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To: Dave B who wrote (18542)	4/12/1999 7:51:00 PM
From: Dave B	Read Replies (1) \| Respond to of 93625

OTOTOTOTOTOTOTOTOTOT FWIW. If you were bored by my previous ramblings about Dell, go to the next message. Below is the original message I posted to capt. rocky re: Dell. It was from this that I excerpted some of the sections I posted earlier. Capt. rocky suggested I post the entire message, so here it is... ________________________________ capt, Retail only makes up 10% of PC sales right now. People don't need to touch/feel them anymore. I've been in the PC business since 1980 while I was in business school where I helped a software company market graphics software for the Apple III. In 1982 I joined HP as the hardware product manager for the HP 150 personal computer (you may remember our butterfly ads for the computer with the touchscreen) and have been in the PC industry since then. One of the trends that is pretty universal is that each new technology starts off requiring a "priesthood" -- a group of technical people who understand the technology and sell their services to help you implement that technology. As vendors improve the ease-of-use of that technology, and as more people become knowledgeable about it, the technology starts to get pre-packaged, and appears in retail stores where, in theory, you can ask a salesperson (who has a rudimentary knowledge) questions about the technology. Finally, the technology moves to a "direct" model which commoditizes the product to an even greater degree. The primary customers that Dell and Gateway sell to have a strong knowledge about PCs and need no hand-holding. This trend has happened with a number of technologies - the two best examples I can see are PCs and networking products (both software and hardware). For example, it used to be that you had to have a networking expert to set up a network. Now you can buy boxes that have everything you need in one kit and anyone can set up or expand a network. And it's happening now with servers as low-end servers require little expertise to get up and running (this isn't true with high-end, multi-processor, clustered servers yet). The low-end PCs showing up on the market now are just the next natural evolution in the market. Every technology starts out expensive and then comes down the price curve. I personally believe that this segment is not replacing higher-end sales to any significant degree, but is enticing new users who wouldn't have paid $1000 for a computer (creating a new market segment). A perfect example is my father. He bought one of the $499 computers from Microcenter ($650 with monitor) last year, but he would never have bought a computer for $1000+ (I asked him that question on Saturday since there's been so much discussion about E-machines and others lately). He had it in for repair 4 or 5 times during the warranty period - mostly for problems he caused. Any profit that Microcenter made on the box was quickly chewed up in the warranty costs. And first-time users are not going to accept the "no support" policy that these new low-end vendors are espousing. If they don't get help they're going to scream. And that's going to eventually drive these companies into bankruptcy. The one thing that people don't give up is an expectation of quality. Packard-Bell is a great example. I was on a listserv list once where someone asked for a PC recommendation. They received about 10 recommendations split across Compaq, Gateway, Dell, and HP. They received about 20 messages (seriously!) that said DO NOT BUY A PACKARD BELL!!! The quality was poor and if you had a problem, it was difficult to get it fixed. Packard Bell was screaming. That was the first I had heard of this problem and Packard Bell was the leading retail brand at that time. It was clear, though, that people were pissed off and I knew that Packard Bell was not long for this world. At the time I was consulting for a hard drive manufacturer that supplied a LOT of hard drives to Packard Bell and I bet one of the people there that within two years Packard Bell would be virtually gone. I won. I asked my father on Saturday if he'd buy the same performance-level computer again and he said no (I asked him this because I was helping him do some scanning and I was getting frustrated with how slow it was). I asked him if he'd buy the same brand and he said probably not. On the other hand, Dell has one of the highest repeat-purchase customer bases in the business. Can Tiger Direct compete with them? (I just checked my latest Tiger catalog and was surprised to see that mostly what they sell is sub-$1000 systems. I had never paid any attention to that before. That was interesting.). If it was just a question of price, I'd say probably. But as I suggested above, it's about price, quality, support, service, etc. and Dell leads that pack by far in those areas (check out the customer polls in almost any PC magazine). So I don't think Tiger can compete in those other dimensions. Compaq, HP, and others are trying to compete in this low-end segment; Dell is not. Personally, I agree with Dell that just because the market is there doesn't mean you have to compete in it. There are a million products that Dell could sell for a loss, why should they sell low-end PCs? Why not toothpaste? Or lightbulbs? I'd rather invest in a company that actually wants to make a profit (which doesn't include Compaq at this point). When they can make money in this segment, they've said that then they'll get into it. There are two things that impress me about Dell. First, they have a metric called the Cash Conversion Cycle which is a measure of how long after they pay for the parts for a system that they get paid for it. Right now they're at -8 days (negative 8!). That means that they get the money for a system 8 days before they have to pay for the parts. They're not even using their own money to build PCs!!! They're using the customers money! Therefore, falling prices actually helps Dell - they pay less for the parts that they put into a computer than they thought they were going to have to pay. On the other hand, Compaq inventory sits in stores gathering dust (current estimate is that they have 3-5 weeks inventory in the channel) and eventually Compaq has to give the retailer back some of the money that they received for the system since the retailer can't sell it for as much. I'm not sure if Gateway is in the same boat - if I were Gateway, I'd let customers see the boxes, then have them spec out a configuration and build it to order from there. So it's Compaq that gets squeezed as prices fall because they've already paid for the parts that went in to the box. The announcement on Friday is the perfect example. It appears that their net profit is going to be about 3% of gross sales. That's obscene. The second thing that impresses me is that Dell is the largest internet vendor - they do $15M per day or $5.5B per year. From what I can tell, Amazon is at about $7M per day. And Dell does it profitably whereas Amazon continues to lose money. This $15M per day represents about 25% of the $18B-$19B in revenues from last year. This year they expect to do about $25M and have 50% of that come over the internet (or at least they're moving toward the 50% number). That would mean $34M per day of internet sales! As technologies keep coming down the "commodity" curve, Dell can easily move them into their sales/production model. Some good examples of these technologies would be servers (as I mentioned before), network attached storage and other appliance-type products (Dell has announced deals with Network Appliance and Novell). My fingers are starting to cramp up so I'll send this now. If I think of anything else, I'll send it to you after they've recovered <g>. Happy hunting today! Dave p.s. I'm assuming that since you PM'ed me, you'd like to keep this discussion private. Is that correct? __________________________