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Is Dell On the Decline?

Posted by iTech - 2005-11-23

When Dell recently announced it would miss its earnings forecast because of slumping U.S. and U.K. sales, plus a $300 million charge to repair faulty circuit boards, it raised an inevitable question: Is Dell losing its luster?

Of course, one weak quarter doesn't put any multibillion-dollar company into the frying pan, and it's too soon to tell whether Dell is headed toward a major downturn. Nonetheless, Wall Street reacted negatively to the news, and analysts have been quick to point out several suddenly visible holes in the direct computer maker's armor.

Moors & Cabot, which lowered Dell's rating from buy to hold, questions Dell's competitive position in the server market, as well as its customer-satisfaction levels. Cindy Shaw, vice president of research at Moors & Cabot, wrote in a recent report that Dell is slipping, most notably in the x86 server market, where industry shifts toward higher-end Linux and blade servers have led to stagnant growth for Dell's Wintel servers. Shaw also says two of Dell's most potent weapons are declining. "We believe that Dell's price advantage has largely disappeared over the last two years," Shaw wrote. "We are also concerned about Dell's declining reputation for service and support."

Meanwhile, others say Dell is seeing increased competition from Hewlett-Packard, Lenovo and Acer on the PC front, and has been badly hampered by defective Optiplex motherboards. "Although Dell remains one of the highest-quality names in technology, questions about growth rate amid a more competitive environment could take some of the luster off the venerable tech giant," says a report from investment banking firm Robert W. Baird & Co.

Some solution providers say they have seen a noticeable decline in quality in Dell's products and services. "They used to be known for great quality throughout the '90s," says John Samborski, vice president of Ace Computers in Arlington Heights, Ill. "But when the economy went bad, they decided to scorch the earth with low prices and use the cheapest parts and equipment they could find, and it has caught up with them. Now their brand is Kia instead of BMW."

Another Dell competitor, Bi-Tech Enterprises of Ronkonkoma, N.Y., has heard many customers complain about the vendor's low-level technical support and services. "They're certainly not happy about the lack of on-site services," says Bi-Tech president Al Rosen. "So, in a lot of cases, we'll come in and provide integration or repair services, which helps us get a foot in the door with those customers so that we can sell them our own machines."

VARs that work with Dell, although small in number, have concerns as well. Tyler Dikman, founder and president of CoolTronics of Tampa, Fla., says his Dell business is doing well, but wonders if the company's aggressive pricing and marketing is becoming counterproductive.

"Their markets are so oversaturated that they're competing with themselves," Dikman says. "A customer buys a PC from Dell, and two days later they're getting tons of catalogs and e-mail offers trying to get them to buy another system for a little bit less. It's a no-win situation."

While Dikman hasn't had quality issues with Dell's products, the company's customer service and technical support is another matter. "None of my customers call Dell anymore. They always come to us first," Dikman says. "I'm skeptical of their [new] XPS [computer] line because Dell is talking higher power and better speeds, but it's quality support that they're missing."

Others are concerned about Dell's channel efforts--or lack thereof. While Dell continues to flirt with resellers, earlier this year it scrapped its Solution Provider Direct program, which provided VARs with unbranded Dell white boxes, after failing to generate more than lukewarm interest after two years. Dell also struck an alliance two years ago with ASCII, the industry's largest organization of independent resellers, but that partnership has also achieved limited success. Jerry Koutavas, vice president of business development at ASCII, says Dell's sales are steady for ASCII members, but relations with the computer maker are not.

"VARs are very much a rogue group to Dell, and they don't get a lot of dedicated attention," Koutavas says. "The ease of doing business isn't there. Their response times are poor, and they need better logistics on the sales side."

However, Scott Gordon, president of SBBS Technologies in Glenview, Ill., says his Dell sales reps have been excellent, and that the vendor has improved its ease of doing business. But, he says, being a Dell reseller still has its challenges. "We don't make a dime off the hardware. The customer gets the same price as they would from Dell," Gordon says. "We make all our money on services and support."

But here's the rub: Despite Dell's recent problems, many VARs continue to lose deals to it. Roger Grady, for example, recently closed his systems-builder company, Native Systems of Boulder, Colo., because he could no longer make money going up against Dell. Ironically, Native Systems had done some Dell business in the past, mostly around integration and repair services for customers that had already purchased the products direct from Dell. Still, Grady couldn't replicate the low-cost model with his own systems.

Like many VARs, Bi-Tech's Rosen still believes Dell will continue to be a dominant channel adversary for the future.

"We still can't beat their prices," he says. "I still think a lot of people will continue to buy Dell because of [that], regardless of quality issues."

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