Dell's Perplexing Strategy 29 comments
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Dell (DELL) unveiled their new ultraslim, the Adamo, a few days ago. The new laptop is a 13.4 inch “luxury” portable featuring no optical drive, a long life sealed-in battery, edge-to-edge glass screen, and a solid state hard drive comes at the very affordable starting price of $1999. Does this sound familiar? A MacBook Air, perhaps? To a lesser extent, the HP Voodoo Envy 133?
One can’t fault Dell for wanting to keep up with Apple (AAPL) and HP (HPQ). HP has maintained its stranglehold on worldwide notebook marketshare for over two years. In North America, Dell’s “home territory,” marketshare has fallen below 2006 levels while Apple and HP continue to capture the bulk of sector growth.
click to enlarge
Data courtesy of Gridstone Research. Apple bars represent “Total CPU Revenue”
Dell, which made its name selling low cost computers, has seen its competitive advantages eroded since growth peaked in 2006. As PCs have become increasingly commoditized, Dell has not been able to successfully scale its revenue despite a heavily growing market for PCs and notebooks.
While Apple and HP used new form factors and pioneer case designs with products like the MacBook and Touchsmart lines to defend their margins, Dell has simply watched its operating margins fall from a high of 8.6% in 2006 to barely 6% in 2009.
Not surprisingly, Dell stock has fallen over 50% in the last four years while HPQ and AAPL both appreciated substantially as optimism about Dell’s ability to capitalize on tech sector growth has evaporated and HPQ and AAPL have filled the growth void.
With the American consumer pulling back and even Apple sales waning, this move by Dell seems perplexing at best. Yes, there’s a market for high style notebooks. But, this is not a product which will move the needle for Dell. Furthermore, Apple’s brand clout is derived from its overall experience - hardware design, proprietary OS, and customer service through its retail locations. PC manufacturers are inherently disadvantaged as the user experience is ultimately commoditized regardless of how pretty a shell is put around the computer. Particularly in a recessionary environment, Dell shouldn’t be playing follow the leader and instead should be looking at how to add marginal value through design or technological changes to its PCs ala HP’s Touchsmart or Vivienne Tam lines which offer style, uniqueness, and a pricepoint significantly closer to $1,000 than $2,000.
Disclosure: Author was long shares of AAPL at the time of writing.
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but the problem for Dell is that their reputation is 'budget'. it reminds me of many decades ago when Sears put a woman in a mink coat on their mail order catalog and they had a section on expensive furs. it didn't make sense then and it doesn't make sense now.
It's Apple that has the reputation for cutting edge, cool, innovative products and at the same price, their Air is more compelling to most buyers.
it's hard to change public perception...ask the guy who bought Sears.
I disagree with the statement that "the consumer segment is a significantly higher margin business" - The consumer business is a cut throat business were every buck counts and the $ cost for a consumer is king , consumer units only come with limited services associated to the warranty on the box. The $ per box margin is significantly lower on a consumer machine when compared to an corporate system I.e. Corporate systems can incorporate, custom imaging, onsite installation, 4 hr mission critical support - invariably a consumer system has collect and return warranty or next business day onsite at best. - but that's only on Pac's and Notebooks which don't carry much margin compared to enterprise and managed services, the Tier 1 manufacturers are more interested in the backend infrastructure because that where the money is.
Example a Dell Equallogic storage array (depending on spec) can cost up to $140,000 - it costs Dell $9000 to make the unit, therefore Dell make $131000 margin on one storage array.
Dell may make $30 margin on every PC/Notebook they sell in the consumer space, they would need to sell 4500 PC's to make back the same margin as 1 Equallogic storage array.
The funny thing is that every business needs a back end storage infrastructure, granted it may not be a fully blown Equallogic Storage array costing $131000 however my point is that storage is a margin rich product. Storage is mission critical to all business's, business run on their data therefore they are willing to pay top $$ for top notch products to store an protect that data. And heres the smart part, Data is growing almost exponentially year on year - e.g. finance houses such as banks need to be compliant need and store data in some cases for 15 years for auditing purposes - that means customers continually need to increase their storage arrays to cope. That data resides in their large storage pools which cost $$$$$$ and it grows by terabytes year on year - Data growth means more storage required by customers which results in more margin $$$$ for the manufacturers.
Services are also key to margin $$ -ask IBM why they don't play in the consumer market and why their margins are so high - they run on services, Managed deployments, consulting, virtualisation etc along with high margin hardware such as storage and server solutions. Just look at their financials and their margins. Why to you think they sold their PC/Notebook division to Lenovo?
