Intensifying competition among the major PC makers is going to drive prices, and manufacturers' margins, lower in 1999, especially in large deals like the Mobil contract, according to financial analysts. And, unlike in 1998, Dell will participate more actively in the price games, which could fuel discounts even more.
In a recent financial conference call earlier this month Dell CFO Tom Meredith said that the company will likely see lower gross margins next year, but also try to maintain its current pace of revenue growth, which is roughly 50 percent per quarter on a year-to-year comparison, according to analysts on the call. In all likelihood, this means that Dell will lower its prices.
This is different from 1998 when Dell managed to grow its market share, without cutting its prices as aggressively as other vendors.
Dell will "increasingly become more price aggressive to maintain top line growth," said Kurt King, computing analyst with NationsBanc Montgomery Securities. While some of the effect of lower prices will be absorbed through improved manufacturing, the company will also likely accept lower product margins on average in 1999, said King.
Meredith, in fact, said that price has already become a larger factor in large corporate account sales "where an incumbent is attempting to protect its position," said Richard Gardner, an analyst with Salomon Smith Barney.
"We agree that Dell's gross margins will likely trend down over the coming 12 to 15 months due to, one, an impending moderation in component price declines...and, two, increasing competition from top-tier companies like Compaq, Hewlett-Packard, and IBM, who have been working to reengineer their manufacturing and distribution for at least the past 15 months."
Dell will also slow down its rate of hiring, Gardner predicted. The company added about 9,000 employees in fiscal 1998.
Under the Mobil contract, the oil company will standardize on, or purchase on an essentially exclusive basis, Dell desktops, notebooks, and Windows NT servers for a three year period. Standardization will result in a cost savings of approximately 25 percent, according to Dell, by streamlining acquisition and testing procedures.
The company has been buying its desktops from Dell but relying on IBM for notebooks and servers, according to a Dell spokeswoman.