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Dell expands on his success, PC's future

Michael Dell has revolutionized the PC industry with the "direct sales" approach. He tells's Michael Kanellos how he got there and offers glimpses of the future.

Michael Dell, youthful CEO and founder of Dell Computer, has revolutionized the PC industry with the "direct sales" approach.

Later this month, he'll come out with his first book, Direct from Dell, about the company's rise. In a recent interview in San Francisco, he tells about his book, the industry, and the future of PC companies.

Q: Why did you write the book?
Dell: Well, the Internet in the last few years has really helped our business quiet a bit and generated a lot of interest in this whole direct business model. A lot of companies are asking about how does this work. Our company's stock has been listed as the best performing stock in the S & P 500 in the last 10 years, and a lot of people seem to have a lot of interest in this, whether it's big companies, small businesses, kids in college, or grad school, or high school, or whatever. We thought it was, I thought it was, a good time to put this together and describe how we use information in our business to make our business more efficient.

I should mention, by the way, that all the proceeds of the book will go to the Dell Foundation, which is the company's foundation, not my foundation. It focuses primarily on kids and health care and education.

Q: One thing I picked up in the earlier chapters of the book is that you don't like stores too much. Was this a life-long thing or was picked up from PC shopping?

Dell: (laughs). When I was in high school Computer Darwinism I used to hang out in these computer stores, and I observed a couple of things that were very apparent. First was that the stores had tremendous markups. They would buy a PC for $2,000 and sell it for $3,000, and the other thing was that they knew very little about the PC. And they were very inefficient, they would have the wrong kind of product and wouldn't know how to support it. It just appeared to be a really screwed up business model to me. And I just saw this huge opportunity. Now, of course, some of this disdain for the store probably comes from built-up competitive spirit.

Q: When you first started, were most of your customers from the enthusiast base or were there corporate buyers?
Dell: When I started, most of the customers were businesses. My biggest sale in the first month was to Texaco, the oil company. Today it is 86-87 percent to businesses and institutions and government, and about 14 percent to individuals. Both are growing very rapidly, but we have more market share and are effectively No. 1 in the desktop and notebook to corporations in the U.S.

Q: With the direct sales model, did the benefits seem to grow over time, did you have an inkling of what they were at the start?
Dell: We didn't know all of the stuff in the beginning. The basic idea in the beginning was that you could provide better service to the customer and get the latest technology faster. In other words, IBM had 6 MHz parts but Intel had 12 MHz parts, and it didn't seem to make sense to me that it took so long to get the technology to the customer. So there was this time market element, there was the elimination of the dealer and a better level of service.

I can't say that I knew all of the benefits. This idea that we would have an economic savings to the customer because we had less inventory, that never really occurred to me. It turned out to be a beautiful thing. It became obvious very quickly. It is interesting if you go back and read about the PC industry, say, six or seven years ago. You could read 100 stories about the PC industry and never would it ever have been mentioned that inventory was a crucial factor to success because nobody had ever really identified that as a differentiator. But then we came along and said, 'Hey, we could really draw a huge advantage and save our customers a lot of money, lets draw our inventories down.' Today we have six days of inventory. Take HP, they had at the end of the last quarter, they had over 60 days inventory, and it had gotten up to 80. Compaq was?again?Well, apparently, old habits die hard.

Q: You say in the book that the company has concentrated more on making the products easier to use vs. doing heavy research and development. Why so?
Dell: If you look at most of these companies that are in our competitor base, most of their product strategies, R&D strategies, are heavily engineering driven, in fact a lot of the companies are engineering driven in their focus. And of course that brings on a lot of product innovation, which is not necessarily a bad thing, but if it is not customer focused you can really be misdirected, misguided, and the dollars don't yield much benefit to the users.

We, I think have been quite different in our orientation. We have 25,000 people in our organization, we spend $350 million in our R&D, so there are serious things going on there, but we direct the energy not at duplicating the inventions of other companies, but at unique things that are going to add real value

Q: A lot of these companies are moving to a direct model, and picking up this customer-centric approach. What will be the differentiator in the future?
Dell: That's the topic of my second book. Just kidding. That will be another 15 years. Um, I don't know. There are a lot of uncertainties in a business like ours. It changes very quickly, lots of new technology?This transition from the indirect to the direct is not as easy as it has been made to seem, and we're seeing some of the signs of that now. For one, you have to deal with the question of doing both at the same time. And our experience in that, which goes back 6 or 7 years ago, was pretty disastrous. [Dell sold through retail stores for a brief period.] The manufacturing guys build a plant that can support both a direct and indirect channel, and it's not very good for either one.

