Selling Dell

Some laughed when Dell branched beyond PCs. Mike George, who runs Dell's consumer business, is having the last laugh.

Mike George, chief marketing officer and general manager of the U.S. consumer business at Dell, has the sort of resume that is getting to be fairly common at the company.

He's not a longtime member of the technology community or even a company lifer. Instead, he came from consulting firm McKinsey about four years ago. What does that mean? It means that George is a wealth of data when it comes to price points, demand elasticity and customer surveys. Editors from CNET recently spoke with George about Dell's move into consumer electronics and what that portends for the competition.

How's the U.S. consumer business looking these days?
We are pretty excited about the potential to really expand the role of the PC as the central entertainment appliance in the home and then to market an array of access and communication devices. We are really focused on the top three or four usage models around the PC and trying to make sure we have--either through Dell directly or through our partners--the right products and services.

For us, photography means continuing to expand our printer lineup. You have seen us morph our printer line into a line that has a pretty rich photo capability. We also sell a lot of digital cameras. That business has really grown. Today, that is all through partners like Canon and Kodak. I don't anticipate at this point a change because I think those companies have great camera lineups.

How do you decide what to go into?
We look at every category in the digital home and ask a series of questions. Can we add a lot of value to that marketplace, or do we think there is a big price umbrella to go after? Or do we think we've got some unique supply partnerships or advantages in the market? We rank ordered the priorities, and cameras just fall a little bit lower for us. It's not obvious that we bring great supply advantages, and again, we think our partners do an awfully good job. That was a very different story in printers and a very different story in TVs.

So tell us about TVs.
Consumer electronics stores are quickly moving to be digital-TV stores because they can get a 40 percent markup on those products. The reason I put the focus on big-screen digital TVs is, that's where they're getting all of their gross margins. That spells opportunity. Our plasma launch was a great example. We came in with an absolutely awesome quality 42-inch plasma TV for $3,499. Sony's product is $7,999, and the other guys are in the $5,000 to $6,000 range.

In terms of your growth strategy, what you have described is fairly predictable. Are there some solutions in this area that people aren't thinking about, that you think offers Dell growth potential?
I don't think you'll see us pushing any radical new solution.

The vast majority of customers that spend more than $2,000 on a PC come to Dell.
It's not how we think our brand adds value to customers. We will stay away from most first-generation usage ideas because it's highly unpredictable what will happen. If the usage model isn't exactly right, it will end up in someone's closet, and people would say, "Why the hell did I spend 1,000 bucks?"

How about video?
We're not ready to announce anything yet, but we are kind of talking to a bunch of folks, and I think we will have some video partnerships in the near to medium time frame.

For downloading movies, for example?
Those are the kind of things we're looking at. Again, that market is a little more immature, but conceptually, there is really no reason we won't do something like that with movies.

I have talked to lots of the traditional CE players, and they say Dell faces two problems. The company has no retail shelf space, and you need it for home consumer electronics. Two, product design. Dell doesn't have a huge history of designing a lot of products for the home and making that emotional connection with consumers. Are those real issues and, if so, how are you directing those?
We are not overly concerned. We think this market will mature like most other markets are maturing. You can debate analogies, but I honestly think that 10 years ago, when you were looking at buying a $3,000 to $4,000 PC, some people said direct sales wouldn't work. We've seen a high level of interest in our products. The competitors can poke fun at our design skills all they want--which is fine. I think that you judge for yourself. These plasma TVs are fantastic-looking products. I've got a 30-inch LCD in my living room. I don't think anyone would be anything other than thrilled to look at these products and have them in their home.

With everyone getting into this market, are we going to see consolidation and price declines?
Yeah, we will absolutely see it in this market. This is the only prediction I'll make today. A margin decline is a good thing because we have structurally the lowest costs.

Do you have much of an overseas opportunity for your CE products, or is it primarily a U.S. push?
I think we have a good overseas opportunity. I would view (our strategy as, first and foremost, win the business customer, and win the enterprise customer.

