akidron - *off topic*
I noticed your short on CPQ, we have a pretty knowledgeable poster of our own on the CPQ thread, he did a very nice writeup of CPQ/Dell, in case you don't follow the thread I thought you might find this interesting...
John
To: Dr. David Gleitman (36596 )
From: rudedog
Sunday, Nov 15 1998 11:00AM ET
Reply # of 36617
Dr. Dave -
I also hold both CPQ and Dell, and worse yet almost 80% of my portfolio is tied up
between the two. Last year at about this time (mid-December actually) I sold about
10% of my CPQ holdings and bought Dell with it. Obviously in retrospect the smart
thing to have done would have been to sell all the CPQ since I got more than 300% on
the Dell and the CPQ is about where it was at that time. But hindsight is always perfect,
the question is what to do going forward?
For a lot of reasons, I am growing increasingly uncomfortable with Dell as an investment
over the next few years. Let me give you some of my reasoning, which is not well
thought out or researched at this point but does include some compelling datapoints at
least for me.
Dell is an extremely focused marketing and sales company which complements their
great financial model with good 'manufacturing engineering' (the engineering required to
make the products, assure quality and differentiation, and anticipate future product
direction). They are 'fast followers' in their chosen markets - they let someone like CPQ
drive the snowplow of big R&D spending and technology heavy lifting, verify the market
segmentation, and validate product concepts, then Dell picks the products which fit their
design, manufacturing, distribution and margin targets. This gives Dell a very low R&D –
they are about 1/10 of CPQ's R&D with half CPQ's revenue. It also allows them to be
nimble – they have substantially less cost to bring a new product to market.
This model worked well when Dell was a relatively small player – they could maintain
spectacular growth by concentrating on a relatively narrow product range, ‘skimming
the cream'. But as they saturate those relatively narrow categories and have to start
reaching out to a broader market, they also have to go to less profitable products, take
some risks on getting to market before the categories are proven, and tie up more
money in development and base technology.
For example, the multi-vendor storage category is a large, growing market. But
increasingly, products are differentiated by required investments in base technology such
as fibre-channel which require investment in silicon, software, and systems integration,
and closely linked services products for design and implementation of the systems. IBM
and CPQ are leading the field and EMC is hanging in but is increasingly marginalized
because they lack the full range offerings. Dell has made some noise in this space but
has made few investments here. They get their technology primarily from DG Clariion,
their service from Unisys, Wang and other service partners, and have to wait on MSFT
for software components. This will assure that Dell's storage offerings will be
mainstream plain-vanilla and will leave them at the mercy of whatever technology
direction is set by the big three in this space.
Another example is the low-cost desktop business. CPQ has been working for several
years to refine a high-volume low-cost model for their consumer business based on
consumer electronics vendors like Sony rather than on the computer manufacturing
model. CPQ picks market segments based on a lot of up-front market work, designs
products to hit those market windows, lines up a single manufacturing run to hit the
segment (with very simple and limited options) and does all of the production in a single
run. This results in very low cost manufacture which allows CPQ to sell $799, $699,
and in the future $599 and $499 systems which still deliver better than 20% GM. The
simplicity of the designs also reduces service problems which reduces back end costs.
And finally, CPQ completely replaces their whole product line in this space 3 times a
year with new models which offer better capability and integration at lower prices. This
has resulted in a very effective replacement market – many presario customers will just
buy the new model rather than do upgrades. At these prices the systems are almost
‘disposable'.
Dell has been very reluctant to develop any products in this space, for good reason –
their manufacturing model does not deliver large volumes of nearly identical systems as
efficiently as CPQ's and the consumer space is dominated by retail sales, where Dell has
almost no presence, so they have no easy way to get to the customers. But as the
obvious value and capability of these low-end products becomes more visible, it
inevitably affects the price points in the commercial desktop space as well, which cuts
into Dell's bread and butter.
