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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: BGR who wrote (56915)	4/22/1999 2:25:00 PM
From: Eggolas Moria	Read Replies (3) \| Respond to of 132070

I wrote a very long response to this message and my ISP decided to disconnect before I hit the send button. Oh well . . . It's a reasonable question to ask and the market right now is trying to sort through the situation. It's a complex matter. 1. Are corporate sales quite healthy and is there a market there? I am a little disconcerted by the "all or none" approach to this question. Unit sales are reasonably good and revenues are not quite tracking with units. IBM's ASP increase may well be from their doubling of Netfinity server sales and the rise of Thinkpad sales, both high margin items. You will have to ask yourself whether Dell is capable of similar activity. 2. A lament from Round Rock this past quarter is that IBM was extremely aggressive in pricing desktop corporate systems. I don't know how to factor that development for Dell. If Dell is winning its fair share of those accounts and IBM is being aggressive on price, then perhaps there is a margin issue out there. I don't know. 3.<<My understanding has been (and please correct me if I am wrong) that many in this thread believe that the only growth sector left is the sub-1k one, which by account of it's razor thin margins can only hurt those who engage in that market. >> Again, this is an all or nothing framing of the question when an incremental approach would be more meaningful. The sub-$1,000 sector is indeed showing the most growth, with more than 60% of the PC desktop growth coming from this segment. That still leaves a lot of room for now in other areas. So, it is my SWAG opinion that Dell probably will do fine this quarter in its operations. Whether it will do well enough for the valuation is always a different question. I don't have an opinion to express on that subject. But keep something in mind. IBM's quarter saw service and software climb to 60% of profits and Thinkpad and Netfinity sales were robust with their high margins. It's possible that IBM has decided to use the corporate desktop market as a loss leader or small margin business with the idea of offering a complete enterprise solution for a business. With their revenues and the profitability of their service and software businesses, they could do that for a very long time. A very long time . . . for as long as it makes sense. In my opinion, IBM will not cede that business to Dell or anyone else to give them a base from which to launch other types of corporate sales. If Dell has a weakness overall, it is in this enterprise area of service and software and high-end servers. CPQ had the pieces, but neither the execution nor the quality of IBM. Dell does not have the pieces currently, IMO. 4.<<DELL, of course, has planned to grow in the corporate market>> Actually, Dell plans to grow in three main areas: corporate, small business and consumer. Michael Dell has said that the company plans on expanding to a 40% pc market share within 7 years. To do that, as I've said many times, they will have to compete in the sub-$1,000 area and most likely, further down as that is where a tremendous part of the growth is. Anyone who believes that the eMachine concept isn't going to lead to a collision with Dell at some point in time simply has a very different view than do I. It also would appear that Carl Everett of Dell appreciates this situation when he speaks of entering the consumer market "in force." Whether the collision is with eMachines per se or someone else following that business model, it would appear that at some point, the collision will occur. More difficult to assess is what this might mean for Dell in the near term or short term. Again, I'll leave that to others who are more versed in Dell's business model than am I. BGR, Dell is a terrific company that up to now has executed better than its competitors and used a superior business model. IBM now inteds to turn up the heat by launching Project Odyssey, its attempt to sell $10B-$15B online this year. Obviously, that means lower costs for IBM. The question then is whether IBM will retain the higher margin or pass along the savings selectively to add pressure in certain competitive segments of the market. I don't have the answer to that question, nor do the analysts at the present time. But you can be certain that the question is being discussed in Round Rock and Houston. A powerful Big Blue with 2/3rds of its operating profit coming from services and software isn't going to be an easy target anymore. But then, Dell is a great company. Perhaps they will make the necessary adjustments to their model and business strategy and execute as well as in the past. Either way, it will be a very interesting 24 months, IMO.