Ten years ago, when you were looking at buying a $3,000 to $4,000 PC, some people said direct sales wouldn't work.
Second is, win the consumer of PCs. Third would be to win the consumer with consumer electronics. In some of our more mature international markets with the most developed consumer businesses--like the United Kingdom, Japan, Canada and Australia--we definitely see a big opportunity in those markets for consumer electronics.

Even in Japan?
Japan is a wonderful market for our flat-panel TV. It's a wonderful market for small PCs. Our business in Japan is quite good, and we're rapidly approaching No. 1. We're not there yet but are rapidly approaching it.

What point will drive the adoption of the Dell Digital Jukebox compared to the Apple iPod--like Dell PCs compared to Macs? What needs to happen?
I don't know, and it's honestly not a particularly high focus for us. Music players are not in the Dell scale. They're not a particularly large market. They are huge for smaller companies, but for us, they will never be a large market. Would I love to be the No. 1 player? That would be great, but that's a market where I give a ton of credit to Apple Computer. They came up with great products and a nice music service.

What fraction of your consumer electronics sales go to existing PC customers, and what fraction go to people who haven't bought a PC from Dell?
That's been a bit of a surprise for us. When we started to play around in these markets, we assumed that these would be overwhelmingly sold to existing customers. I can't give you really precise numbers, but we have recently measured a few of our newer categories, like music players and TVs--and 52 percent are going to new customers. While it's too early for this to be really definitive data, it appears that those customers have a disproportionately high likelihood of then coming back to us and buying the PC. So that's a double win.

Are they using Dell PCs at work?
Perhaps. We don't know that. We know from our database that they've never bought a Dell PC from us directly.

Is that changing your marketing strategies with these new products, in terms of where or how you advertise?
One of our most important advertising vehicles is the Sunday newspaper insert.

By putting a TV on the cover of a Sunday insert, we sell more PCs than when we have with a PC on the cover.
It's a very successful vehicle for us. We started to do things like put TVs or music players on a cover of that insert, where six months ago, we would have said we want the PC on the cover. By putting that TV on the cover, we sell more PCs than when we have with a PC on the cover. We have to sell a lot more TVs, but we also have to sell more PCs.

People opened up because of the TV?
We captured their interest. Maybe they've gotten a little bit used to the insert. They may not be in the PC market, but that TV catches their eye.

Is price your main asset?
Dell's great secret and success in the PC market is that we have a fairly low market share among value-price PCs and an absolutely dominant market share among high-end PCs. If you were to use third-party data like IDC, what you would find in the sub-$500 category, which is the overwhelming share of PCs sold at retail, is that we have about 3 percent market share; in the category $1,500 PCs, we have between 50 percent and 75 percent market share.

So it is not surprising that we're winning in high-end electronics because we are taking that same customer. Again, the vast majority of customers that spend more than $2,000 on a PC come to Dell. It's those same customers that are earlier adopters of the digital lifestyle.

What is the sweet spot for TV pricing?
I'll give you a couple of examples. The 30-inch LCD TV has turned out to be a real winner for us. We saw some interest at $2,999. When we started to drive that price down to $2,499, we saw high interest. We recently broke to the sub-$2,000 barrier and have seen some very high interest.

Based on that, we've done something different in plasma. The $3,499 plasma is in a sense equivalent to the LCD at $999. Had we been following the LCD pricing strategy, we probably would have priced that plasma at $4,499, but we said, "Let's go right to the $1,999 equivalent price." That's our best judgment that that price is kind of breakthrough for plasma.

On other notes, how is the campaign against spyware going?
Spyware is a huge issue for the industry. We've seen calls related to spyware grow from less than 2 percent to of our calls 14 months ago to 20 percent now.

When people call us, they don't know they have spyware. Unfortunately, the solution can be as painful as an operating-system reinstallation. Step 2 is to educate people about how you need a spyware blocker on your PC or a spyware removal device.

We have offered a free spyware diagnostic tool on our site, and we're trying to get everyone educated that if you're not using a spyware tool, you're going to be in trouble. Ninety percent of consumers have spyware on their PCs.  

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