WORLD

THE QUEEN OF THE AIRWAVES

NANCY MACDONALD May 29 2006
WORLD

THE QUEEN OF THE AIRWAVES

NANCY MACDONALD May 29 2006

Dell: from genius to moron and back

BUSINESS

Can Dell Computer be fixed? With a billion in quarterly profit, it’s not even broken.

STEVE MAICH

In the world of CEOs, you are only ever a genius or a moron. There is no happy medium. When sales are growing and the stock is rising, the world kisses your feet.

Hit a bad stretch, even a speed bump, and you’re a joke. The only thing that makes the carousel tolerable—well, besides the money— is the sure knowledge that your luck will always turn around eventually.

Take, for example, Michael Dell and Steve Jobs: two men who seem destined to forever be on opposite sides of fate’s coin toss.

Back in 1997, Dell was the visionary and Jobs was the chump. The latter had just returned to the helm of Apple Computer, the company he founded and which looked to be on the verge of collapse, when Dell took the opportunity to dump a little trash talk on his rival. Asked what he would do if he were CEO of Apple, Dell suggested surrender. “What would I do? I’d shut it down and give the money back to the shareholders,” he laughed.

Four years later, Jobs had managed to pull Apple back from the brink, but Dell was still king of the computer industry. Apple had only recently launched its foray into digital music, and most of the world still didn’t know what an iPod was. Jobs, who had always struggled to get decent shelf space at major retailers, decided to open a chain of Apple stores across the continent to showcase the company’s flashy hardware. Dell, who pioneered selling direct to the public through call centres and the Internet, scoffed at Apple’s retro, bricks-and-mortar approach. “We figured out 10 or 15 years ago that you don’t need stores to sell computers,” Dell said in an interview with CNBC. “Physical stores have been tried by a number of our competitors, and universally, that strategy hasn’t panned out.”

Well, so much for that.

Five years have now passed. The iPod has gone mainstream, Apple stores have become a phenomenally successful outlet for the company’s sleek line of gizmos for hard-core technophiles, and the company’s stock has

risen about 466 per cent. Dell, meanwhile, has seen its share of the personal computer market shrink from more than a third to about 29 per cent at last count, and its stock is pretty much exactly where it was five years ago, when Dell launched his verbal spitball at Jobs’ retail strategy. As a result, Apple has now surpassed Dell’s market value by US$1 billion, and it’s been awhile since the chairman had reason to gloat.

By selling boring black boxes at bargain prices, Dell did more than any other company to turn the computer into a commodity, and it’s now wrestling with the dark side of its own no-frills business model. Rivals like Hewlett-Packard and Toshiba have learned to mimic Dell’s efficiency, slashing component stockpiles and eliminating inventory of unsold machines. They’ve closed the gap on the industry leader and waged a battle for mar-

ket share fought almost exclusively on the basis of price. (Last week, a Dell laptop could be had in Canada for $649 plus tax.) The results are showing up on Dell’s bottom line. Last week, the company reported an eighth consecutive quarter of decelerating revenue growth. Its stock is down 38 per cent in a year. Suddenly everybody is talking about Dell in the past tense, and big-name Wall Street analysts are advising their clients to steer clear of the stock.

Michael Dell, your dunce cap is ready.

But as most of the world has fallen back in love with Apple, and become breathless about HP’s resurgence, they’ve been too quick to dismiss the industry’s stumbling giant.

Perhaps the most concise assessment of Dell’s inherent strength came a few years ago, from a most unlikely source: Steve Jobs. At that point, Jobs was just beginning to reap the spoils of the iPod revolution and was asked to assess the differences between Apple and

Dell, the world’s two most successful computer companies. “We’re making money because we’re innovating,” he said. “They’re making money because they’re Wal-Mart.” Jobs meant it as an insult, payback for Dell’s many swipes at him over the years, but the point stands. Apple regained its stature by being constantly at the cutting edge of design. Dell stays on top through its size and efficiency, and that hasn’t changed. Consider last week’s “disappointing” earnings: revenue of more than US$14 billion, profit close to US$1 billion. This is a company with roughly three times the revenue and twice the profit as Apple, yet investors have decided Apple is worth more. Dell has an unparalleled business selling to large companies and the most efficient distribution network in the industry, and yet Hewlett-Packard—a company with profit margins less than half of Dell’s—trades

at a premium on the stock market.

Can Dell be fixed? It’s not even broken.

Bank of America analyst Keith Bachman last week issued a concise road map of how Dell can get back on track. Among his recommendations: focus on stabilizing and increasing profits, rather than sales; make more realistic forecasts and make sure you meet them; and seek out retail partners in the developing world to diversify away from North America and western Europe, into fastergrowing markets. It’s all relatively simple stuff, more of a tune-up than a turnaround, especially when you have the advantages of a strong brand, a huge distribution network, and US$9 billion cash in the bank.

Right now, Dell is reeling and Jobs is the toast of Silicon Valley, and that’s only fair. Fortunes always reverse, and they will again. The lesson of history is clear: applaud the genius, but always bet on the moron. M

steve, maich @macleans. rogers. com