Dell Advancing to the Championship Round

As the Dallas Mavericks battled the San Antonio Spurs here last week for the right to advance to the NBA finals, hot dogs sizzled in the concession stands, colorful ads flashed on electronic screens and spectators in the luxury suites logged on to the Internet.

Maverick guard Nick Van Exel and Spur forward Tim Duncan controlled the basketball on the floor of the American Airlines Center. But Dell Computer Corp. was in charge of just about everything else inside the sports arena.

Most consumers know Dell as an aggressive purveyor of custom-built, low-cost personal computers. In fact, it sells more PCs than any other in the world.

But those sales to individuals account for only 20% of Dell’s business. The Round Rock, Texas-based company is moving aggressively to expand beyond its PC roots, offering products ranging from printers and digital cameras to data storage machines and server computers for running corporate networks.

Dell’s sights are clearly set on its powerful rivals: Hewlett-Packard Co. and IBM Corp.

A poster displayed at the entrance of Dell’s server plant, the Topfer Manufacturing Center, in a landscaped technology park in Round Rock sums it up: “Dell Does Domination.” Still, Chief Executive Michael Dell portrays the company he launched 19 years ago in a University of Texas dorm room as an underdog trying to scrape out a niche against Silicon Valley stalwarts in the global information technology industry.

“If you look at the $800-billion market that we’re in, we have about 4.5% market share,” Dell said in a recent interview. “I’m not sure if that would qualify as dominant.”

Some computer industry analysts, such as Martin Reynolds with the technology research firm Gartner Dataquest, warn that Dell’s success in its core market may not be easy for it to replicate elsewhere. “It isn’t clear that they can extend their model to the rest of the world,” Reynolds said.

Some potentially big customers say Dell just doesn’t have the scope to match heavyweights such as HP and IBM. “Dell is still not an international company. They just could not support us globally,” said Tony Hoke, manager of global technology and procurement for the San Francisco-based law firm Morrison & Foerster, which dropped Dell servers two years ago.

But other customers are bullish, and so is Wall Street. While most of Dell’s competitors have been losing money, market share or both, Dell’s revenue has almost tripled since 1998, and profit has more than doubled.

To say Dell is a juggernaut “is not exaggeration,” said Laura Conigliaro, a managing director of Goldman Sachs’ investment research department. “They are an execution machine.”

The company’s goal is to find a way to make the rest of world as reliant on Dell machines as the American Airlines Center in downtown Dallas is.

An increasingly powerful force in the computing world, Dell has honed the art of producing custom-built computers quickly and inexpensively. Its vaunted production system keeps costs low, squeezing margins throughout the industry.

The Topfer factory in Round Rock, where Optiplex and PowerEdge servers are assembled, is a beehive of motion, with scores of conveyer belts and shelves shuffling parts in a hypnotic ballet. Even as the assembly line spits out sleek servers, the process is continuously being refined to increase efficiency.

“If you come back in a year, this will be a completely different operation,” said Chris Cowger, director of production operations.

Dell keeps gaining market share while competitors falter. The company said total shipments in its fiscal first quarter rose 29%, while sales for the rest of the computer industry slipped slightly. Its 40% increase in server sales was more than four times the average increase of its competitors.

Last month Dell announced record first-quarter profit of $598 million. After achieving sales of $35.4 billion last year, analysts expect Dell to boost sales to at least $44 billion in 2005. Michael Dell’s goal is to top $70 billion in sales by 2007.

About 80% of Dell’s revenue comes from what are known as enterprise customers. These corporations, government agencies and universities buy Dell servers, storage, services, workstations and laptops. Altogether, they poured more than $28 billion into Dell’s coffers last year.

Dell shipped more servers in the U.S. in the first quarter of this year than any of its competitors, with around 29% of the market, according to technology research firm IDC.

A visit to the American Airlines Center in Dallas reveals why customers are so enamored of Dell machines.

In a heavily air-conditioned room off the main concourse, 35 Dell PowerEdge servers control 300 Dell workstations, which are used to run the arena’s day-to-day operations.

