But the comparison is inherently unfair to the vertically integrated company. Vertically integrated companies, by definition, have reached a stage in their corporate life where they are no longer growing as quickly. There are no more suppliers to replace. IBM is a lot more than a box maker. Because of this, IBM is much better placed to handle the coming changes to the way that computers are built. When DELL reaches the point where it can gain no more market share, (certainly well below 100%,) it will be forced to expand business by going vertical. Vertical integration is the sign of a business that has been successful, and it is how highly successful businesses are able to compete with smaller competition. Conglomerates are a completely different story. The idea, (if I remember correctly) was that you could combine two or more completely different companies into a single company that would be more efficient than the parts. The assumption was that the "dishwasher soap" part of the company would have sales that were more stable, while the "automobile brake systems" part of the company would be more cyclical. The combination, would, supposedly, provide sort of a mutual fund reduction in risk to the investors. The problem with conglomerates was that they didn't bring any improvements to the efficiencies of the businesses, and the investor could avoid non-market risk by diversification anyway. So there were no advantages, but they had the extra expense and inefficiency of an extra layer of management. Vertically integrated companies have had problems associated with the tendency to require internal units to preference the company's own products. But vertical integration does provide efficiency, as it is much easier to control the process of production. Sometimes those suppliers that a "virtually integrated" company uses just don't supply. They go out of business, start up competing businesses, go to court and sue, etc. I'll post some accounts of businesses that are currently in trouble for not vertically integrating their production... Like all management techniques, vertical integration, etc., is not a panacea. There are advantages and disadvantages for just about all common means of doing business. We are looking only for small differences, because small differences are what result in large profit and growth differences. -- Carl

To: Geoff Nunn who wrote (1962)	9/26/1998 3:34:00 PM
From: Bilow	Respond to of 2578

Hi Geoff Nunn; You wrote: Correct me if I'm wrong, in its pc business IBM used to manufacture its own disk drives, modems, printers, monitors, memory chips, mother boards, and OS software. They still do, in large part. Their ICs are the world's most advanced. I know. I've used them: chips.ibm.com Those are state of the art SDRAM memory chips. IBM also makes them into DIMM modules, for you users who can't solder: www5.pc.ibm.com They make printers: printers.ibm.com You want an IBM disk drive? storage.ibm.com Modems: pc.ibm.com Operating systems (lots of em): software.ibm.com I am told by a friend (MIS at MVIS) IBM still has more operating systems sold than MSFT. But this is an area where IBM lost dominance for the personal computer world. It is my guess that MSFT will retain their dominance for the next 6 years, at least, and will continue to make good money. DELL, of course, has never written an operating system, correct? Some of these products are, no doubt, manufactured by suppliers for IBM. This is not what is critical. What is critical is IBM's possession of that SDRAM memory technology. Those are made in the USA, state of the art, memory chips, as found in most computers. In fact, the IBM product generally has better spec's available than the competition (i.e. Toshiba, Micron, (TXN), Hitachi Fujitsu, etc.) IBM is state of the art in memory chips, and is state of the art in processor design. It is clear to me that they will survive the next computer revolution in good shape. It is clear to me that DELL is in big trouble. -- Carl

To: Geoff Nunn who wrote (1962)	9/26/1998 4:13:00 PM
From: Bilow	Read Replies (2) \| Respond to of 2578

Hi Glenn Nunn; A parable on vertical integration... Consider the case of OVON. A few quotes from a recent EE-Times article: Demise of OIS said to loom as 'crisis' for big defense contractors -- Top military display maker could go lights out Should OIS cease operations, the who's who of military integrators will be in a bind. Traded on the Nasdaq as OVON, OIS saw its public shares range in value over a 52-week period from 1/32 to 2 9/16, closing last Tuesday at 3/16. "We're working very hard to bring a positive outcome to this," said Tapp. Gary Jones, president of display maker FED Corp. (Hope-well Junction, N.Y.), called the OIS situation "not atypical" in the industry. Late last year, Korea's Hyundai pulled the financial plug on now-defunct active-matrix LCD maker ImageQuest (Fremont, Calif.), and this year, Litton Industries dissolved its AM LCD operation in Canada. techweb.com In other words, OVON goes belly-up and leaves its customers in the lurch. The customer's options are to either stop production or buy OVON. But if the customer buys OVON, then it is on that (inescapable) road to vertical integration. Now think about the current situation among the suppliers of disk drives. They are hurting pretty bad. Sure DELL gets good prices, but are its suppliers going to stay in business? Are they going to do spend the money to continue to reduce costs and advance technologies? Why should they, if they won't make money doing it? Things are peachy right now. But, eventually, this cycle, like all the previous cycles, will turn and disk drive glut will turn into a disk drive famine. When that time arrives, the vertically integrated makers will begin to look pretty smart. The same applies to the other parts of a computer. I've been in the hardware business for a long enough time to see both the good times and the bad times for IC makers. When the good times roll, you cannot buy newer parts at any price, in even small quantities. Someday, those times will return, and IBM and MUEI, will be making as many boxes as they can turn out, while their competitors are limited by "allocation" on those memory chips. In order to predict what is going to happen in the future, we have to know what part of the cycle we are currently in. Linear extrapolation only works for very short time periods. It's been getting colder in Seattle this past week. Will it get colder a month from now? Probably so. But will it be colder 11 months from now? Probably not. Will there be more carbon dioxide in the air 11 months from now? Probably so. Will this have an effect? Probably will. How much? Less than the cyclical yearly variation in temperature. -- Carl P.S. I didn't mean this to get off into the subject of global warning. Anybody wants to converse on that subject, please use a private message.