Compare high margin IT players to Acer who simply shift tin by selling on price - they are a disruptive force in the PC/Notebook market for sure but they fly close to the wind on low margins preferring to push volume based upon a best price approach. They achieve this by having one of the lowest Opex in the business, everything is outsourced. Should a high margin player such as HP decide to go aggressive on margin within the PC/Notebook market then Acer will be in trouble, they have no where to go and little margin play while HP could afford to drop PC and notebook margins by funding it with their high margin enterprise and services business.
FYI Dells market share in storage grew in 2008 while all the other players lost share to Dell, Interesting that storage was also the only major growth market in the IT sector recording double digit growth
In summary I disagree that the consumer market is a high margin market and I also believe that the consumer market for the large IT players isn't as important as you think.
Storage and services are the way to go and Dell is well placed to grow in this market. Perhaps it hasn't occurred to lots of people but Dell are loosing interest in the PC/Notebook market - simply put it doesn't make them money anymore.
I should know - I work for one of the big 3 (IBM,HP,DELL), I'll leave it for you to decide which one!
On Mar 19 10:04 AM The Curious Investor wrote:
> My main purpose in the article is to examine the motivation behind
> this attempt at a brand and image change is on the consumer end.
> Why play copy cat in a market environment where the "luxury" model
> has flagged? Further, I don't believe that any mass market PC manufacturer
> can, in fact, create this kind of brand image. As referenced above,
> even HP launches its "high end" computers at price points below Apple's.
> The baseline Adamo is $200 more than the MacBook Air and is suspiciously
> similar in specifications.
>
> Is this not a big deal because Dell is mainly an enterprise focused
> business? Well, I think it definitely speaks to the quality of decision
> making at this Company. Further, it would seem that the consumer
> segment is a significantly higher margin business. It would be foolish
> not to pursue an effective strategy there when your Company clearly
> ought to have the core competencies to do so.
So here's Dell: So we build Chevys (and not very well) and now we're going to try our hand in the Maserati market? This company is totally off its rocker. And at the price of the Adamo, it comes bundled with the magnificent (SIC) MSFT Vista to try to compete with Apple and OS X. Good luck and watch this stock continue to sputter.
On Mar 19 07:54 AM cloughg wrote:
> Question - I presume your stats only focus on the consumer market
> share and CPU share? 80% of Dells revenues come from business to
> business sales therefore I would expect a predominately consumer
> focused manufacturer such as apple to be streaks ahead in the consumer
> space.
>
> 2008 Stats for Dell's consumer only business - Notebook units grew
> 43% in 2008 while desktops units were down 18%. Dell grew Notebook
> units in the consumer space 1.9 times faster that the rate of the
> industry concluding that Dell is gaining market share in the consumer
> space.
>
> Overall stats (consumer & business sales) are: Apple sold 2,5million
> Macintosh® computers during quarter Q4 compared to Dell's 4.47 million
> units. Therefore despite Dells Q4 decline in market share share they
> still shipped nearly double the number of units that Apple shipped
> in Q4.
>
> In 2008, Hewlett-Packard Company accounted for 20% of Intels net
> revenue (17% in 2007) and Dell Inc. accounted for 18% of Intels net
> revenue (18% in 2007). No other customer accounted for more than
> 10% of Intels net revenue including apple.
>
> The Adamo notebook on its own is not about gaining market share for
> Dell, im sure Dell dont beleive that launching a single notebook
> will do this.
> What is it will do is re-enforce the brand and image change that
> Dell are attempting to make and will continue to make throught 2009.
>
>
> The Adamo is a consumer gimic. Consumers buy gimics as they are emotive
> buyers if Dell continue to drive innovative designs like this in
> the consumer space it will continue to change the perception about
> Dell in both the consumer and business markets which can only be
> a good thing.
>
> The real money for Hi Tech companys is in the large corps - Servers,
> Storage and services are where the big $$ sit. Not in shifting tin
> like PC's, notebooks into consumers etc - there is simply no margin
> in this area.
>
> Tell me one fortune 500 that runs on apple? None
>
> Thats why apple will never overtake Dell or HP or IBM the dont have
> crediability to play with the big boys in the market area which makes
> the real money
Some food for thought...
1. The author is long on AAPL shares.
2. The Comparative Revenue Performance chart is misleading and a poor choice of statistics to substantiate the author's point. Does that analysis address total company revenue, or revenue for PC/notebooks only or revenue from the consumer segment? Most importantly, let's figure out the comment "Apple bars represent Total CPU revenue." What do the other bars represent? What does Apple consider CPU revenue? Does the Apple bar include AppleTV? Does it include other devices such as iPod or iPhone? Does it take into account Apple's unusual accounting policies for revenue and expense recognition (i.e. the 24 month issue)? This particular statistic was poorly explained.
