Dell home computer

For years, Michael Dell never paid much attention to the consumer computer market because, quite frankly, it was a pain in the neck selling a PC to Mom and Dad and Buddy and Sis. First, the margins were too low in the home market. But more important, novice computer users needed so much handholding after the sale that any profit a company might eke out from selling the machine was usually burned up in tech support.

And so Dell Computer, the Round Rock, Texas-based direct seller of PCs, staked out its territory in the business market, where the handholding was kept to a minimum and the margins were high. The company--whose sales will reach $15 billion this year and whose stock has climbed more than 29,000 percent since 1990--has historically sold about two thirds of its machines to big business and government. Dell has sold and does sell to consumers, but it was always more of an "off the back of the truck" model--meaning Dell would accommodate the home-market customers if they called, but it certainly wasn't encouraging them to do so.

But now Dell is making its first real push into the consumer market. Shoppers still won't find Dell machines at any of the big-box retailers this holiday season; direct sales via phone or the Internet will remain the only way to buy Dell. But the company is finally serious about gaining share in the consumer market; to that end, it is designing special software bundles for the home user and buying advertising on network television and in mainstream consumer magazines.

Lots of geeks. What has changed for former computer wonder boy Michael Dell, now 33 years old and worth about $13 billion? Rather than the company adapting to fit the market, the market has now adapted to fit the company. Dell has always marketed to users who wanted the latest and greatest technology at a price cheaper than they could find in retail stores. These customers were either business customers who liked the efficiencies of buying direct or a handful of computer geeks who felt they knew more than the salesclerks at the retail stores.

But that handful of computer geeks has grown into the mainstream. With PCs now in about 40 percent of homes, many consumers are no longer technological naifs. According to Dell market research, 40 million Americans are on their second or third home computer. Of that group, Dell has identified 31.5 million Americans who are savvy home-computer users, people who are comfortable using the Internet and users who understand the technical configurations of their box. Almost half of these users, dubbed the "tech-know generation" by Dell marketers, have purchased three or more computers. And 84 percent can solve most PC problems they encounter themselves.

These technically savvy Dell customers defy the old computer geek stereotypes. Vicki Brown, a 50-something systems analyst based in New York, uses her computer for stock trading, online banking, and take-home work. For Brown, buying directly from Dell makes sense because "the people at Dell give me exactly what I want, while those clerks at the computer stores might as well be working at Burger King."

Michael Dell says the company began to see the shift in the market a few years ago. He told U.S. News that the company has no intention of dealing with resellers or diving into the low-end market. "For the most part, the sub-$1,000 market is the obsolete market," Dell says. "It's about inventory liquidation. They have to get rid of the stuff, and they have to get rid of it now. But these products will not run the latest software customers want to run. We give them that."

For example, Dell plans to include "easy sign-on" Internet access software from AT&T WorldNet with its new computers. The machines will boast a personalized "front page" featuring Excite's Internet portal, co-branded with the Dell logo. High bandwidth is part of the package, too. Customers in SBC Communications' local telephone territory--including California and Texas--will be offered deals on high-speed ADSL service, which runs at far faster speeds than traditional modems. Taking advantage of that will require more memory and faster microprocessors--favoring Dell's higher-end machines.

Power play. All told, Dell sold about $1 billion worth of computers to consumers last year, double the sales of the previous year. So far in 1998, sales were up about 70 percent in the first two quarters--and grew about six times as fast as the consumer PC market did as a whole. Dell has tripled its ad budget this year, producing a homey consumer catalog and TV ads geared toward families. But the message is always clear: Buy Dell for power and memory, not merely for connecting to the Internet. Prices for the Dell Dimension desktops run between $1,399 and $3,399, but most configurations include a Pentium II 450-megahertz processor.

One key to the Dell strategy is that it believes consumers are finally ready to order big-ticket items directly. They also are more comfortable than ever buying on the Internet. The company currently sells an astounding $6 million worth of computers per day online, and Michael Dell has predicted that fully half of the company's revenues will come from the Internet by 2001. He expects the consumer side to hit 50 percent of overall revenues sooner.

Will consumers run to Dell in large enough numbers to steal market share from Packard Bell NEC, Compaq, and Gateway, which together controlled more than 50 percent of the consumer market (compared with Dell's 2.4 percent) last year? Probably not in the short term. But Dell will continue to skim the cream off the top of the market, concentrating on tech-savvy consumers. "They [Dell execs] are not obsessed with the number of units they sell," says Roger Kay, senior research analyst with International Data Corp. "They are obsessed with profitability."

The foray into the consumer market comes at a crucial time for Dell, which has grown at better than 50 percent annually in recent years and whose stock has increased eightfold in the past 21 months. Since reaching a 52-week high in August, Dell stock has been on a roller coaster ride. Some investors wonder if the global economic crisis that has affected Asia, Russia, and Latin America might take some steam out of Dell's future earnings. Dell recently opened a plant in China and is building one in Brazil.

Also, companies like Compaq are going to a Dell-like build-to-order model while Gateway, which has historically concentrated on the home market, is trying to steal Dell's business customers.

Of course, that's what happens when you're No. 1: Everyone takes his shot. "They've been saying forever that we can't continue to grow at 50 percent every year, and eventually they'll be right," Dell says. "No company can grow at that rate forever and execute flawlessly. However, let's keep in mind that we have only about 8 or 9 percent of the global PC market."

And for Dell Computer, this latest opportunity in the company's own back yard comes with a back-to-the-future quality. When Michael Dell founded his computer company in his college dorm room in the 1980s, he envisioned his market being other computer users like himself who wanted powerful, bare-bones machines at a good price. Unfortunately, there were too few consumers like him, and he moved his company steadily into the business market. Now, billionaire Dell sees millions like himself out there. And he wants to sell a computer to every one of them.

Gaining ground Although still a minor player in the home computer market, Dell's share of computer sales has risen dramatically over the past two years.

Business market share 105 percent increase since 1995 Dell 1997: 12.9 percent.

Home market share 50 percent increase since 1995 Dell 1997: 2.4 percent Source: Dataquest.