Channeling Sales

Today comes news that Microsoft is fed up with the 10k other companies who have tried to take a run at Apple’s iPod hardware advantage.  Surprise, they intend to do it themselves.  With a rich history of quality hardware design in the PC space I am absolutely sure that they can succeed where every other company in this category has fallen short against the iPod.  It is a measure of their lack of understanding of this market that they have reached this conclusion.  Instead of pressing their true advantage, the universality of their DRM solution and the clear difference of their approach to the digital music store market with “Plays for Sure” and all you can eat subscription models, they are focusing on a battle they can’t possibly win, trying to outdesign the design leader.  Maybe a few dollars spent marketing Plays for Sure would help?

Nice article in the New York Times today on some of Dell’s problems.  Putting aside the customer service issue, which is mostly a problem they created themselves, and can likely fix relatively quickly, the article picked up on an overlooked issue in assessing Dell’s competitiveness.  As the market has shifted from desktops to notebooks the cost and manufacturing advantage Dell has had in building its PCs has disappeared.  The reason is that almost all OEMs design, assemble and ship their notebooks through contract manufacturers in
Asia.  While Dell may have some volume purchasing advantages due to its sales there isn’t a lot Dell can do to reduce costs on notebooks when much of the supply chain is out of their control.  So everybody gets basically the same price on having their notebooks built in
Asia but that erodes Dell’s cost advantage.  And they have milked that issue by continuing to focus sales on desktops long after others moved on to the notebook.  In fact Dell probably has the highest proportion of desktops to notebooks (either to enterprises or to consumers) of any major PC company, and that benefits them.  However the tidal wave of sales focused on notebooks means their supply chain cost advantages are rapidly being erased and they need to rely more and more on the direct model cost advantages.  And since those are also being rapidly eroded by better retailing, more OEMs selling a portion direct and a decline in upselling that fueled the direct advantage Dell is more and more in a position, especially against HP, of having its cost advantages being whittled away across the board.

Dell subtly announced last week that they would test moving some of their successful mall kiosks into an in-line 3000 sq foot concept store in a couple of malls.  Of course they had to make this announcement stealthily because the press and analysts, who know little about retail, would immediately jump to all sorts of conclusions.  Dell already has about 170 mall kiosks, which means they have employees, a management structure to control them and a method to track their success.  The kiosks have been very successful (according to Dell, it would help if they would put a number to that success) and it is natural to want to show more products and offer a more comfortable shopping experience through a full line store.

Dell is no Gateway, so the expectation is that they believe the no inventory model can work in-line as well as it did in the kiosks, and that they can execute a better retail strategy than Gateway did, which was really it’s ultimate demise.  All that said Dell is not Apple either and without a cult following we are hard pressed to understand how people are going to be willing to shop in store and buy online, despite what Dell says its current experience is. We are, as is evident by this post, taking a wait-and-see attitude because we can see success and failure in this endeavor.

But we do have to ask,  If Dell is so great at managing inventory why can’t they manage a couple of dozen skus in a few stores, because that would not be a repudiation of the direct model, but more likely an enhancement and an adaptation of it.

Interesting article in the NY Times the other day, talking about falling prices in the PC market.  These articles show up every few months as industry outsiders struggle with the concept of continuous falling prices.  This year has seen some exceptional price declines as vendors and retailers compete to gobble up unit volume.  However, as always the sensationalism of journalists wants to declare these falling prices as a “price war” and declares that products are being sold by retailers as “loss leaders” to drive traffic. 

Bah, no retailer I have known in the past 10 years, as retail professionalized and markets stabilized would ever start a price war, nor do retailers sell stuff below cost.  Especially not one of the two or three most expensive products in their store.   And why would they need to price PCs below cost to drive customer traffic?  Why not sell TVs below cost, that would drive a lot more traffic, in addition why do they want to drive traffic to their PC department, unquestionably the lowest margin segment of the whole store? 