The servers also control the climate inside the 20,000-seat arena, which doubles as the home of the Dallas Stars of the National Hockey League. When the Stars play, the computers keep the ice frozen and the rink’s temperature and humidity low.

The Dell machines simultaneously track ticket sales and the allotment of parking spaces. The servers control when to flash Dr. Pepper or Ford truck ads on the dozens of electronic panels that ring the stadium and when to replace them with ads for Kodak or Budweiser.

One of the computers’ most important jobs is to keep track of chili cheese dogs, frozen yogurt and draft beer sold in the cavernous arena. “If we’re running out of something in certain locations but another location has a lot of it, we can shift inventory,” said Derek Gadson, the arena’s information technology director. (Or he can see what’s selling the worst, such as duck quesadillas or kosher hot dogs. Both were dropped from the menu.)

The server system has sharply reduced administrative tasks. Without it, Gadson said, “someone would sit around until 2 or 3 in the morning doing the paperwork.”

Although steady, growth hasn’t always been trouble-free for Dell. Quality problems weighed down the company a few years ago. Laptop screens were known to fizzle and hinges to break.

Hoke, the procurement manager for the San Francisco law firm, said he had bad experiences getting the Dell hardware he ordered, and that some of it was faulty when it arrived. “They were pushing too fast to move into areas they weren’t ready to push into.,” Hoke said. “They released a lot of programs to combat Compaq and Hewlett-Packard.... They were trying to match it, and they were releasing things that just weren’t ready.”

The criticism is fair enough, said Tim Mattox, Dell’s vice president of marketing for client products. “The stuff we were shipping four or five years ago would not meet our standards today,” he said.

Analysts agree that Dell now is making products that last. “Dell is usually ahead of the competition in terms of quality,” said Shebly Seyrafi, an enterprise hardware analyst with A.G. Edwards.

None of this worries Jeff Clarke, HP’s executive vice president of global operations.

“Understand the scope of HP versus the scope of Dell,” said Clarke, who previously served as Compaq’s chief financial officer. “Hewlett-Packard is a $70-billion company -- nearly twice the size of Dell -- with more than half our revenue overseas. Eighty percent of [Dell’s] business is PCs, and 70% of their business happens in the Americas. There’s no comparison between Hewlett-Packard and Dell.”

Likewise, the competition at IBM professes not to be overly concerned. With enterprise customers seeking to buy all their IT gear from one vendor, IBM has an advantage over Dell, said Jeff Benck, director of product marketing for Big Blue’s server division. IBM also develops its own software and maintains an army of support staff to maintain its customers’ computer systems.

“Customers like a one-stop shop,” Benck said.

Dell is moving in that direction. In March, the company set its sights on printers, the heart of HP’s profit center. Although the Dell-branded printers are made by Lexmark International Inc., customers who are loyal to Dell could become a problem for HP.

“Printers are HP’s cash cow,” said Gartner’s Reynolds. “Should Dell start to squeeze printer profits -- which it can do two to five years down the road -- HP will suffer.”

Dell is looking overseas, specifically targeting China, Japan, France, Britain and Germany as key markets in which to win more share for its PCs and servers. Dell’s PC sales in China were up more than 67% in this first quarter over last, and they rose 36% in Japan as overall PC sales shrank 9% there.

Dell has overtaken the domestic competition for servers in China and is gaining on IBM and HP. In Japan, Dell expects to surpass Tokyo’s NEC Corp. and become the No. 1 server vendor by the end of the year. Competitors don’t contest that assertion.

Back at the American Airlines Center, the servers were humming Thursday night as Dallas faced San Antonio in game six of the Western Conference finals. They maintained the arena lights at NBA-specified intensity and tracked which concession stands to close as the game wound down.

“They’re working just fine,” said IT director Gadson. “They’re letting me deal with VIPs and set up all the TV trucks.”

The servers performed better than the Mavericks, who lost 90-78.