At the last such gathering at an Austin hotel in October, the analysts walked away empty-handed, even when the Dell execs actually did have something interesting to talk about: the rumors that the company was going to sell a handheld computer. The Dell folks just weren’t ready to talk on the record. But next week, at the industry confab Comdex, Dell will make it official, announcing a personal digital assistant called the Axim X5. Technologically, the new PDA is nothing special: it runs an Intel chip, sports a color screen and runs Microsoft’s increasingly popular PocketPC platform. Designwise, it’s yawningly similar to other PocketPCs, like Hewlett-Packard’s iPAQ. So, what will set it apart? The price tag, $199 ($299 for a more powerful model), is strategically calculated to upend competitors who are selling equivalent models for $500. More important, the new device will continue Dell’s headlong rush into new markets, which it needs to conquer if it’s going to extend the hottest streak in the world of high tech.
The Axim X5–and why Dell decided to introduce it–tell you everything you need to know about how the world’s largest PC maker has managed rare success in recessionary times. Dell didn’t do anything particularly new with the Axim X5. In fact, though the company did design the PDA, it signed up Taiwanese manufacturer Wistron to actually make it–unlike Dell’s PCs, which the company assembles itself. The biggest twist is that Dell decided it could undercut rivals by selling essentially the same device for less. Those kinds of cutthroat tactics are why some competitors call Dell “a parasite” that piggybacks off the inventions of others, slashes prices and destroys the profit potential of markets. IDC analyst Roger Kay uses the more-neutral phrase “fast follower.” He says, “They wait for someone to establish a category, move in with mass production and deflate the margins.”
Michael Dell prefers to view his company as a high-tech Robin Hood, delivering cheap prices to “parts of the market where customers are not getting a fair deal.” Dell’s bio is now the stuff of high-tech legend: the richest American under the age of 40, he started the company out of his dorm room at the University of Texas. He dropped out after his freshman year, and–according to a stack of early memorabilia that his mother collected and recently sent to the company for its new online museum–did nearly every job for the first few years, including putting his own name and number on press releases. Today he’s an unrepentant techie who seems to be using the Axim X5 to place a bet on a wireless future. Even though PDAs still aren’t a booming market and won’t immediately help Dell’s bottom line, he points out that they sit between two massive categories: the telephone and the PC. A machine that effectively combines elements of both “is quite exciting,” he says.
Michael Dell’s mixture of price sensitivity and tech savvy has worked well, especially recently. While revenues for the rest of the PC industry are flat, his company’s rose 5 percent in the last quarter. And Dell now has a 16 percent share in the worldwide PC business, up 23 percent from a year ago. Its now famous business formula, called the Dell model, includes setting up superefficient factories, keeping parts on hand for only a few days before they’re used and selling computers based on common industry standards like Intel chips and Microsoft operating systems. Most notably, Dell cuts out the retail middlemen and sells directly to customers over the Internet.
By its nature, the Dell model requires aggressive expansion. Back in the mid-’90s, Michael Dell would often say he didn’t need to enter new markets because the PC business was growing so quickly. Then the Dell model helped uncork the PC’s downward price spiral, and suddenly computers were a commodity that everyone owned–and there was little reason for consumers to upgrade to more powerful machines. “Dell’s problem is that it picked a business that you now need to be great in just to break even,” says Wharton professor David Croson.
That’s the reason behind Dell’s furious brand extension. It started in the late 1990s, with Dell selling low-end servers to companies. Now it has a strong foothold in those sectors, and the expansion has kicked into high gear. Last year Dell announced it would compete with Cisco and 3Com in networking gear. Last September it announced it would compete with HP on its strongest turf: printers. Last week Dell even broke with the orthodoxy of its direct model and announced–gasp–that it would sell PCs in retail middleman Costco. But when a brand-new device is introduced into the computing ecosystem, the company gets cautious. Of Microsoft’s new tablet PC platform (following page), a Dell exec says, “We don’t think the applications are all that pervasive right now.”
With all this product-line growth, competitors predict hopefully that Dell has finally bitten off more than it can chew. “I liken it to Napoleon’s invasion of Russia,” says a rival exec, who points out that certain elements of the Dell model won’t translate well to these other markets. For example, he says, there aren’t widely accepted industry standards for products like printers, and only a company that can make big technical innovations will succeed. Dell execs hear this a lot, and point to a $500 million R&D budget last year. Says VP Russ Holt, “We choose to innovate where it enhances customers’ benefit”–like designing servers that run cooler–“as opposed to innovation for innovation’s sake.”
Rival execs also hope that Dell’s entrance into PDAs signifies that it’s losing its focus (like IBM in the ’80s and Intel in the late ’90s). Michael Dell vows that won’t happen to his company. The rest of the industry can only hope that he’s wrong.
