Why Is Dell Up and Gateway Down?

Nearly 20 years ago, two guys set up mail-order businesses, one from his dorm room, the other from a barn in South Dakota. Dell had a paper route and rooted for the Texas Longhorns; Waitt had a pony tail. They both had a dream of changing the way computers are sold.

Fast forward to today. Michael Dell’s eponymous company has a market cap of US$62 billion, annual sales of more than $30 billion, $2 billion in profits and first place in home PC sales. On the other hand, Ted Waitt’s Gateway (NYSE: GTW) is a $900 million company with roughly $4 billion in annual sales, a net loss in the tens of millions and a third-place market position. What did Dell do right, and what did Gateway do wrong? And will Dell’s winning formula continue to serve it well in a changed PC marketplace?

Cow Tipping

From his very first kit computers, Michael Dell’s intention was to package the latest standard PC technology at a price that undercut computing’s Big Guns. IDC PC analyst Roger Kay told the E-Commerce Times that Dell’s secret weapon is its focus.

“Dell has had a very consistent business model,” Kay said, noting that in the past, the company usually has passed on 50 percent of its cost savings to customers. “They have maintained growth by making sure they have the best deal in every product segment.”

In contrast, Gateway misinterpreted the model of selling commodity products in at least a couple of ways. First, it took on operating expenses needlessly. Most glaringly, its jump into retail stores — the Gateway Country shops — meant taking on overhead that dragged down profits.

Second, the company missed market opportunities. It has virtually no share of the $50 billion per quarter market for corporate computing, versus Dell’s 18 percent, perhaps because while Dell spends $400 million on R&D each year, Gateway spends almost nothing.

And while Waitt wandered away from his business during the dot-com era, spending a year in semiretirement, Michael Dell stuck around, driving his company like no other to pursue cost cutting and cost savings.

Very Un-PC

But the heady days of the PC market are over, and that has to be scary for any company dependent on high volume. Last year, the PC market grew just 1.5 percent in terms of units shipped year-over-year, IDC said, compared with a growth rate in the high teens during the late 1990s.

This shift has rocked Dell’s world, though the company has been less affected than Gateway and other PC vendors. In 1998, Dell was growing revenue at 50 percent or better per quarter; in the December quarter, its revenue increased just 22 percent.

But if anything can be said of Dell, it is that the company does not stand still. Much has been made recently of Dell’s strategy to branch out beyond selling PCs. Last year, the company lost Hewlett-Packard as a reseller of printers after Michael Dell started talking about slashing margins on printer cartridges the same way Dell did on PCs. Cisco and other networking partners have similarly retreated from dealing with Dell as the company has moved toward designing its own switches and hubs.

Same as It Ever Was

But Dell executives downplay the company’s new market pushes. Instead, said Carl Stolle, vice president of sales to small businesses, Dell’s growth over the next few years will depend on bringing cost advantages to large corporations in the areas of servers, storage systems and consulting services.

“It’s really more of the same,” Stolle told the E-Commerce Times. “Where we can bring the latest standard technology to customers at a better value, we’ll gain share.”

In the corporate server market, for example, Dell expects the move from various Unix operating systems to the commodity Linux OS to represent an enormous growth opportunity for its sales of Intel servers. The company nearly doubled its unit share of servers between 1999 and 2002, according to IDC, but more than 80 percent of the market is still under other vendors’ control — meaning Dell has plenty of room to grow.

And in an effort to drive purchases of storage systems, Dell has pushed storage leader and strategic partner EMC to slash prices on some of its proprietary products. Such a move would enable Dell to pass on more cost savings to corporate buyers.

Also, as CIOs grapple with storage networks and Linux installations, Dell hopes to exploit the rapport and reputation it has built through direct sales. “Even for a $2,000 switch, a small business will pay us to help them design their local area network,” said Stolle.

Tougher Than Gateway

Despite its efforts in the server market and other sectors, about 30 percent of all Dell units sold worldwide are still consumer PCs, according to IDC. And Dell’s old tricks may not work as well in this new era. For starters, consumers are far more demanding than they were when Michael Dell was in college.

“Consumers these days not only want the fastest processor or the cheapest overall deal, they want consumer electronics technologies for video, and they want to be able to put together home wireless networks,” Forrester Research senior analyst Jed Kolko told the E-Commerce Times.

Can Dell’s model, which has allowed it to leave competitors like Gateway in the dust, hold up as technology evolves beyond pure PCs? Kolko is optimistic about Dell’s chances, but he warned that second-place HP and seventh-place Sony will be tougher competitors than Gateway in this new world.

“To the extent that consumers want to add networking and consumer electronics capabilities to their PC, Dell will be hard-pressed to develop the breadth of product line and the deep retail channels that HP and Sony will use to tie this all together,” he said.