But let’s all jump and down and declare “price war” because it is easy and expedient, hopefully in the future we would see more nuanced stories and commentary on the consumer PC market but given the quality of most analysts and reporters out there I don’t have a lot of hope.

You know, most of the time when 800 lb gorillas go thrashing about, especially in areas they don’t belong or aren’t familiar with, everybody hears them long before they see them and there is plenty of time to get out of the way, or if you are Jack Black in “King Kong”, figure out how to capture him. Just like chasing Kong everybody worries when Wal-Mart makes a move into electronics, but this week’s decision to move into BTO PCs is stillborn and unapproachable.

Wal-Mart has had lots of success selling bundled desktops and notebooks, in one box, at a cheap price, for a limited time. They have had no success in selling any PCs off the shelf. And while BTO is partly meant to account for that, the fact is the BTO model for consumers is in somewhat of a crisis (ask Dell how well consumer is treating them) and the in-store kiosk model for retailers to copy Dell has proven to be less than successful, (try finding a BTO kiosk at Best Buy). Wal-mart would love to sell more expensive PCs but BTO Kiosks aren’t going to help them do it.

Well, it’s official. Origami is arriving on our shores and it’s a whopper.  With a price tag or $1099 no one is going to confuse Samsung’s Q1 with anything but an expensive, elitist toy, at least for consumers. And it is equally interesting, at least to me, and equally mystifying as well why Samsung would choose Best Buy online and then a select number of stores for the consumer portion of the launch (CDW makes a lot more sense if businesses are going to buy it, but since none of them are going to buy this iteration, the business channel Samsung chooses is less relevant).

While Samsung’s channel proclivities are well known, as in “we will never sell direct,” BB seems a strange choice for an overpriced gadget geek toy. Best Buy has been striving to be a first mover in technology for quite awhile and it is always a bit of a stretch for them, but this seems like a nonstarter for all concerned. Especially since I can’t imagine any kind of mass volumes to support BB’s business needs nor can we see geeks happy to visit one of those places pretty high up on their list of evil empires. However, it probably was a great channel relations move for Samsung, but it is likely to mean a slower more painful birth for the Origami.

In a much-rumored transaction, Dell finally absorbed niche PC OEM Alienware. Alienware was the real originator of the cool PC tend, with painted desktops, lights and whistles, strange mods and out of the world performance. Focusing on performance allowed Alienware to become one of the desktops of choice for the PC gaming community, and draw way more attention than its sales warranted as it catered to that highly publicized, much sought-after niche.

But selling out to Dell seems to be contrary to the maintenance of cool, hip and cutting edge company. Dell has always been the Borg, sucking up all the air in the PC market as it mechanically absorbed market share gain after market share gain in the past ten years. If there is any PC company that represents button-down corporate values and a military-like obsession with efficiency it is Dell. For Alienware to say they have a lot in common with Dell, as the CEO's statement claims, is an exercise in fooling oneself. Any company positioned as Alienware is can hardly claim to be the ruthless, take no prisoners, play to win type of company Dell is. We firmly believe that this is a mistake of the first order for Alienware and will open the market for serious high spending gamers to all the Alienware pretenders out there in the market.

And why would Dell do this if they can’t absorb Alienware and benefit from their cache? The sales volume and profit dollar that Alienware can add to Dell's business can hardly amount to more than a single reported Alien abduction since Roswell. And, without taking them over, they can hardly learn anything about managing a transaction business model, the lack of understanding of which has been the culprit behind Dell’s recent consumer market troubles as the efficiencies in the consumer market have turned away from direct and towards retail. It would be much better for Dell to buy Gateway and gain that transaction business model knowledge and Gateway's retail distribution channels. That would go a long way toward solving some of Dell’s consumer troubles. But, of course, after 13 years out of retail and a subsequent blazing trail of hate mail towards the channel, Dell is not likely to reverse course so abruptly.