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Technology

The indirect approach

Dell's move to embrace retail is a sign of changing marketplace

June 1, 2007

When Michael Dell's upstart computer-building company began doing business in 1984, it was able to carve out a niche in the computer industry by shunning retailers and resellers, and selling directly to the consumer.

Twenty-three years later and now a giant company with sales of close to $60 billion, Dell Inc. is altering its strategy by embracing partners in areas it had previously avoided.

CBC.ca news story

Dell to cut 8,800 jobs (May 31, 2007)

"The direct model was a real revolution in the computer industry, but it's not a religion," Michael Dell said during a meeting with reporters in Toronto on Wednesday.

"We're expanding the number of places and ways people can buy our products," he said.

The most prominent of these changes was the Round Rock, Texas company's announcement a week ago that it would begin selling models of its Dimension series desktops at 3,500 Wal-Marts in the United States, Canada and Puerto Rico in June.

If the move seems unusual, these are unusual circumstances for the company. After years as the top PC seller in North America, Dell has lost its place as market leader to Hewlett Packard, and seen its earnings flatten.

The relative downturn prompted a change at the top, with the return in January of the 42-year-old Dell to the role of CEO, and the turnover of much of its senior management.

On Thursday the company beat Wall Street expectations in posting first quarter earnings of 34 cents per share on revenue of $14.6 billion US. Financial analysts had been predicting earnings of around 26 per cent on $13.95 billion in revenue.

The company also announced it would reduce its number of employees by 10 per cent, or almost 9,000 workers worldwide.

It's the latest shakeup for the company since its founder returned. In addition to the experiment with retail, the company is said to be pursuing more formal relationships with computer resellers, who represent a significant portion of computer industry sales but have long had a mostly unacknowledged relationship with the company.

Dell has also attempted to reach out to previously ignored consumer bases, such as its decision earlier this year to start offering the Linux-based Ubuntu operating system, to give customers an alternative to Microsoft's ubiquitous Windows OS.

Direct sales model in question

The moves come as some analysts have suggested the direct sales model is falling out of favour with consumers, who want to see and touch their computers before purchasing them. Others have criticized the lack of innovation in the look of Dell computers, an area where Apple Inc. in particular has set the bar in the industry.

Michelle Warren, an analyst with Info-Tech Research Group, said Dell's move to retail is a good sign for the company.

"Dell had reached a point where it was looking to find new customers to grow its business, but some people just prefer to go through a retailer or reseller," she said. "If they want to reach those people, these kinds of partnerships are inevitable."

Warren thinks the Wal-Mart deal could open a market for first-time computer buyers who need less customization in their PCs and are more comfortable being able to feel and touch the machines.

Dell's move to retail is particularly surprising because it's a strategy the company tried in the early 1990s, and abandoned as unprofitable. But Dell himself said changes in the industry make the move more attractive now.

"One thing that's different is that Dell is about 20 times larger, so that kind of changes things a bit," the CEO said. "I also think that price points have changed fairly dramatically, so in the early '90s a computer was a couple thousand dollars and now computers are quite a bit less expensive," he said.

One question for Dell's move to retail will be whether the company can maintain the level of the customer experience by going through a third party. Eddie Chan, a consumer technology analyst with IDC, said one concern is that while more consumers want to touch and feel products, Wal-Mart — and not Dell — would be handling the early customer connection.

But Chan also said Dell's access to Wal-Mart's customer data could help the company learn more about the kinds of choices customers are making, and that could prove invaluable when marketing future models.

Betting the brand

The larger question for Dell in its move to retail, however, is whether the company's brand — for years so closely tied to its direct sales strategy — will be diluted by its forays into retail and reseller markets.

Warren said it's a question that will likely be decided by consumers, but added that the company had already begun shifting its brand away from direct sales and towards more personalization, as epitomized by the company slogan, "Purely You."

In at least in one area — the look of its computers — Dell has fallen behind companies like Apple, said Chan. And Dell himself acknowledged that cheaper prices have made design an increasingly important differentiator for notebook and desktop manufacturers, as clunky, faceless PCs give way to sleeker designs.

"[Computers] are becoming more of a personal accessory, so certainly fashion becomes more important," he said. Dell promised his company would be introducing new products in the coming months that push the envelope on design, but declined to provide details.

Embracing Linux

Another area where Dell has tried to add customization is in its move to offer the Linux-driven Ubuntu. The open source program for computer users looking for alternatives to operating systems offered by Microsoft and Apple is still a niche market, but it's a market expected to grow, said Warren.

Dell said he doesn't know how successful it will be, suggesting consumers themselves will answer that question.

"Linux is in an interesting gestation period," said Dell. "[Linux users] are clearly interested. As to how viable the market is, we'll know a lot more about that over the next weeks and months."

Chan said the Ubuntu offering is symptomatic of the consumer desire to have products tailored to their specifics needs, a trend he says is here to stay and embodied by the move towards more mobile, portable computing options.

He suggests the move to provide desktop computers at Wal-Mart could be the first step towards introducing notebooks and mobile products to the retail arena. That would set the stage for a battle not only between Dell and HP, and other companies like Acer and Apple, but could also pit Wal-Mart against other computer retailers.

"It's a hyper-competitive market," said Chan. "And it's always evolving. Dell's move to retail is a good signal of the company's openness to change."

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