Fueled by a growth rate that has topped 70 percent at times during the past three years, No. 2 Dell Computer is on the verge of capturing the No. 1 slot in the U.S. A switch in the domestic rankings, according to some, could come by next quarter.
The same thing could happen worldwide. Globally, Dell wasn't even ranked in the top five in 1996, but it could overtake No. 1 Compaq a year from now if trends continue.
"You're seeing the crossover now in the U.S." said Ashok Kumar, an analyst with US Bancorp Piper Jaffray. "If you look at this on a worldwide basis, Dell is about 75 percent of Compaq's run rate. It was 65 or 64 percent a year ago," creating the possibility of a reversal in a year. "Run rate" refers to the amount of product being shipped at present.
Not everyone agrees on when this may happen. Kurt King, an analyst with Banc of America Securties said crossover is occuring but at a slower rate. Dell could overtake Compaq in the U.S. in the next few quarters, while it could take close to two years internationally. "Dell has a ways to go worldwide," he said.
Both companies actually gained market share in the second quarter. The latest results show them neck-and-neck in U.S. shipments, while Compaq ships about 1 million more desktops and notebooks per quarter on a worldwide basis, according to GartnerGroup/Dataquest. Sequentially, Compaq shipped 150,000 more computers worldwide in the second quarter than in the first. Dell went up 290,000 in the second quarter.
The PC market, however, often doesn't follow the rules, and the current dynamics of the marketplace could upset any trends. Cheap PCs, often bundled with long-term Internet service contracts, have become the rage among consumers. Compaq, which is currently selling computer-printer-monitor bundles for as low as $199 after $600 in rebates at select dealers, has a stronger presence than Dell in the consumer market.
Dell will also need to expand its presence in Asia-Pacific and other geographies as well as counter any gains made by other PC companies emulating Dell's sales strategies.
Meanwhile, both companies face an increasingly competitive business market. Several large PC makers last week claimed that they have taken parts of big contracts, including contracts with MediaOne, Home Depot, and Coca-Cola, away from Compaq as it struggles to rebuild its management team. On the other side, Hewlett-Packard snagged a contract to supply PCs to florist FTD nationwide from Dell, HP said last week, although FTD will continue to get its servers from Dell.
Dell's rise is both simple and subtle, according to observers. The company's "direct sales" model, under which the company sells PCs directly to the customer rather than through a dealer, has been embraced by corporate America, leading to spectacular growth in the large business market. The increasing technological sophistication of small businesses and consumers has also allowed Dell to expand to those segment as well.
The business model also allows Dell to build PCs as customers order them, a shift in manufacturing that helps the company avoid painful inventory hangovers and better take advantage of component price reductions.
"A great edifice"
Further, the system allows Dell to market few different models, pointed out Roger Kay, an analyst with International Data Corporation. By contrast, "Compaq throws out a thousand fish hooks instead of one good one. They may snag a few more customers but a lot of added cost.
"[Dell is] a great edifice built of thousands of tiny business decisions. These decisions, mostly the right ones, translate to star power," he added.
A switch in U.S. numbers could occur if everything works in Dell's favor, added Kay. "Dell's shipment level, particularly in the United States, could surpass Compaq's in one more quarter."
On the other hand, consumer sales stump Dell's relative growth, added Christine Arrington, another IDC analyst. Compaq usually sees greater acceleration in sales during the second half of the year, because it sells more consumer PCs. Compaq has also been aggressively promoting heavily discounted PCs with Internet contracts. Dell has yet to come up with its ISP-PC onslaught.
"In Q3 and Q4 is it really hard to knock out the leader, especially when they are really strong in consumer," she said.
Further, Kumar added that Dell needs to expand its presence and concepts to Latin America and Asia.