Back in January, I described the bifurcation of the home PC market – into a dirt-cheap low end and a fashion-driven high end – and the challenge it posed to Dell. Back then, the challenge was theoretical. Now, it’s real.
The company’s announcement of a major sales and revenue shortfall yesterday underscores the problems it’s having, particularly in the consumer market. Dell’s been extremely successful for many years in riding the IT commoditization wave – streamlining its operation to make money at a price point that’s unprofitable for competitors – but now it’s finding that sometimes cheap can be too cheap. Unlike in the business market, where Dell has been able to offer attractive value-added services to keep box prices off the floor, a large number of home buyers are just grabbing the cheapest machine available. With competitors, including a resurgent HP, now willing to battle Dell for market share, particularly in the expanding laptop market, Dell’s in a squeeze. It’s lost its margin on home PC sales. Although the consumer market represents a relatively small portion of the company’s overall revenues, it’s big enough to wreak havoc with Dell’s results, a fact that’s led investors to flee the once bullet-proof stock.
Dell’s response? To shift away from its traditional, scale-driven commodity strategy and try to boost profits by selling high-end machines to the well-heeled. Because the new positioning goes against the grain of its low-cost, anti-innovation heritage, the shift will be a tough one to carry out. Dell will have to compete more on the terms of high-style companies like Alienware and Apple, rivals it hasn’t had to worry about much in the past. It’s leaping, in other words, into a new world.
Michael Dell is from Mars, Steve Jobs is from Venus. Planetary convergence is rare, in business as in the heavens.