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Finger-pointing after Dell's Halloween scare

Analysts debate whether bad capacitors and increased competition are worse than the problems that Dell causes itself.

Analysts can't seem to agree what spell has been cast over Dell for the low-cost PC maker to fall on hard times for two quarters in a row.

It seems every armchair quarterback has a good explanation for Dell's anticipated failure to meet its third-quarter revenue forecast. The Round Rock, Texas-based company blamed sluggish consumer sales in the U.S. and U.K. consumer markets, as well as performance problems with capacitors in its GX270 and GX280 Optiplex computers.

Dell offered no additional explanations for its disappointing outlook on Monday. A conference call scheduled on Tuesday focused solely on Dell's pickup of Intel's Xeon "Paxville" processors, which is designed for servers with four processor-sockets.

Possible reasons run the gamut. Dell may have been pricing its computers too competitively. Increased competition from Hewlett-Packard, China's Lenovo Group or so-called white-box sellers like Acer disrupted Dell's U.S. and U.K. businesses.

The bottom line for most analysts is that the salad days for Dell are over in the short term unless the company can get a grip on itself.

"It's not Dell vs. HP, Dell vs. Acer or Dell vs. Lenovo. It's Dell vs. Dell which is the major issue," Bear Stearns analyst Andrew Neff wrote in a newsletter to investment customers. "

Based partially on a recent lunch hosted with Dell CEO Kevin Rollins, Neff said he and other Bear Sterns analysts were concerned that Dell's biggest challenge is not tough industry conditions, new competitors or new economics. It was ego.

"And it's not that Dell was becoming too big or complex," Neff said. "Our sense is that--to the contrary--Dell was becoming complacent because it had won and it had begun to take winning for granted."

The firm noted that the $300 million shortfall in the July quarter was largely attributed to weakness in government sales and some problems getting consumers to upsize their purchases. In the past, Dell has managed to overcome weak sales in one area, such as desktops, with strong sales in others, such as printers, displays or televisions. But this time it didn't happen, Neff said.

Analyst Cindy Shaw, with Moors & Cabot, suggested Dell's problems stemmed from its lack of growth in key areas such as China and India.

"We think Dell may be facing tough competition from Lenovo, which we believe is well-entrenched in China and has been making a concerted effort in China and India on the heels of acquiring IBM's PC business earlier this year," Shaw said in a report to investors on Tuesday.

Shaw also noted that Dell has been pressured by customers over the last six months for its lack of an AMD Opteron-based server. This might not be solved by Dell's adoption of Intel's new Xeon processor.

"We believe the current Opteron processor offers several advantages--performance, price, and heat generation--over Intel's closest offerings, including the Paxville that Dell is now selling," she said.

But for all its problems, analyst Toni Sacconaghi, with investment firm Sanford C. Bernstein, said Dell's problems are not necessarily spreading to the rest of the PC industry.

"We view Dell's shortfall as company-specific, principally due to unrealistic expectations, and do not think investors should read into it as a sign of weakening aggregate IT demand or as providing any correlated insight into HP's third-quarter results," Sacconaghi said in a newsletter to investors.

Industry PC unit growth was stronger than expected in the quarter. And other technology bellwethers such as IBM, Intel and Microsoft, reported earnings last month that were largely in line with expectations.

That said, Dell's goal of reaching $80 billion in revenue over the next three to four years is unlikely now. Analysis suggests that Dell would have to grow revenue at an annual growth rate of about 13 percent for the next three years for that to happen, Sacconaghi said.