Dell to Buy Perot Systems – Too Little, Too Late
Sorry, Dell, but you’re too late to this party. I was once a big believer in Dell, and its business model, but it seems this company may be just too far behind the times.
Remember the Old Dell?
Dell stormed onto the market back when custom computers were for gaming nerds. Their TV advertisements offered slick deals on a PC that was built just for you, with all the components you could individually choose. The idea was popular, as it was the first company to do custom computers in volume. They were also well known for their top-notch customer support, offering service packages to customers still new to the whole idea of personal computers.
Where Dell Messed Up
Early on, Dell made the decision to outsource their own customer support from a call center in the US to India. Prior to then, Dell customer support was of the very best and most experienced IT professionals. This quickly changed (in order to cut costs) to a call center which did nothing but provide scripted responses. Dell could no longer charge a premium for its service packages but that didn’t stop it from trying.
From Offshore to In-House
Even today, Dell generates nearly 50% of its business from other businesses. Most of its revenue is undoubtably from computers but its profits come from the support and warranty service. When Dell burst onto the scene in 1988 there was no such thing as an IT department, very few businesses even had a computer for every employee. Dell was the IT department, and it made a lot of money doing it. When they dropped that, every nerd and their brother opened their own IT solutions company locally, stealing what were once Dell customers.
The Modern Computer Market
When Dell entered the scene many years ago there were only a few computing companies and the choices were limited. That gave Dell a difference, and a niche. Today, there are literally hundreds of computer-makers as well as many thousands if not millions of small businesses that will make custom computers for individuals. Profit margins in computers are their thinnest ever, with many top-level companies bringing 3-4% of the product price on each sale. That’s nothing compared to servicing, where IT specialists are hired for $30-50 an hour and sent to work on networks and business computers for $90-120 an hour.
Simply Put
Dell focused far too much on building computers and not enough on fixing them. Its analogous to auto makers that make $500-$1,000 on a car but the autoshops make $2-3,000 fixing cars. Personal computers were a rock solid business with huge profit margins, but there is more competition than there was in the 1990s. Dell has proven itself to lag behind the market, and for this reason, I’m afraid their stock price will lag too.
good thoughts
What does this have to do with the Perot purchase? It seems to me that Dell is obviously seeing the fact that margins on PCs and Servers are razor thin. That is why the are looking at higher margin businesses such as Services(professional with Perot) and Storage (with EqualLogic).
In the late Nineties/Early Aughts (00s), I bought Dell computers on the strength of their customer service. Today, the market is too saturated, and computers are more stable–less need for customer service. Your assessment is spot-on.