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Dell relying more on indirect sales

Although it made its name as a direct vendor, Dell is acting more like a traditional computer company every day.

Although it made its name as a direct vendor, Dell (DELL) is acting more like a traditional computer company every day.

High tech executives and analysts agree that mail-order king Dell Computer is increasingly using the "channel"--the term used to describe the computerindustry's reseller and service infrastructure--to grow its market share.

Moreover, enterprise (or business-class) accounts are increasingly important to the Texas manufacturer, as demonstrated by the company's third-quarter results, which were reported yesterday. (See related story) In the third quarter, ten percent of Dell's sales went to large enterprise accounts. Among product segments, sales of workstations and servers grew 340 percent while notebooks, which primarily get sold to businesses, grew 46 percent.

The consumer segment grew still faster during the quarter, Dell said.

"Dell has clearly created brand preference in the corporate workplace. It is interesting how a significant number of customers want the Dell brand but want to buy it from resellers," said David Dukes, vice chairman of Ingram Micro, the industry's largest distributor, who said that Dell has been courting distributors and resellers.

While chairman Michael Dell maintains that the company sells two percent or less of its product through the channel, others say that sales which would not have occurred but for the presence of a reseller in the deal could be as high as 20 percent of Dell's corporate sales. The reason, say most, is that corporate America still needs resellers to control their computing assets and provide service.

(Ironically, at the same time Compaq, IBM, and others have installed Dell-inspired logistics systems that take away the pricing advantage of direct vendors like Dell.)

The discrepancy has sparked a war of words between Dell and its rivals.

Eckard Pfeiffer, chief executive officer at Compaq, called Dell's channel strategy the "dirty secret" of the computer industry in his keynote speech at Comdex earlier this week. "We have literally destroyed the direct vendors' pricing advantage," he added.

Michael Dell instead argued that Compaq is scrambling to emulate his company. "Our reseller sales are only at one and a half percent--and look at our profits and growth," he asserted, referring to the company's phenomenal growth in recent years. Dell went on to say that many resellers don't make money, and therefore the channel is a failed business model.

Nevertheless, while the exact percentage of reseller-assisted sales is difficult to determine, but most observers see it growing.

"Dell is going to have to get more and more integrated in the channel to serve enterprise accounts," said Roger Kay, computer analyst at International Data Corporation. "Enterprise" is industry slang for corporate, specifically entrepreneurial business, accounts.

The channel has been described by at least one channel executive as "the ugly stepchild of the industry." In earlier times, the channel mainly functioned as a distribution mechanism and made its profit on product margins. But as margins decreased over the past few years, resellers began to derive their profit from services, such as asset management, help-desk staffing, and system integration.

Dell established a presence in corporate America by selling computers for less than channel-dependent vendors like Compaq. Larger companies, in fact, have found the Dell message the most compelling because these companies often have MIS managers who can provide reseller-like services, according to Kay and others.

Corporate America, however, often bases its buying patterns on long-term relationships, said Kevin Hause, an analyst at IDC, typically with large resellers such as Entex. Thus, while Dell might technically be selling or shipping the computers directly, the sale is really being facilitated by the reseller in these accounts.

"Do you call it direct or indirect if a reseller ends up selling 30 Dell computers into its own account," Hause said. "An awful lot of that goes on."

The murky status of these transactions also makes it difficult to state the true percentage of Dell's sales that go through the channel, or would not occur without an accommodation by the channel.

Scott Miller, an analyst at Dataquest, posited it could be as high as 20 percent. Most estimates are lower, but the number is believed to be rising.

Regardless of the percentage, growing Dell's business will prove increasingly difficult because using the channel infrastructure is more expensive for Dell than the other major vendors, said Jacques Clay, vice president and general manger of the extended desktop business unit at Hewlett-Packard.

The indirect vendors have long-standing relationships with the channel that have often been secured by comarketing dollars or technology investments. Dell has made no such investments in the channel. Therefore, when the price of equipment becomes equal, Dell will find itself on the wrong side of the cost equation, he said.

"The day Dell has to do that [create channel incentives], they will have to put money on the table, and they will lose their pricing advantage," Clay said.

Dell and other direct vendors, however, have not been standing still. Dell has been hiring a number of executives all year from large resellers in an effort to build a larger service and support division, according to Dell executives and other sources.

Desktops and servers are also being made with an eye toward manageability and ease of use, said Joseph Wei, director of product management at NEC Computer Systems, which increased its direct sales this year.

Brooke Crothers contributed to this story. Related stories