by , 1:30 PM EDT, October 12th, 2001
RedHerring has published an article that we wanted to bring to your attention. It's not about Apple or the Mac, but it is about one of Apple's biggest opponents, Dell Computer. Better yet, the article calls a spade a spade by saying that far from a technology company, Dell Computer is an anti-technology company. The article also quotes analyst Tad LaFountain as saying that Dell is a bottom feeder. We couldn't have said it better ourselves. From the RedHerring piece:
Dell is not a technology company. There, we said it. Despite ample evidence to the contrary -- $32 billion in annual sales of computer systems, a Web business that does $30 million in sales a day, and the requisite Nasdaq listing -- calling Dell Computer a technology company is like calling the Bible a good book: it's true in one sense, but completely misses the point.
Dell's style of rapidly commoditizing marketplaces -- driving down prices, and sucking profit margins dry -- goes against everything technology companies are all about. By focusing on markets that are standardizing, and using operational efficiency to gain huge chunks of market share quickly, Dell undermines the very thing that investors usually look for in a tech company: proprietary technology with sky-high margins. So, while it deals in technology products, Dell is in fact the antitechnology company.
That's not to say that the Austin, Texas, company doesn't innovate in its own right. It just doesn't innovate with technology. "Dell's innovation is in its ability to refine the processes," says Brooks Gray, an analyst at Technology Business Research (TBR), a market research firm in Hampton, New Hampshire. "They have people brainstorming a 10-cent fix and how to cut back on the number of screws they use."
[...]
For the time being, Dell is targeting the $5.3 billion small and medium-size business market in networking. But ultimately, it has its eye on the $30.2 billion enterprise market dominated by the likes of Cisco Systems, Nortel Networks, and others. Cisco, for one, has averaged gross margins of 69 percent over the last five years.
It will take time, however, and for now Dell is just nibbling at the low-hanging fruit. According to Tad LaFountain, an analyst at Needham & Company, the low end of Cisco's product line is already approaching commodity status, which makes it a prime candidate for Dell's business model. "When you're charging the prices that Cisco has been getting away with, you're doing it because you're not selling plug-and-play products, you're selling solutions," he says. "But how much hand-holding do you need to plug a bunch of phone jacks into a socket?" That said, Mr. LaFountain doesn't think Dell poses any immediate threat to Cisco's overall business. "Dell's a bottom feeder. They've never run up against anything like Cisco before."
There is a lot more in this article about Dell and the company's business model that we did not quote.
The downside is that, as the article clearly states, Dell competes by destroying the very market in which it competes. As we have said before, the consumer benefits in the short term from falling prices, but once there is no competition in that market, and once R&D spending drops to nothing because there are no margins with which to sustain R&D, the consumer loses. Those who see only the cheap PC in front of their noses are missing the point entirely. Then again, many of those same people also think that Windows is a good OS, so their taste should be instantly suspect anyway.
How does this impact Apple? Apple's challenge is to be able to maintain their own margins (that means Macs that are "too expensive," for those keeping score at home), so that they can also maintain their own innovation and R&D efforts. Since Apple doesn't directly compete with Dell in the Wintel world, it is very possible that the company can do so. Indeed, they have done just that since Steve Jobs returned to the helm of Apple in 1997. The company has maintained margins in part by out-Delling Dell, and making their own inventory management and other related manufacturing processes second to none. At the same time, the company has managed to maintain the perceived value of its product line. If Apple can continue to do so, Dell's market destroying antics won't matter at all to Apple. Time will tell.