Dell thinks small

The PC maker has added more than 1 million new customers in the small- and medium-sized-business market since January 2000 and plans to keep digging in.

Dell Computer may be the No. 1 PC maker, but it is still trying to grab a piece of one of the most lucrative and potentially untapped markets for name-brand PC makers.

On Monday--the start of National Small Business Week--the company announced that it has added more than 1 million new customers in the small- and medium-sized-business market since January 2000 and that it plans to keep digging in through low pricing and other incentives.

Round Rock, Texas-based Dell has gained tremendous share in the overall PC market in each of the last two quarters--up as much as 43 percent year over year--despite an industrywide slowdown in sales. But in tackling the small-and-medium-sized-business market, the company faces perhaps its toughest rivals: local dealers, also known as value-added resellers.

Resellers build custom PCs--known in industry lingo as "white box" machines--and account for the vast majority of the "other" category in computer-sales figures. And the "other" category accounts for 40 percent of PC sales worldwide, according to IDC.

Dell is the No. 1 computer maker in the United States and worldwide. But, according to Dataquest, that equates to just 25 percent market share in the United States and 13 percent worldwide.

"The 'other' category is by definition white box," IDC analyst Roger Kay said. And "the nature of white box is small and medium business."

Oddly, Dell's small-business assault pits the company's direct-sales strategy against a market heavily dominated by computer middlemen. It also is a market that shows little sign of giving way to Dell or any other PC maker, said NPD Intelect analyst Stephen Baker.

"Small business has been the holy grail for PC makers--none of which have attained it," he said.

Small and medium-sized businesses--those with fewer than 500 employees--account for 37 percent of the U.S. PC market.

Dealing out direct
Small and medium-sized businesses tend to buy through three sales channels, Baker said: local resellers, direct PC makers and catalog dealers, such as CDW and PC Connection. The bulk of the business goes to the first then the second of these seller categories, he added.

"Different companies have different strengths in each one of those areas, but no one has been able to execute in all three," Baker said. That's a problem for Dell because it doesn't really embrace the indirect market.

Dell's low-cost

Gartner analyst John Doe says small businesses offer a definite profit opportunity, but Dell will not find it easy to make the most of that opportunity.

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direct sales methodology would seem appealing to price-conscious small businesses, Kay said. But in reality, "the local resellers offer service and other extras that are hard for Dell to match."

The IDC analyst sees other barriers to breaking through in this segment--particularly for Dell. The small- and medium-sized-business market is made up of so many specialized types of companies, that "for a large PC maker, it's kind of hard to approach the segment in any one way," Kay said.

"Dell is not approaching the segment at all," he added. "It's sort of letting the segment approach it."

Still, Dell has had some success chiseling away at the market by focusing in a limited way "on individual slices, like three-man software companies, medical clinics, et cetera," Kay said. "They're doing fairly well going after slices of it, particularly geographic slices."

The strategy helped Dell make the most out of the dot-com boom, capitalizing on small and medium-sized businesses that had lots of capital but small staffs. Conversely, Dell took a revenue hit in the third and fourth quarters because of collapsing dot-com sales.

Driving out dealers
Still, Dell has made inroads into the small-and-medium-sized-business market. Technology Business Research analyst Brooks Gray estimated Dell's business in the segment grew 98 percent year over year in 1999 and 43 percent last year. By comparison, Dell's sales to large corporations, government and health-care institutions combined grew 18 percent, while consumer sales soared 63 percent.

Dell last year racked up $5 billion in small- and medium-sized-business sales, or 17 percent of the company's $31.8 billion in revenue, Gray said.

"But Dell will undoubtedly see slower revenue growth from the (small- and medium-sized-business) market this year," he warned. "However, I expect the company to be extremely aggressive with product and services pricing. And it is likely Dell will pick up at least two to three percentage points of (small- and medium-sized-business) market share in 2001."

Surprisingly, Dell's biggest asset--the ability to make PCs at a low cost and sell them at cheaper prices than competitors--doesn't work well in the small- and medium-sized-business market, Baker said. This is especially true given the slow economy.

"Small businesses tend to be more sensitive than other segments," Baker said. "They're really price sensitive in that they aren't going to buy anything. If their business isn't doing well, they're not going to buy."

Kay agreed.

"The small-business market has really dried up right now. Small companies are more price elastic and more sensitive to the economy than large companies are, so they're the ones throttling back" Kay said. "If I'm a small-business guy and I don't want to spend one thousand bucks a PC, I'm not going to buy because it's $900." So Dell's aggressive price "doesn't mean much."

Frank Muehleman, senior vice president of Dell's small- and medium-sized-business group is not concerned about resellers, because he sees them moving away from hardware sales.

"There is a movement among some of the value-added providers who are moving away from providing the hardware to providing more of a service or the software," he said. "If you track that group, a higher percentage of their revenue is derived from services and software."