3. Apple and Dell compete in some markets, but the overlap is not as significant as the author depicts. Dell's primary business is in the enterprise & business computing segment. Apple's primary business is to make toys for consumers. Apple ships 20 million iPods a quarter vs 2.5 million computers. iTunes sales of on-line content significantly enhances Apple's margins and provides diversification.
Apple has done a stellar job at introducing innovative products, diversifying their product set to capture more dollars per consumer, and becoming a leading on-line content distributor. Their positive economic results are well earned. On the downside, they need to improve product quality and customer service.
Dell has allowed the market to pass it by. They are in a bad spot right now and are playing catch up. But they still make a good product for a good value. Dell must do the following if it wishes to re-capture its former glory.
1. Cut costs to improve margins. Check, they are running that play and run it well.
2. Diversify in the enterprise & SMB segments. Provide more value added services and clearly demonstrate why Dell provides better value. Some progress was made by Dell in the past year, but there's still a long way to go.
3. Diversify in the consumer segment: broaden into new device types. Additionally, they should offer more content on boxes. Get into on-line content distribution, similar to iTunes. They're implementing plans to try this now.
4. INNOVATE: Get in front of the product curve. Capitalize on the upcoming Windows 7 release and design products that take advantage of its full capabilities. Become a leader in the next paradigm of computing (e.g. touch screen, voice recognition, etc). At this point, Dell is still playing product catch-up, and introducing "me too" products like the one introduced this week.
Lot's of folks seem really high on Apple nowadays. That's great. But let's not forget that they are basically a consumer toy company. No, Fortune 500 companies do not run their business critical applications on Macs. Apple competes for the same consumer dollars that are spent on devices like Sony Playstation and Microsoft X-box.
If you'd like to benchmark Dell's financial performance, compare them with HP, Cisco and IBM. Those companies compete for the same enterprise computing dollars.
Dell is not focusing on its strength, it is focusing on copying. Unfortunately, unlike Hyundai and Toyota and Honda who built up the engineering know-how to have a follow-up plan after "copying", Dell will continue to ship the same old OS on different looking boxes. In this regard, Dell's venture will net little if anything. Windows PC is a commodity, its margin is slim to nothing. It is becoming a loss-leader.
As for consumer vs. enterprise, there is money to be made in both areas. Your position on enterprise being the only worthy money maker is strange. At best, it seems outdated and at worst, it seems bubble-like and out of touch with reality. Before the internet, enterprise solution made sense because few consumer care to have a computer at home. Large corporations were the only ones running a room of computers. Today, computing platform permeates our households from game consoles to computers to smarter electronics controlling our homes and cars and offices. Computing systems are no longer limited to giant Oracle machines in the IT backroom or a couple of PC's sitting on a desk. IT in a home is already readily available from Apple and Microsoft and HP and IBM and Comcast and so on. A forward looking technology company has to keep an ever-shifting eye on this ever-evolving landscape to survive. The one company best positioned to adapt to changing consumer and/or enterprise needs is the one that is best able to survive.
Your claim that enterprise trumps all is thus false. Todays explosion of personal computing needs will continue to fan personal computing innovation. Such innovation will in turn fan the rise of enterprise innovation. I do not see consumer needs lagging enterprise or enterprise overshadowing consumers.
Your claim that consumer computing product margin is slim is also false. Your claim seems to be based on only cursory understanding of the Windows-based PC market. Windows PC is now a commodity. Fortunately, there is a viable alternative in Mac OS/X. A PC is not just a piece of hardware made up all the same components. A company can choose the components, the design and also decide on the OS. These choices can be significant differentiating factors resulting in drastically different price points. This is why Apple is able to charge a premium and still sell to discerning clientele while Dell, HP and IBM can only compete at the price level.
Your position of Dell at the "big 3" is also false. I have worked at HP way back when RISC was introduced. I worked at IBM developing a whole new operating system and later a cutting-edge compiler. HP and IBM have significant engineering expertise that Dell cannot match. I work in start-up's today and while I deal daily with IBM and Sun sales force, and my company uses several Dell desktops as workstations (about to switch to HP), I do not remember one single Dell salesman ever mentioning a Dell SDK.
Dell is not focusing on what is needs to survive long term. It is focusing on what it thinks is needs to survive now. If Dell, as you claim, is shifting to enterprise services to cut losses, that may be a good decision. May be it can then invest its profit into creating an engineering organization that can rival those of HP, IBM and Apple. If not, it is just selling an enterprise solution based on price again. IBM and HP have the ability to move on while Dell will be left carrying the same-old enterprise bag.
