Dell shrugs off PC slump predictions
The direct vendor is market leader, but for how long?
Direct PC vendor Dell has knocked heavyweight champion and channel friendly Compaq off the number one spot by becoming the UK's leading PC manufacturer.
Research firm IDC named Dell the market leader in desktop sales, after the vendor claimed almost 19 per cent of the UK market.
Profit for the vendor was up by more than 42 per cent on last year's results to $6.1bn (PC Dealer, 25 August). On their own, the figures are impressive. But they are even more so when analysts have forecast that PC sales are in dire straits, and considering that rivals such as Compaq and IBM are re-inventing themselves as value-added service companies to cope with the apparent decline.
Dell's success has stunned industry observers who had been expecting PC sales to slow by between two and five per cent until they dry up altogether.
Jon Collins, senior analyst at Bloor Research, said the vendor had stolen a march on its competitors by pushing direct sales through the internet.
"Dell was a mail-order company and it has used that experience to do very well in the internet sector," he added.
Dell's ace card has been to set up after-sales service and helpdesk facilities, and overcome the fears that many people had about dealing with ecommerce.
"It had also been able to slash costs by refusing to order the components until after an order had been placed," Collins said.
He added: "Some of Dell's rivals have switched to more direct sales and were also doing well. However, Compaq and IBM are concentrating on restructuring themselves away from hardware sales - Compaq into infrastructure and IBM into services - and this is distracting them from attaining Dell's levels of profit."
But while Collins was impressed at Dell's results, he warned that the vendor had a limited amount of time to capitalise on its good fortune, believing rocketing profit heralds the swansong of a doomed PC industry.
"We have seen markets disappear overnight before," he said.
Collins and other analysts believe that PCs could easily be replaced by thin client options. Microsoft seems to agree, having changed its slogan to remove the word PC.
Observers claim most people want a PC for word processing and to access the internet. Word processing packages reached their development peak about six years ago and have remained pretty much unchanged, while browser software is not particularly resource hungry.
Most customers can obtain their computer requirements from a design that left the factory four years ago. Those that want the graphics-hungry and technologically advanced games can invest in a much cheaper games console.
Collins claimed: "A lot of people are being sold a high-spec PC to do things that they don't want to do." It's only a matter of time before the penny drops and the buying public wants thin client technology for a quarter of the price. If this regime comes about, then the channel could be a big loser as PC manufacturers choose to deal with more clients directly.
But Collins was confident that the channel will remain because most customers don't know much about technology and need advice on what to buy. "The channel will continue to add value to products and provide advice," he said.
Martyn Lambert, marketing manager at Dell UK and Ireland, understands the thin client meltdown model well, having sold it while working for Sun Microsystems. Now, of course, he doesn't advocate it: "I can see the argument, but it's not happening that way. The figures don't bear it out."
He accepted analysts' predictions that there will be a slowdown in the growth of the PC market of between three and five per cent over the next few years.
"But we're talking about an industry that's growing 20 per cent each year for general purpose PCs and that's on a base of more than a billion PCs," Lambert claimed.
While thin clients will have a mass market appeal, there's no reason why they should kill off the PC. Lambert is banking on the two co-existing happily.
"It is true there will be people who will only want to obtain information from the internet, but there is a larger number who will want to do something with it. If they only have a thin client system, they will be unable to process the information and will buy a PC," he said.
Dell, meanwhile, accepts that PC prices will have to drop by a percentage point a week, which is why it runs a 'just in time' supply system.
"Direct selling removes a lot of these sorts of problems. If you have to hang onto a PC for longer than six weeks, there are going to be serious problems with margins," Lambert pointed out.
Whatever happens in the market, Dell will be a winner. If Lambert is right, then Dell's market share will grow as other companies duck out and this will more than compensate it for any sales lost to thin client and low-cost PC packages.
But if Lambert is wrong, then Dell's policy of direct selling has proven its worth in delaying the demise of the PC and will leave the company profitable enough to change direction if it needs too.
Either way, expect more profit from Dell in the foreseeable future.