Q&A with Dell Computer's Michael Dell
Business Week Online
''Product transitions for us are great because we go to the new product faster than anybody''
Since launching Dell Computer Corp. in 1984 from his dormatory room at the University of Texas in Austin, Michael Dell has built the company into one of the most successful computer makers in the world, with annual revenues of $18.2 billion and profits of $1.5 billion. More than Dell's financial success, though, what has set the company apart is its breakthrough business model: selling built-to-order PCs directly to customers with no middleman. Dell's direct model began using traditional mail-order techniques, but it has evolved over time to take full advantage of the Internet. Equally important, the company was a pioneer in operations. It outsources much of its manufacturing and maintains minimal inventory, allowing it to operate with low overhead and very fast turnaround. Michael Dell spoke to Business Week's Andy Reinhardt in San Francisco on the day his company launched
its new online shopping service, Gigabuys.com, which carries not just Dell PCs but also software, peripherals, and software from hundreds of suppliers. Here are excerpts of their conversation:
Q: Can you give us any sense of expected revenue impact of Gigabuys.com and how big you expect it to be?
A: It's a pretty big market. What you can expect to see is that Dell's online commerce, now incluDing Gigabuys, will continue to grow. This should be a nice continuation of our leadership position. Basically, we have a first-mover advantage in E-commerce. Twenty-five million people came to our site in the fourth quarter. It's a logical extension of our relationship with customers, not only at the time they buy PCs, but afterwards, and will allow us to introduce ourselves to new customers.
I don't have any projections, but if you think about the PC market and you think about all the things that go along with the PC, that's a big market, and Dell's brand is trusted we're known; we have relationships with the customers, and we're becoming an increasingly important part of the distribution of all computer products.
Q: Is this a response to Shopping.com?
A: It's a different strategy, and it started before the Shopping.com announcement was made, so it wasn't in reaction to
Shopping.com. Let's contrast Compaq's Internet strategy and Dell's Internet strategy: We view the Internet as an integral part of
our business, so we don't think of Dell.com as a separate business. They've said that Compaq.com is a separate business, AltaVista
is a separate business, etc. It's totally different from our strategy. This is 100% integrated into our business. We're not dealing with
this question of channel conflict, who's authorized to sell what, and other issues they have. And we're not selling Furbies and a wide range of stuff -- we're selling computer-related products.
Q: But isn't there a potential for "channel conflict" between you and the retailers who've traditionally made money from selling the products you'll be offering on Gigabuys.com?
A: There's nothing about this that has anything to do with retailers. We don't sell to retailers, we don't buy from them, they don't
buy from us. They don't sell to our customers. Retailers are in no way involved in this whatsoever.
Q: Switching gears to E-commerce. How did you have to reengineer your business around Internet technologies?
A: We came to a realization a few years ago, and the way it came about was that we were developing systems for our internal operations, things like technical support tools and order-entry tools, and at the same time, this Web activity was going on. And it became apparent that actually the internal organization of tens of thousands of people and the external customers, which number in the millions, essentially used the same tools. And so what we came up with was an architecture where we said, O.K., here's our data, and then you have the layer of business logic, which relates to the internal things we do like support or sales, and then you have the front end, internally, which is the Web browser.
So people access this data and business logic through a system like this, and externally, it's the same system, going to the same
places, but with slightly different information. It's virtually the same information. So what you have is one common system, and what that means is that when somebody orders something at Dell.com, the order goes right to the factory, and so you get this real-time integration, so you get order status, support tools.
One of the keys in using the Internet is you have to not just automate things that occur in the physical world, but you have to use the information in ways that you couldn't before, and that add value for the customer. You can see this in our site, especially in the support areas, in a very dramatic context. When you go to our support site and identify what kind of Dell PC you have, you get this massively rich information about your specific PC. The diagnostic tools, flowcharts on how to solve your problems, the BIOS files and upgrades, schematic diagrams. That's not as exciting as $14 million a day in E-commerce, but it's more immportant to customers. It's something we spend a lot of time on.