Dell's foray into "high end" laptop seems a waste of effort. It should focus on reinforcing its money-generating divisions and cut its money-loosing efforts. It needs to rapidly channel its profits into developing an engineering organization that can help it grow into the next five to twenty years. Until that happens, it will eventually go the way of GM.
Coming back to you working for the "big 3", I starting working in the valley when Amdahl occupied a huge complex not far from us. When HP was hot, IBM was Big Blue, and punched-cards were still in use. Many of use built OS, RDBMS and eventually OODBMS and went on to work in large scale real-time systems that require hot-swap fail-safes. Today, many of us work in start-up's that focus on consumer level innovations.
If you are an engineer, I suggest you get out and survey the landscape in order to gain a more complete view of our exciting and ever-advancing landscape. Learn to look outside the box and think outside the box. Simply defending Dell, one single employer, and focusing on one business segment, namely enterprise IT, is limiting and will only make it that much harder to work on exciting projects of the future.
Cheers!
Most large corporation make IT investments in 3 to 5 year cycle. They value stability over innovation. If Windows 2000 works, they will stay with Windows 2000 until Microsoft forces them to move to VISTA or Windows 7.
The same is true of corporations that deploy Mac's. These companies stayed on System 7, 8, 9 until the last possible moment forcing Apple to continue support for these legacy systems. It was with great reluctance that they are moving to Mac OS/X.
Innovation is found in the scientific, engineering and some consumer communities. This is where Apple decides to focus its effort.
To return to point, this is where Dell is failing. Dell is not focusing its strength but diffusing it. If Enterprise is a true Dell strength, then Dell ought to focus in that area instead of competing in the consumer world with an over-priced commodity Windows PC. What is the point? Image?
While one can compare Dell to IBM and HP and CISCO, there is one glaring weakness that Dell has to overcome, its engineering prowess. IBM and HP can build OS, the fundamental software that runs a computer. That expertise allows them, if they so wish, to create new OS in the future that may outperform UNIX, Linux or even Mac OS/X. Where is Dell in this area?
Until Dell expands its technological know-how beyond throwing hardware together and selling them, Dell will always be the wannabe looking up to HP and IBM. Dell may grow in terms of enterprise customers, over time, I doubt its revenue will grow as new and more capable solutions become available from IBM and HP through innovations. If my IT can pay $100,000 for a system that saves me headaches and lets me run my company smoothly for three years, why pay $50,000 for a Dell system that requires a contract tech? In the long term, my goal is to graduate to the $100K system as I expand, why stay with an el-cheapo system from Dell that cannot grow with me?
The key, as you stated, is innovation and that starts from creating a capable engineering organization with cutting-edge engineering thinking and discipline. I have yet to see that from Dell.
We literally sometimes have pallet loads of these computers at the loading dock. Dell workstations have become the Bic pens of our era.
'None' is true, until you include Apple itself. It's listed as a Fortune 500 company. Unless you believe they run on Windows PCs throughout their organization.
On Mar 19 02:25 PM dsrtwriter wrote:
> In our government institution, we use Dell Optiplex 745's at our
> workstations. We call them "disposable Dells" since we are always
> replacing them every six months after they slow down or crash.<br/>
>
> We literally sometimes have pallet loads of these computers at the
> loading dock. Dell workstations have become the Bic pens of our era.
On Mar 19 04:49 PM Cheat Sheet wrote:
> > Tell me one fortune 500 that runs on apple? None
>
> 'None' is true, until you include Apple itself. It's listed as a
> Fortune 500 company. Unless you believe they run on Windows PCs throughout
> their organization.
> But let's not forget that they are basically a consumer toy company.
It may seem obvious to call iPods, iPhones and even Macs as toys. But is that useful?
You might find it interesting to see how those "toys" are supported with digital content distribution. Look behind the transaction engine that drives commerce through them. There's real money being exchanged in these "toys" beyond the hardware - server/client software and cloud services comes to mind (Don't forget that Apple is not just a hardware company). Last I checked, there are 60 million credit cards saved in Apple's iTunes. The "toy" known as iPod Touch/iPhone is a terminal to this service at 30 million strong. It's still in its infancy at less than 2 years deployment but growing. There are copycats already - a testament that following this way of doing business is a viable and profitable one. Regardless, it's a business model that is changing the game in the consumer market and has potential to be modeled into the enterprise space.
Do you believe that Microsoft, IBM, Cisco, HP, Oracle, Dell, Nokia, RIM, Comcast, Verizon, AT&T wouldn't want that digital distribution engine at their finger tips now? Given their expertise in enterprise technology, content distribution and network; why didn't they accomplish what a consumer "toy" company did in a relatively short time?
