Dell Inc. Lowers Its Sights for Gadgets, Consumers

I would refer to my January comments after CES 2011 - competing with the Cupertino wizard is not about a piece of faster hardware :-)

Dell Inc. Lowers Its Sights for Gadgets, Consumers
(Reproduced from the Wall Street Journal)
By JUSTIN SCHECK And BEN WORTHEN

Michael Dell, the founder of Dell Inc., four years ago talked of creating gadgets such as smartphones and music players that would inspire "brand lust" and allow the company to charge premium prices for the products.

His efforts fell flat time and again, and buyers moved in droves to products from Apple Inc. On Tuesday, Mr. Dell will take another swing at the company's consumer-electronics ambitions with a $999 laptop designed to better compete against Apple's popular Macbook.

The launch marks a starting over for Dell. Dell, a $61.5 billion a year computer maker, consistently has failed to produce such hits at a time when gadgets are all the rage. Mr. Dell pulled the plug on a different set of sleek laptops earlier this year. Before that, he killed a series of music players and an online music store before they ever went on sale. Forays into smartphones and tablet computers have borne little fruit.

Dell wants to maintain a consumer presence because many consumer innovations, such as touch-screens, increasingly are making their way into commercial products. The influx of consumer technology into businesses puts Dell "on the defense" in its traditional corporate turf, says John Thode, a Dell vice president.

To keep one foot in the consumer market, the Round Rock, Texas, company has scaled back a consumer push that included a number of sub brands to focus more on what it calls "prosumers" (professionals+consumers), those who use the same gadgets at home and in the office.

Its latest efforts underscore how far the company has backtracked from its mission of building a consumer market presence that would rival its business PC glory days when the upstart company was trouncing rivals including Gateway Inc. and Compaq Computer Corp.

A recovery of its business sales lends credence to its strategy. On Tuesday, it reported increased fiscal first-quarter sales and a big jump in profits in its mainstay commercial business. In contrast, consumer sales— which account for about 20% of total revenue—fell by 7% from a year ago.

Mr. Dell, who in 2007 returned to the company as chief executive amid falling profits and sales, began the last push by hiring an all-star team of managers from Motorola Inc. and elsewhere and bought Zing Systems Inc., a company that made software similar to Apple's iTunes music software.

During a 2007 visit to Zing, Dell's then consumer chief said the company had become "the GM of computer manufacturers," selling lots of cheap PCs, but, like General Motors, had fallen behind competitors because it resisted innovation, according to people who heard him speak. The new Dell would develop software and gadgets that it could sell at premium prices, he said, according to these people.

But Apple-like success hasn't followed. Over the past year, as Apple's iPad sales exploded to nearly 20 million, Dell says sales of its tablet, called Streak, have been "immaterial."

"I didn't completely see that coming," the 46-year-old founder has said of the tablet's rapid rise among consumers.

Founded in a dorm room by Mr. Dell in 1984, Dell rose to prominence on its ability to cater to corporate PC buyers and a famed frugalness that allowed it to undercut rivals' prices.

Critics say Dell's struggles in consumer products come in part from an unwillingness to spend on developing new products. Unlike Apple, Dell historically kept its R&D lean by basing its computers on technologies from Microsoft Corp. and Intel Inc.

Over the last four years, the company spent $2.6 billion on research and development, or about 1.1% of its revenue. Apple, by contrast, spent $5 billion in the same period, or nearly 3% of revenue. Dell also cut spending on advertising to $730 million in its most recent fiscal year compared with $811 million two years ago.

Successful consumer-electronics makers "invest in marketing and put the brand out there," says Gary Shapiro, chief executive of the Consumer Electronics Association, an industry trade group. Dell, he says, is "not investing in the brand name the way that other consumer electronics companies are."

Mr. Dell now plays down the significance of its consumer business, saying that his company's focus is products and services for businesses. He says consumer products will never be the "epicenter" of the company, and that "we want to participate in many markets."

Recently, this strategy has paid off. The company's earnings have nearly tripled from a year earlier in each of the last two quarters, largely on the strength of corporate sales. While the consumer unit's revenues were down, its profit rose in the latest quarter, in part because Dell has reduced its number of consumer brands.

Now, the scaled-backed consumer unit is making another run at the slim laptop market, even after concluding that its earlier thin model, called Adamo, was a flop. Dell boasts that a new, $999 model will be the thinnest 15-inch offering "on the planet."

The company has recently doubled the number of software engineers it employs to improve its consumer skills. Steve Felice, Dell's executive in charge of consumer products, says some of its recent acquisitions aimed primarily at boosting corporate sales will also help its consumer offerings.

He adds that Dell is getting smarter about how it spends its research and advertising dollars by targeting them to a limited number of products, even if the total amount is down.

Mr. Dell, meanwhile, says his focus is on selling sophisticated computers and consulting services to corporations.

"Five years ago, we were something else," he says. "But it's not five years ago."
—Ian Sherr contributed to this article.

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