• So Which PC Maker is in Trouble Now?

    November 5th, 2005

    As Microsoft has learned in recent years, dominating a market isn’t always very easy and there are many chances to fail, not to mention occasionally drawing a little too much government attention. In the hardware arena, many of the smaller players have had their own brand of difficulties and that explains why Apple’s slightest misstep is considered to be a big deal. At the same time, Dell, the number one PC maker, has been almost regarded as untouchable over the years. Its sales have outpaced the PC industry, and investors appreciate the consistent reports of stellar profits.

    Well, the last couple of quarters, Dell hasn’t done quite so well, although its number one status isn’t been challenged seriously yet. But sluggish sales of PC to consumers in the U.S. and the U.K. have caused Dell to reduce its revenue forecast for the third quarter. Instead of earning from $14.1 billion to $14.5 billion, it is expecting sales of $13.9 billion. There’s another problem that I’ll get to shortly.

    Now $13.9 billion isn’t too shabby for a single quarter. That’s in the range of what Apple can manage in an entire year these days, so you can see that Dell isn’t going away, although some of its employees are going to be looking for new jobs as a result of a restructuring. But could there be signs of trouble? I suppose that’s anyone’s guess.

    As a practical matter, Dell is also taking a financial hit to the tune of $450 million for so-called “operational issues.” Operational issues? Well, around $300 million of that involves hardware troubles with two of its business desktop computers, the OptiPlex GX270 and GX280. The problem is apparently caused by faulty capacitors, which can, according to published reports, “expand or bulge and the systems won’t power up.” In case you’re not up on what capacitors do, the long and short of it is that they are tiny parts that store power or regulate current on a PC’s motherboard.

    Now component failures aren’t restricted to Dell. Apple has extended the warranties of the first generation iMac G5 because of video and startup problems. And, as some iPod nano owners know full well, other parts, such as LCD displays, can also fail prematurely. So it’s not necessarily fair to say that Dell is the only PC maker responsible for serious quality control lapses. Some of the same contract builders in Asia that put your Mac together also assemble Dells and getting a bad batch of parts isn’t uncommon. But when you’re the number one PC maker, that batch can get mighty large and costly before serious troubles are discovered.

    Besides, the Dell OptiPlex is typically far more expensive than the cheap desktops that are touted in those obnoxious TV ads. The GX280, even in basic trim, lists for $1,080, and the actual price can exceed $1,800 if you make any effort to customize it to include the same basic equipment provided in a $1,299 iMac G5, minus the digital lifestyle software, iSight camera and remote control. And you thought a Dell was cheap!

    So it’s fair to say that consumers aren’t necessarily lining up to buy those OptiPlex desktops with failing capacitors. At the same time, you wonder if Dell isn’t suffering from the fact that, in a practical sense, it hasn’t differentiated itself from the typical PC box maker. Nipping at its heels is HP, the number two PC maker. And a revitalized Gateway, once given up for dead, is also outpacing the industry. So Dell’s competition isn’t just Apple; in fact, it barely plays in the same ballpark, except for the consumer and educational arenas.

    It’s also true that Dell makes a lot more money in the business arena than in the consumer market. It can sell millions of those $399 PC systems and not be rolling in cash, because margins at the entry-level are real slim. In fact, one of the reasons given for Apple originally not choosing to enter the sub-$500 PC space is the difficulty earning a decent profit. Of course, nobody is suggesting that the Mac mini isn’t producing decent margins. It’s fair to say that Apple makes good money from just about everything it sells, and the insides of the Mac mini are largely tried-and-true components that, to a large extent, are also used in the iBook.

    I do not think that Michael Dell, who got into the business in 1984 as a college student who assembled PCs in his spare time, is shaking in his boots. A few good quarters and a little better quality control, and everything will be forgotten.

    In an ideal world, of course, you can suggest with plenty of justification that Apple is stealing more and more sales from PC users who are just fed up with the ever-present malware and other unpleasantness of the Windows platform. Dell, being number one, just gets hit harder than some of the other companies.

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