Dell's Reality Distortion Field (DELL, AAPL)

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Includes: AAPL, DELL
by: Robert Zenilman

Rob Zenilman submits: While the term Reality Distortion Field was created to describe Steve Jobs’s ability to "convince people to believe almost anything", Dell’s (DELL) recent moves in the marketplace have me wondering if Michael is trying to deflect concerns about earnings by co-opting Steve’s strategy:

● On March 22nd, Dell announced the planned acquisition of Alienware
● In a recent interview, Michael Dell said he would like to sell PCs running Apple's (NASDAQ:AAPL) Mac OS X.
● Dell announced last week that they will begin using AMD (NASDAQ:AMD) microprocessors, ending their exclusive relationship with Intel (NASDAQ:INTC).

Alienware: Dell’s 18% drop in first quarter profits indicates that Dell is becoming a victim of their own success. Their business model, combined with perpetually falling component prices have led to some incredible prices on PCs. You can now purchase a Dell notebook for under $500, and a desktop with an LCD screen for under $400. There cannot be much unit profit at these price levels.

Gaming systems are the last bastion of high margin consumer PCs. So Dell’s purchase of Alienware makes sense, given the declining margin environment. The question is, although the gaming system market is more profitable, what is this sector’s growth potential? For my money, I’d sooner purchase either an Xbox 360, a PlayStation 3 or a Nintendo Wii. I’d have a powerful pure gaming system for a lot less money. Heck, I could even buy all three, throw in a PlayStation Portable and a Nintendo DS, and still spend less money than I would on an Alienware system!

Mac OS X: Since the beta release of Boot-Camp, people have been focused on the ability to run Windows on a Mac. In a recent interview with PC Magazine’s Jim Louderback (listen here), Michael Dell turned the tables when he was asked if he would build a Mac OS machine:

When is Apple going to license Mac OS to the other 97% of the world that doesn’t buy Macintoshes?… Absolutely, we would be happy to sell Mac OS X as soon as it’s available.

Given margin pressures, maybe he’s just trying to cut a better deal with Microsoft (NASDAQ:MSFT). Selling OS X will require the additional time and expense of ramping up a new technical support department.

AMD: Buying from a single supplier does not guarantee the best price. Until now, Dell could negotiate with Intel implying that they were evaluating AMD microprocessors. Now that there are AMD products in the pipeline, Dell can play Intel and AMD off each other. The market has shown that people do not really care if a PC has “Intel Inside”.

In short, Dell is looking for ways to increase margins.