Dell is celebrating. Research company IDC has named it the market leader in desktop sales, claiming more than 18.7% of the overall UK market. (see Newswire 18 August)
Not surprisingly, profits for the company are up by more than 42 per cent on last year's figures, to $6.1 billion. That’s not bad when you consider that PC sales are supposed to be dire, and Dell's rivals like Compaq and IBM are reinventing themselves as value added service companies to cope.
The announcement has stunned industry observers who have been expecting PC sales to slow by 2 to 5 per cent until sales dry up altogether. Bloor Research senior analyst Jon Collins said Dell had stolen a march on its competitors by pushing direct sales through the Internet.
"They were a mail order company and they have used that experience to do very well in the Internet field," he said.
Dell's ace card had been to set up excellent after sales service and helpdesk facilities, and overcome the fears that many had dealing with electronic commerce.
"They had also been able to slash costs by refusing to order the components until after an order had been placed," Collins said.
“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 making Dell's levels of profit.”
Rise and fall
But while Collins was impressed at Dell's results, he warned that the company had a limited amount of time to capitalise on its good fortune. He believes that rocketing profits now herald the swansong of a doomed PC industry.
"We have seen markets disappear overnight before," he warned. 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.
The idea is that British public were prepared to spend £1000 to get a PC but now they want them cheaper. The recent spate of low cost or 'free PC' deals is just the tip of the iceberg.
Most people want a PC for word processing and to get onto 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 punters could get what they want from a computer from a design that left the factory four years ago. Those that want the graphics hungry and technologically advanced games can easily invest in a much cheaper games console.
"Most people are being sold a high spec PC to do things they don’t want," Collins said. 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.
However, Collins believes that the channel will remain because Joe Public doesn’t really know that much about technology and needs someone to tell him what to buy.
"The channel will be adding value to products and providing advice," he believes.
Now and then
Marketing manager for Dell UK and Ireland, Martyn Lambert understands the thin client melt down model well. When he was working for Sun he helped sell it. Now, of course, he doesn’t believe a word of it.
"I can see the argument, but it’s just not happening that way. The figures just don't bear it out," he said.
He accepts analysts' beliefs that there will be a slowdown in the growth of the PC market of about 3 to 5% 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 said.
Thick and thin
While thin clients will have a mass market appeal, there’s no reason why they should kill off the PC, and Lambert is banking on the two types of computing coexisting happily.
"While it is true that there will be people who will only want to get information from the Internet, 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 they will buy a PC," he said.
Dell 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, you’re going to have serious problems with your margins," Lambert added.
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 of the competition. This will more than compensate the company for any sales it loses to thin client and low cost PC packages.
If Lambert is wrong, then his company policy of direct selling has proven its worth in delaying the demise of the PC and will leave Dell profitable enough to change direction if it needs too.
Either way, expect more profits from Dell in the foreseeable future.
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