For Dell, will luxury PCs boost profits?

PC king may be trying to pump up margins with a line of high-end laptops to sell with its bargain basement computers.

Dell, the low-cost king, may be trying to fatten up its margins by going after the top end of the PC market.

The Round Rock, Texas-based company on Wednesday unveiled its XPS brand, a luxury line of computers that will compete head-on with high-end PC makers like Alienware and even Apple Computer.

Some analysts interpret the move as an indication that Dell, which rocketed to the PC industry's top spot by building an efficient manufacturing operation that enables it to sell computers for less than its competitors, wants to feast on the fatter margins that come with selling snazzier gear. Prices for the XPS systems start at $1,099, while prices for the long-running Dimension PC line can go as low as $400.

What's new:
With its new XPS line of PCs, Dell is taking a shot at the high end.

Bottom line:
Considering that PC components are already at rock-bottom prices, the Texas company is hoping to pump up its margins with the luxury brand. But can it lure style-consious consumers away from Apple Computer?

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But why bother? After all, Dell's margins seem to be holding up. In its most recent fiscal quarter, which ended July 29, Dell said its operating margin was 8.7 percent of total sales, up a tenth of a percentage point from a year ago. And sales were up 15 percent to $13.4 billion.

Still, in an industry whose customers expect prices to keep on dropping, even the most efficient of companies, at some point, will find that it's becoming difficult to maintain a healthy profit.

"There is probably no other business on earth in which buyers continually expect more for less," said Roger Kay, president of the tech analysis firm Endpoint Technologies Associates.

Moore's Law, which argues that the number of transistors in a silicon chip doubles about every two years, has held up for many years and still has some life left in it, Kay said. Moore's Law also means that the cost of producing that better performance inversely drops--and it has over the years. But costs of other basic components, such as cases, fans, frames, power supplies, and a multitude of diodes and resistors, are already at rock bottom and aren't going much lower, Kay said.

Dell XPS line

"It's pretty clear that (Dell) needs to go after those high-margin markets if it wants to maintain its profits," said Nicholas Carr, author of several tech industry books, including "Does IT Matter? Information Technology and the Corrosion of Competitive Advantage."

The solution: Go upscale with some of your products, where margins are always higher. It's a strategy similar to what big car manufacturers have been doing in recent years: Big trucks don't cost too much more to make than sedans, but they cost a lot more on the sales lot. Customers are willing to pay a premium for that size and power. That's money the carmakers can pocket.

It's the same thing in the PC market. More power, more features usually mean more profits for the manufacturer on each item sold. And Carr argues that, like car buyers, some consumers think of their PCs as statement items and are willing to

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