Dell Bent on Protecting Coveted Turf
Fifteen years ago in his University of Texas dorm room, Michael Dell founded Dell Computer with $1,000.
Since then, Dell’s chief innovation--selling personal computers directly to customers and avoiding the markup by retailers--has forced such industry giants as IBM, Hewlett-Packard and Apple Computer to change the way they do business.
It has also forced many of Dell’s stockholders into higher tax brackets. Shares in Round Rock, Texas-based Dell have repeatedly been the single best-performing issue in the Standard & Poor’s 500. In the 10 years ending last month, Dell stock gained 36,000%.
Yet in the last few weeks, after Dell said its sales growth slowed to 38% from the last two years’ rate of 50%, the stock has slumped from $110 to less than $85.
While archrival Compaq Computer and other computer companies have also reported slowdowns, investors have been left wondering whether Dell’s historical growth rate, which has been several times faster than the industry, might dwindle.
Last week, before Dell announced a $16-billion, seven-year deal to buy disk drives and other components from IBM, Chief Executive Michael Dell sat down with The Times in San Francisco. Dell was in town to promote his new book, “Direct From Dell” in which he discusses his business strategies.
Question: Hewlett-Packard, which just announced a spinoff of its non-computer, non-printer business, said that in the future all companies will be selling both directly to the consumer and indirectly through retailers, regardless of which way they started. If that’s true, what happens to Dell’s advantage?
Answer: Like IBM, they’ve been kind of struggling to compete as the market goes direct. HP, contrasted to Dell, is at the polar opposite in terms of inventory efficiency. At their last quarter they had about 60 days of inventory, 70 days of inventory, whereas we, in our last quarter, had six days. That difference accounts for a measurable problem. If the value of inventory declines at a half a percent or 1% a week, that means that the customers have to pay quite a bit more or HP loses money. . . . That’s without factoring in the cost of the dealer, which is an added markup.
This business of trying to be indirect and direct at the same time, I don’t think it works. We had quite a bit of experience with this about seven or eight years ago, in trying to do both at the same time. To effect this change, you have to go into competition with the people who sell the vast majority of your products.
For Hewlett-Packard, it’s very hard to go to a dealer and say, “Guess what? We’re going to sell printers through the indirect channel, but we’re going to sell computers directly.” The dealer says, “If you’re going to sell computers direct, screw you. We’ll sell other printers.” NEC tried that, and they lost more revenue on the indirect side than they gained on the direct side, by like 10 times.
Q: What are you doing in the sub-$1,000 PC market?
A: The price of PCs is really a function of the cost of the components. It is possible to make PCs for $100 or $200, but they don’t do very much. We’re focused on serving the largest portion of the market that we can and also earning a profit doing it. We have consumer models that start at about $1,100, and that includes everything.
Q: Are you going to try to go lower?
A: If the cost of the components goes down, you’ll see lower-priced machines from Dell. And the price of components has been artificially high because of all the investments in Asia [by manufacturers trying to build market share there].
Q: You’re one of the few remaining companies without chips from Advanced Micro Devices. That’s one way to go lower. Is that something you’re going to consider?
A: I’m not sure that’s really the answer. We’re seeing chips from Intel that are priced very, very close to, if not exactly the same as, AMD chips. There’s also the question of what is the cost [in Dell’s configuring overhead] of having multiple architectures running at the same time. We’re also trying to strike a balance here in providing customers with a machine that’s going to last over a useful lifetime. . . . Microsoft’s Windows 2000 is going to come out, and it’s not going to run on those $500 computers. And these machines are not going to be used.
Q: Are you able to get preferential treatment from Intel that allows you to keep your prices competitive?
A: I have no idea what kind of pricing they give other people. I assume they give pricing that’s based on their volume. But Dell getting better pricing than anybody else? That doesn’t make any sense.
Q: There’s huge growth potential in non-PC, Internet-connected appliances of various kinds. That’s an area that Dell hasn’t explored in a substantial way, at least not publicly. Looking farther down the road, where does Dell want to play in that space?
A: The information applications of the future could very well be a kind of next-generation PC that has a broad-band connection on it, and that’s the kind of device that I think you’ll see Dell compete in. When and what does it look like, we’re not ready to say.
Q: If it’s not these devices that Dell is banking on, where does the big growth come from? Or are you never going to get back to the growth rate you had until last quarter?
A: There are about 325 million PCs installed in the world, and 10 years from now I think there will be 1.4 billion. We have as good a shot as anyone at capturing a significant amount of that. I don’t think that this is a time to say “Oh, it’s [Sun Microsystems CEO] Scott McNealy’s post-PC era.” This is bull. . . .
Q: Have you explored any partnerships that would change the model of how you sell directly? Would you take a subsidy from an advertiser that would do something to the Dell computer?
A: We haven’t got that far, though certainly we get lots of discussion with media companies and telecom companies. We do a lot with the telecom and the cable companies today, with people like AT&T; and @Home, Southwestern Bell, and various telecom companies, to integrate communications and computing together. So you buy a PC and get DSL [digital subscriber line] service, [or] you get a cable modem, and this all gets included in the price of the machine.
Q: How do you view the Microsoft and Intel antitrust trials through the lens of your business?
A: This question of “Can a company improve its product?” is something that ought to be important to a lot of people. If we were told that we had to provide equal access to every company that wanted to provide DVD drives, because we were the only company that could sell DVD drives to Dell customers, because we bundled the DVD drive in with our computer, I think you get into a problem of really limiting a company’s ability to innovate. We ought to be able to decide that for our customers, and obviously a customer could decide to buy our product or not.
Q: PCs, which have gotten better over the years, are still difficult for many users. Can PC makers do anything about that in an industry where ease of use is, in many ways, dictated by Microsoft?
A: We have. With Windows 98, we reduced the setup time by about 90%. We cut that down to about a two-minute process. We’re doing things now like color-coding cables and creating direct-connection technology that allows people to get on the Internet very quickly. And we’re measuring these things, how long does it take them to get on.
Q: Does Dell have anything to learn from the iMac?
A: The iMac is a good wake-up call for us and for the rest of the industry, in ease of use and also in ergonomics. We have some things that we can learn, and we’re in the process of learning them.
Q: Where is [alternative operating system] Linux going?
A: I’ve been surprised. We had a commercial customer order 250 machines with Linux on them to run a retail network of stores. There is growing demand there. We’re going to start selling Linux to single-party users very soon.
Q: It’s going to be on the menu?
A: Yes. You’ll go to https://www.dell.com, pull down “operating system,” and click “Linux.”
Staff writer Charles Piller contributed to this report. Joseph Menn can be reached via e-mail at joseph.menn@latimes.com. Piller can be reached at charles.piller@latimes.com.