Q: How is that?
Dell: Well you know, our lines are built to the customer's order, and if you build to that, that is very different from building to stock for the dealer's orders. And there are different processes, and if you want to optimize for each one, you have to have a different processes. It'll work, but it's not as efficient, and every decision gets marginalized. 'Is this something we should direct at the customer or the dealer?' And of course your people get very confused: 'What is our real strategy, is it direct or indirect? How should we handle this?' You get this incredible conflict not only among your channel, but also among your people within the company.

These companies that are very good at indirect, can they be great at direct? Can the world's best baseball team beat the best basketball team at basketball. This is a different game. Maybe they will do pretty well, I don't know--there is a lot of uncertainty--but it is not a slam dunk where they can just come over and say, 'OK, now we're direct, we now have a Web site, we're sold on the Internet. We're called whatever direct and now we're just like Dell.'

Q: You've announced that you will start to sell more third party products through Doesn't that almost put you in the indirect model? In a way, you are a reseller.

Dell: Well, we have been selling these products for a long, long time. We have been a large reseller of HP printers, one of the largest, for a long, long time. I think what you have is an aggregation point where a customer expects to get everything that goes along with the computer. Today our sales of these software, accessory, and peripheral items already significantly exceeds that of many of the dedicated online retailers.

Q: How are you going to do this differently; are you going to manage this yourself?
Dell: Yeah--it is an internal operation. And there is full integration with the Dell shopping cart, so if you are a Dell customer and you want to add a bunch of software peripherals to your order you can jump over to Gigabuys and add those on and keep a common shopping cart.

Q: Are you going to inventory the products?
Dell: No.

Q: Any thoughts about doing a store, like Gateway?
Dell: We don't have any plans for that. We are not setting up stores. Our consumer business contrasted with Gateway's grew at about 56 percent last quarter. Gateway grew at about 17 percent, so not quite 3.5 times Gateway's growth. It is possible to add sales by opening stores, but the problem is that you also add cost, and cost at a higher level than you would through the existing mechanism that we are using now.

Q: Do you think that you can enter the cheap PC area and still keep within the parameters you have set for the company?
Dell: We can sell a PC at a lower price than our competitors and still make a profit where they couldn't because our cost structure is lower. Which is interesting, because some of our competitors claim that they make more profit on their sub $1,000 PC's then they do on their more expensive ones. How do you do that? That's a form of math I'm not familiar with. I still to this day don't understand how you can make more money on an $800 computer than you can on a $2,000 computer. Someone is going to have to explain that to me, or at least to their shareholders.

The way that you get low priced computers is to get low priced components. As the component cost comes down, you get lower priced machines. We have machines that are under $1,000 today for the corporate market. We have consumer machines that are $1,100, although we tend to sell the more fully featured machines, Pentium IIIs with 19" monitors.

Q: Assuming prices keep going lower, what will happen to the industry. Will it drive consolidation?
Dell: I think there are a couple of things to consider. Clearly, there is technological evolution that allows us to make machines that cost less. But if you take functionality out it becomes a non-useful device. You can make a $200 computer, but if it doesn't run any software, that's not good.

The other thing to consider is that the guys like Applied Materials and Tokyo Electronic build the capital and the equipment that go into the fab, and fab costs aren't going down. If you put all the money into building a fab, eventually you will want a return on it.

Now if you make DRAM's or hard disk drives or CRT monitors or LCD displays, for the last 3 years you have made a profit of zero. In fact you have probably lost money. Before you add capacity you are going to want to make sure prices are going up, because if you can't profit, why should you invest another dollar in another $2 billion bet? This is another way of saying, a lot of the low priced computer phenomenon has essentially been the result of the market being awash with low priced components.

Q: You give a lot of credit to outsiders and other executives for the company's success in the book. That's not really common for the genre.
Dell: For me it has been a very important part of our success. I can't run a business all by myself, and that's what business is all about. It's about organizing teams and coming up with strategies. The days of the superhero are gone.

Q: How does '99 look? Some people say it is slowing down.
Dell: I think it's going to be another very good year; I expect the industry will grow somewhere in the mid-teens, and we expect Dell to grow much faster than that.

Q: Are Internet devices going take off?
Dell: Depends on what you define as an Internet device. I think you'll see more and more devices that have IP addresses and are attached to the Internet, whether it's telephones, televisions, or cars or other things. I view those as supporting elements of the computing spectrum, not necessarily things that will blow the PC out of the water. If Internet access comes to your phone or car or television, I don't see those replacing your PC. I think that will pull more people in with the Information Age, not cause them to get rid of their PC.

Q: Do you think that you would manufacture in that area?
Dell: We don't have any plans in the near term. There are 325 million PC's in the world today, I think there will be 1.3 billion 10 years from now. We have 9 percent market share--we would like to have 25 percent or 40 percent share 5 to 7 years from now. That's enough to keep us busy.