Q: Switching gears again. We're picking up a lot of signs of a shakey quarter. You announced your results, and the Street was disappointed. Are you seeing a slowdown in the PC business?
A: I think it's going to be another very good year for the industry and for Dell. Industry growth ought to be in the 15% to 17% range, and I expect Dell will grow significantly faster than that. Now, there are some companies that are challenged with their own unique issues. But our earnings per share last quarter grew 55%.
I think what you'll see is some companies now going through the same issues they had before. This happens in product transitions.
You know, have you been to this movie before? You have a big fourth quarter, right, product transition comes up, and the channel is stuffed with products, you get this transition, and you get this problem. It's not a problem for a company like ours, because we
don't stuff the channel. Product transitions for us are great because we go to the new product faster than anybody, and we're off to
the races. Pentium III is going to take off faster than anybody thinks it is, and here we go. So I think it's going to be a good year.
Q: But that 15 to 17% is unit growth. With falling average selling prices, revenue growth for the industry is going to be flat, or up 2% to 5%. Does that jibe with your expectations?
A: That's a tougher one to call. I don't know what all of our competitors' strategies are going to be in terms of product pricing. So, I don't know.
Q: You've been able to thrive without dipping into the low end of the market. You have pretty savvy customers. But are you feeling price pressure now? Are you going to have to start selling less expensive systems?
A: Where this tends to show up the most is in the consumer market, and our consumer growth last quarter was about 80% in unit
terms and 56% in revenue terms. That, to me, is not suggestive of a situation where we might have to bring out cheaper systems.
Q: You don't have any sub-$1,000 PCs in your lineup...
A: We sell some corporate systems for under $1,000, but not many people buy them, they tend to want the latest technology. We
had huge growth in notebooks -- we're now the No. 1 supplier of notebook PCs to Corporate America, and the No. 1 supplier of
desktops, also. We've had huge growth in servers, which helps offset some of this. I guess the answer is, with the growth we're
seeing in the consumer market, yes, there are component reductions that will give us lower price points, but we're not losing share,
as some other companies are, we're gaining share.
Q: What do you think about the split-up of Hewlett-Packard?
A: I haven't really thought about it a lot. But it does raise the question of how this helps HP compete in the computer business.
Q: Theoretically, it frees their top execs from having to think about a very different business.
A: I believe in focus. Focus is a good thing. There are some big issues for HP to think about, in terms of how they make this
transition from indirect to direct, particularly when they're so reliant on the channel for printers.
Q: It seems to me that Pentium III systems are entering the market at lower prices then Pentium II systems did. I've seen them for as low as $1,599. Does that represent a sea change in PC pricing?
A: This is all pretty explainable when you think about what's happening to component costs. The price of PCs is not really that
complicated a formula. [Laughs] Basically, you've got the cost of components, and as component costs come down, PC prices come down. The interesting thing about that is that a lot of the component costs have been in a pretty depressed state. I mean, memory, disk drives, LCDs, CRTs. These guys have not made any money in the last three years.
Part of this is fueled by the tremendous flight of capital in Asia. When the IMF came in and said this is over, [Asian suppliers]
said "we're not going to sell this stuff at a loss anymore, so we're going to stop lowering pricing. And eventually, we're going to
have enough demand to match up with supply and we'll have an opportunity to earn a profit. We're not at that point yet. But when
we do, we're not going to add any more capacity." So, for the last three years, the Western world has had sort of a windfall of cheap components, sold at below cost, so all things being equal in the world of capitalism, that's not likely to persist.
Q: But it's pretty hard to raise prices once a new price point has been set. That's the concern.
A: That will be very interesting to see, particularly for the sub-$1,000 market, because it's precisely that customer who is most
economically sensitive and precisely that market that has been most fueled by this flood of components sold below cost.
Q: So, you don't see a broad-based tech slowdown out there?
A: No. |