Dell may always do better in the commercial desktop space than their competitors, their
model is almost perfect there. But they are reaching saturation in that market – they are
already approaching CPQ in the US, and will soon be there in Europe as well. They can
not sustain 30% growth in that market, let alone the 55% they need to sustain their
overall growth targets. And with ASPs falling in that segment as well, they need high end
business to offset the declines in margin and revenue in their core business (this is
currently 65% of Dell's overall sales). Kumar and others have noticed the pressure on
this core segment, and although I think they have greatly exaggerated the current impact,
the trend is obvious. Dell has to do something different to maintain better than 30%
growth.
Dell management is equally aware of this issue, and has been for years. These are smart
guys who survive on their ability to move quickly with a light weight model. One of the
reasons they went after Mike Lambert (who had been the Marketing VP for CPQ's
server division in 1994) was to develop a server story, and Lambert has certainly
delivered on that. But he is basically re-playing CPQ's strategy from 1993-94, which is
to drive industry standard parts into a high-end market with packaging and cost of
ownership as the value proposition. For Dell, this strategy depends on CPQ continuing
in the same direction, since Dell does not have the R&D or technology capability to
drive this on their own.
CPQ surely knows the plan, since they wrote it. They are not likely to sit around and let
Dell execute. CPQ has nearly all the cards here – they have the engineering and
technology depth and the industry partnerships to take server architecture almost
anywhere they want. You can bet that they will take it to a place where the cost of entry
includes a big service component and the ability to engineer silicon and drive standards,
since they have those things and Dell does not. IBM and HP also have those capabilities
but CPQ has a much lower cost structure than the other 2 in the big 3 (even with the
DEC acquisition CPQ generates more than twice the revenue per employee of either
HP or IBM), so they can simply out-execute the other big guys to maintain their lead.
CPQ also has by far the best relationship in the business with Microsoft, both at a
technology and business level, and they will use that against all of their competitors.
What this means is that CPQ can pressure Dell on the low end in their core business
and make money doing it, while at the same time raising the barrier to entry in the high
end in ways that Dell can not replicate. CPQ will then be in a position to take business
from IBM, HP and Sun in the high end, and also grow their consumer and small
business segment.
As I have said before, I don't think CPQ will win in the commercial desktop space, Dell
has too many advantages there. But CPQ will box that space, and aggressively maintain
presence that will force Dell to ongoing excellence of execution.
I had expected Dell to do something innovative in second half of 98 to get out of this
box, but have seen no evidence of that. What I see is a heads-down focus on their
current strategy. I'm sure they have something in the works but it is too late to help them
in '99, they have simply been outplayed by CPQ.
Initiatives like the ones currently going on with IBM and HP in the I/O and enterprise
storage space, combined with CPQ's full range product and service offerings, will
relegate Dell to a minor position in the enterprise business and force Dell to maintain
higher ASPs in that market to counter drops in ASP and margin in the commercial
desktop space. MSD's comments about ‘ending the price gouging in the enterprise
business' are so much hot air – there has been absolutely no move on Dell's part to back
that statement with any real activity whatsoever. Dell would be cutting their own throat if
they followed up on that plan.
So where does that leave us? Dell will continue to consolidate their dominance of the
commercial desktop space, with CPQ as number 2 and no one in third place. CPQ will
clean up on IBM, HP and Sun in the high end of the enterprise with little fear of
competition from Dell or any other low end players. CPQ will continue to grow their
presence in the consumer space. Overall I expect CPQ's growth to be 25% to 30%
over the next few years. Once this becomes obvious, and it is getting increasingly visible,
CPQ stock price should double from current levels, which I expect it to do in '99.
Dell will still show great financial performance and industry leading growth, probably in
excess of 30% per year, maybe even approaching 40%. Unfortunately for Dell, that is
not nearly enough to maintain their current stock price. While I do not believe that
Dell's price will collapse as some are saying (that would be insane for the best
managed and fastest growing computer company in the business). I do believe
that it will stall at current levels (say between 50 and mid-60's) for at least a
year until overall growth catches up with stock price and a reduced long term
growth expectation. Having just seen a big chunk of my portfolio sit idle for a year, I
have no intention of doing the same next year with the other half. Unless I see something
very different out of Dell in the next month or so I will start moving out of Dell in early
'99.
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