By Sheldon Gordon

This year, Dell is expected to claim a 14 per cent worldwide market share, compare to 12 per cent for Compaq.

But many industry analysts say that these days, leadership in the PC market is a mixed blessing. PC shipments are forecast to grow by only one per cent in the first quarter of 2001 and five per cent for the entire year-the lowest unit growth since the beginning of the PC industry in the early 1980s.

But talk of a "post-PC era" doesn't resonate well with Dell executives. "It's the Internet era rather than the post-PC era," says Kevin Rollins, vice-chair of the Round Rock, Tex.-based company, during an interview in Toronto. "We believe the PC is very much alive, and will continue to be. We continue to see tremendous growth and opportunities for PCs, particularly for wireless and notebook devices. Wireless devices are not generally classified as PCs, but notebooks are clearly PCs."

The reason some are calling this the post-PC era, says Rollins, is that "most of my competitors can't make any money in the PC space. And if you can't make any money in it, you'd just as soon wish it were gone. We make excellent profits in the traditional PC space, see good growth opportunities there and so will continue to play there, but now we'll be a much more pronounced player in the enterprise products arena."

Like its rival Compaq, Dell has been preparing for the PC slowdown by bolstering enterprise products such as servers and storage systems. While company sales grew by 43 per cent overall in the fourth quarter of 2000, enterprise sales accelerated at an even faster rate-56 per cent. Rollins notes that less than 50 per cent of Dell's total revenues, which reached U.S. $32 billion in the fiscal year ending Feb. 2, 2001, now come from desktops. Dell derives 19 per cent of sales from enterprise products, and 30 per cent from notebooks and services.

The company is doing particularly well in the server market, nipping at the heels of frontrunner Compaq. In the fourth quarter of its last fiscal year, Dell accounted for 30 per cent of worldwide server growth, expanding at more than three times the rate of the industry and adding two full points in market share. "We're number two in servers worldwide, number two in the U.S., number three in Canada and number three in Europe," says Rollins. "So the overall growth for enterprise products is dramatic for us."

Unlike Compaq, which says it derives 50 per cent of sales-but only 10 per cent of profits-from PCs, Dell is coy about its profitability sources. Rollins says desktops generate only 60 per cent of the per unit profitability of servers. "If you look at all the revenues in the PC space and all the revenues in the enterprise product space, PC revenue is much larger. But if you look at profits, they're about the same on a dollar basis."

For a company that, a few years ago, had 50 per cent revenue growth, the current U.S. slump signals at least a temporary halt to the glory days. "It's going to be slower going forward than it has been in the past," concedes Rollins. Dell has lowered its previous projections for the first quarter of 2001 and is now forecasting an eight per cent decline in revenues from the fourth quarter of 2000.

Dell expects the slowdown will hit the PC market harder than the server market. "I think there's a lot more infrastructure build that's there," says Rollins, "and as companies continue to build their efficiencies using the Internet, they have to build that backbone."

Dell is adapting to the growth of the Linux open-source operating system, which some forecasts suggest will be running 30 per cent of Web servers by 2004. Dell has an equity stake in Linux distributor Red Hat Software Inc., and its suite of server management tools support Linux-run servers. "As soon as customers tell us that [Linux] has the applications they want, we'll put it on any product that any customer wants. We're agnostic when it comes to that. For the time being, we're predominantly a Microsoft house, but we're not a Microsoft division."

Still, Rollins is cautious about the system's prospects. "Originally, the dot-coms were using Linux a lot, but those companies have fallen off in their purchases. It's in single digits for mainstream computing environments. It will continue to gain some strength, but by 2004, 30 per cent would be a real stretch. As we talk to corporate customers, they've concluded that the most you're going to see are some minimal applications. You're not going to see the mass rollout of Linux as an OS (operating system)
for them."

Dell expects the slowdown will hit the PC market harder than the server market. "I think there's a lot more infrastructure build that's there," says Rollins, "and as companies continue to build their efficiencies using the Internet, they have to build that backbone."

Dell is adapting to the growth of the Linux open-source operating system, which some forecasts suggest will be running 30 per cent of Web servers by 2004. Dell has an equity stake in Linux distributor Red Hat Software Inc., and its suite of server management tools support Linux-run servers. "As soon as customers tell us that [Linux] has the applications they want, we'll put it on any product that any customer wants. We're agnostic when it comes to that. For the time being, we're predominantly a Microsoft house, but we're not a Microsoft division."

Still, Rollins is cautious about the system's prospects. "Originally, the dot-coms were using Linux a lot, but those companies have fallen off in their purchases. It's in single digits for mainstream computing environments. It will continue to gain some strength, but by 2004, 30 per cent would be a real stretch. As we talk to corporate customers, they've concluded that the most you're going to see are some minimal applications. You're not going to see the mass rollout of Linux as an OS (operating system)
for them."

Dell remains bullish on the Internet as the key sales channel in its direct-to-consumer business model. The company began selling its products online in 1996, and now generates 50 per cent of its worldwide sales over the Internet. That proportion is "slightly higher" than 50 per cent in Canada, says Rollins, even though Dell's Canadian market share is only 16 per cent versus almost 20 per cent in the U.S.

The company's long-term goal is 100 per cent online sales, insists Rollins, "because we believe that is going to be the most efficient way to interact with our customers. The first 50 per cent was easier to get than the second 50 per cent will be, so my guess is it's probably going to take us a couple of years to reach 75 per cent, but the consumer market will get to 75 per cent faster than the corporate market." The reason: a major part of Dell's corporate market is government institutions, but many of them don't permit e-procurement without written signatures.

The direct-to-consumer sales model allows Dell to operate without inventory, giving it a cost advantage over rivals such as Compaq and Hewlett-Packard Co. that sell through retailers. They have to maintain several weeks of inventory to ensure that store shelves are stocked. In the current environment, where processor and memory pricing is falling rapidly, the PCs on store shelves are the ones that were made weeks earlier with higher-cost components than comparable Dell systems.

"The good news is that Dell is probably the best-positioned computer maker for weathering the downturn because of its 100 per cent direct model," says Dan Niles, an analyst with Lehman Brothers in San Francisco. "Having said that, they're still going to feel it." The first to feel the effects were the 1,700 Dell employees, four per cent of Dell's workforce, who were let go in February-the first large-scale layoff in the company's history.

Shareholders have also suffered. The stock (NASDAQ: DELL) was trading at about U.S. $25 at press time, well below its 52-week high of U.S. $59. Rollins prefers to point out that the share price has begun to rebound from its recent low of U.S. $17. "For a while, analysts were a bit leery of our strategy," he concedes. "But we've refocused on being the low-cost producer, being very cost efficient, being price aggressive and focusing on enterprise products-which have the highest margin and the greatest opportunity for us."

WEB PROFILE

Compaq Computer Corp. http://www.compaq.com
Dell Computer Corp. http://www.dell.com
Hewlett-Packard Co. http://www.hp.com
IBM Corp. http://www.ibm.com
Lehman Brothers http://www.lehman.com
Microsoft Corp. http://www.microsoft.com
Red Hat Software Inc. http://www.redhat.com