On Mar 19 05:15 PM cloughg wrote:
> Who's servers & storage do apple run in their backend infrastructure
> ? Now there is a question, anyone know? bet its the best kept secret
> in IT ;-()
On Mar 19 07:27 PM alg wrote:
> Dell should jest sell its computer business and return the money
> to the stockholders.
www.youtube.com/watch?...
On Mar 19 06:44 PM Cheat Sheet wrote:
> Would you believe that it may be a mixed environment like any descent
> large organization. Right tool for the right job.
Instead of asking and speculating, care to venture your understanding of Apple's IT needs and possibly how Dell systems can serve them? Share with us your educated guess regarding Apple IT architectural needs? Then show how Dell serves them all?
Please share with us your insight first before I share my guess :-). Not that I have any internal info, I do not, but I can venture a very good guess given my background building large scale system that must be up 24/7 and even when there is a nuclear strike; no joke.
On Mar 19 05:15 PM cloughg wrote:
> Who's servers & storage do apple run in their backend infrastructure
> ? Now there is a question, anyone know? bet its the best kept secret
> in IT ;-()
On Mar 19 07:44 PM gmaster wrote:
> I agree, they are a distration to the bigger picture and bigger bucks.
> Being No 1 in PC's and notebooks is great. Being No1 in Servers,
> Storage and services is where you want to be - just ask IBM how they
> became the most profatible Tech company on the planet
1) iTunes & the business model
2) Apple in the enterprise computing business
Cheatsheet had some stellar points about iTunes and the benefits of the digital media distribution model. iTunes business has been growing by 33% or more per year, even though iPod sales are growing at only 10% per year. I have to imagine that this model has a significantly better operating margin than the hardware side of the business. This represents a tremendous boost to overall company margins. It also provides something similar to a subscription-based, ongoing revenue model for the content fees & rentals. Plus, I think Apple now recognizes revenues & costs for iPod devices over a 24 month basis. Everyone else in the consumer computing industry is already chasing the Apple model again. Microsoft, Amazon, Dell, HP, Asus, Acer, you name it - they all want to get into making money on the content that goes on a PC, or the content purchased using the PC (or other device). In a few years we'll see the consumer PC market move to a "razor and razorblade" model in which the HW is sold at 0 profit and the real money is made on the transactions that are made on the computer (buying music, software, movies, etc). Customized, content driven gadgets will attract consumers attention, clicks, and dollars. Consumer computing devices will be themed (e.g.. Disney character, ESPN GUI, etc). The consumer PC market is already suffering from intense price competition and margins in the 0% to 3% range. Consumers are opting for lower priced Netbooks with less computing power, but more flexibility. iTunes set the standard for PC HW as a media delivery device and makes good money at it. And PC manufacturers are moving more towards "theming" their hardware, and making money off of consumer clicks. I guarantee that you will see this emerge by this Christmas season.
Apple is ahead of everyone at the moment, but they'll need to be careful because they still have the achilles heel of a proprietary format. With all the other competitors out there, and new alliances between HW and content providers, they'll face stiffer competition soon. And the competition will be using open formats for the content, which will be more appealing to the consumer over the long run.
My other thought on the comments was about Apple in the Enterprise Computing business. I'm curious, can you log-in to SAP or Oracle from a Mac? Would those business applications run on theh Mac operating system? Do any major enterprise business applications run on Macs? Honestly I don't know, but I kind of doubt that SAP is spending money to support the Mac operating system. Once again, proprietary format and OS of Apple will likely be the barrier that prevents Apple from conquering the Enterprise business. I'm also curious, if in fact you can't run SAP and similar ERP systems on a Mac, what application does Apple use to manage their books? Did they create something custom, or do they use a consumer package like Quickbooks? I have to imagine that they are incurring a higher cost to maintain their internal IT operations because they have few choices and options in the enterprise software space.
I do not work for Dell or Apple or any HW manufacturer. I own 2 iPods, an AppleTV, a Dell notebook and my employer also provides me another Dell notebook. I use a PC to do my critical busines work and my personal computing. I use an Apple device for music and movies. I like the Apple devices and iTunes, but to me, they are still, and always will be, toys.
And yes, I shake my head every time I pay $2 for a razor and then $4 for every blade that goes on it.
Put your resources to better use, Dell. If Zune can't touch iPod, you actually think Adamo will make a dent on Apple's MacBook line? (BTW, I know a few people who bought Apple's latest laptops JUST TO RUN WINDOWS. How ironic.)
Maybe Dell will buyout Palm and take a stab at iPhone, and get destroyed there, too.