Dell portrayed the price cuts as "business as usual," but they come at a time when its three largest PC rivals--Compaq, IBM, and Hewlett-Packard--are facing swollen inventories of corporate desktops and PCs in their distribution channels. Unlike most of its competitors, Dell saves significant costs by selling directly to customers through catalogs and the Web, cutting out the middleman.
The latest reductions follow Compaq price cuts and monitor giveaways in March, part of an effort to clear out excess supply. A slowdown in demand combined with an aggressive production schedule forced the world's largest PC manufacturer to make drastic moves to offset an expected revenue decline of 34 percent this quarter.
Today's price cuts undermine Compaq's strategy of flooding the market with low-end PCs and making its profits on more expensive server systems--an area where the company typically makes up for its low-margin PC sales.
"We've heard from some corporate resellers that, of the top ten moving [systems], six are under the $1,000 price range. If that's the case, a manufacturer like Compaq who sells these systems has to offset lower margins on desktop systems with higher-end box [such as a server]," explained Tony Amico, director of International Data Corporation's PC channels research program.
"An effective way to compete with a vendor selling through the channel is to drop prices on server products," Amico said. "The Dells of the world can maintain a decent margin because of their efficiencies...This creates apoplexy for the vendors who are selling through corporate resellers and the channel."
Dell said a PowerEdge server with a 233-MHz Pentium II processor, 64MB of memory, and a 4GB hard drive was priced at $3,725 and is now priced at $3,150, a reduction of 15.4 percent. Among other systems receiving price cuts, a server with dual 300-MHz Pentium II processors, 512MB of memory, three 9GB hard drives, and a redundant power supply falls to $10,894 from $11,569, a reduction of 5.8 percent.
Turning to its OptiPlex desktop PC line, a system with 266-MHz Pentium II, 64MB of memory, a 4.3GB hard drive, and a CD-ROM drive was priced at $2,622 but is now priced at $2,303, a reduction of 12.2 percent. Other systems received similar price reductions.
IDC reports that Dell is the fourth-largest vendor in the PC server market with a 6 percent market share. PC servers are usually defined as Intel processor-based systems that cost less than $25,000. In 1997, the company experienced phenomenal revenue growth, logging a 181 percent revenue gain over the previous year.
Compaq remains the world's largest manufacturer of PC servers with 35 percent of the market revenue, compared with 12 percent for HP and 11 percent for IBM. Dell still faces challenges from Compaq and others as it tries to keep up its torrid pace of growth.
Analysts say Dell is at a disadvantage compared to bigger competitors when it comes to acting as a full-service computing company.
With the acquisition of Digital earlier this year, Compaq joins IBM and HP in being able to provide multinational corporations with first-class consulting services and industrial-strength Unix-based computers--both of which are required by many of the largest corporate customers. Profits from service operations are also expected to grow at a more rapid rate than from PC sales.