©5-16-01 Joe Carson

"Little Mikey" in this instance refers to Little Mikey Dell and what he will eat... which may prove to be an unpalatable meal for him in the end. Dell has been waging a price war against his immediate Wintel competitors and that is why we see PC prices that are at or even below cost for the manufacturers in most cases. It doesn't take an MBA to figure out that selling a product at those price points will end up with the company doing so eventually going Poof!

An article posted by Associated Press writer May Wong, "All-out price war has some PC makers fighting for survival" has some interesting commentary on the PC price wear initiated by Dell, if just a tad misleading. Although Ms. Wong may feel that the price war is just fine for consumers since it is forcing the prices on PCs, peripherals, memory, etc. downward, she seems to have missed the main point that this can't go on forever. As soon as whoever survives the price war can do so, the prices will escalate. The problem for the Wintel box makers is that when the price war is over, the PC buyer will have been conditioned to think in terms of Cheap!

Dell expects to survive the price war and to be the top PC maker, and when Dell decides to end the price war, Dell expects to be able to take over and charge whatever they please. Unfortunately for Little Mikey that scenario isn't as likely as he would like. First of all, Dell will have to be the top survivor and I would not put money on that bet. Second, the PC market will have to be strong enough to justify upping prices to realistic and profitable margins. Third, the PC buyer who has been duped into thinking PCs are really that cheap will then have to be convinced that paying higher prices is justified.

So far, Micron has been forced out of the PC market and Dell, along with Compaq, Hewlett-Packard and Gateway have been laying off employees at an increasing rate in order to survive the double whammy of sales declines and price war slashing. Dell does have some advantages in this war. They have no middlemen or channel distributors to take a cut of the profits so they have a bit more wiggle room than other PC makers. But as Andy Neff, an analyst at Bear Sterns said:

"Dell has an hour of oxygen and others have a half-hour, and Dell's agenda is to convince everyone they shouldn't even go in the water."

Even Dell will eventually have to surface for air. Then the PC buyers will be in for a shock as all the price war survivors jack up prices to normal margins and attempt to make up for the losses.

In fact, Little Mikey has had to take some rather drastic measures to keep from going Poof himself. In an article by Douglas F. Gray posted at InfoWorld, "Dell withdraws job offers, considers further layoffs" we get a more realistic view of what may be happening to Little Mikey Dell.

Little Mikey Dell's remarketing company that pretends to be a computer company may not be in as good a financial shape as he has been imagining of late. Dell computer has withdrawn internship offers and job offers this week in order to save a little cash. Dell would not disclose how many of the job offers and internships were rescinded, "...because other companies watch our MBA program closely"... Uh-huh... as if Compaq or Gateway really gave a rat's patoot about Dell's program to indoctrinate new recruits to how wonderful being a part of Dell was. The fact is that the numbers would merely tell all of us how badly off Dell really is.

Read on...

Mike Maher, a Dell spokesman said,

"The fact remains that we're operating in a softer demand environment for products. As we've done in years past, we need to resize our business to meet these demands."

Interesting attempt to put a positive spin on a lousy financial situation. What Mr. Maher said, in Plain English, is that the PC market is drying up and Dell has to lay off a lot of people to stay afloat. I really love that bit about resizing to meet the demands. What demands? The whole point is that there isn't enough demand to keep Dell profitable!

Meanwhile, Dell will have to tell all in their quarterly report on May 17th, 2001. It's obvious that they will hand out many more pink slips just before the quarterly report in an effort to make themselves look better off than they really are. From what is said in the article at InfoWorld, they aren't fooling anyone (Except for Little Mikey, of course...).

In fact, with a declining PC market and Dell having initiated a price war which Little Mikey foolishly thinks will leave him the victor, Dell and their competitors are in fact losing money. This is the source of the current "Cheap" PC myth.

As IDC analyst Roger Kay said,

"I think that it will be very difficult for Dell to get back to the kind of gross margins it had in the past."

It couldn't have happened to someone who deserved it more.

In reality, the price ware has hurt Dell far more than they will admit. An article by David Koenig of Associated Press, "Dell to Cut at Least 3,000 Jobs" contrasts starkly with Dell's "Don't Worry, be Happy" press releases.

While Dell has been trying to terminate their PC competitors with extreme prejudice, they have not gotten through the fight without getting bloodied either. More job cuts are on the way, at least 3,000 plink slips will be given to formerly faithful Dell workers.

A few choice quotes from Daniel Niles, analyst for Lehman Brothers:

"Obviously, this means the business isn't getting better. They see it's going to be a rough couple of quarters, and they've got to get their cost structure in order."

"Right now, a lot of the layoffs companies announce are abstract - you read about them. It becomes a lot more personal when you start to see people you know losing their jobs, and you wonder if you'll be next."

"Consumer confidence will erode further as corporate layoffs grow."

And when will the PC sales slump end? Most PC execs have finally figured out that the grand old times of endlessly growing markets has ended and most won't hazard a guess as to when the slump will end.

Another article posted by The Washington Post from a report by Reuters, "Dell to Cut up to 4,000 Jobs" by Nicole Volpe also posts a grimmer view of Dell's prospects than Little Mikey's Cloud Cuckoo-land public pronouncements.

Although analysts are trying to put a happy spin on Dell's announcement that they are cutting between 3,000 and 4,000 jobs over the next two quarters (in addition to the 1,700 jobs cut in February, 2001), the fact is that Dell has over-extended itself.

Dell has pushed a price war to undercut their immediate Wintel competitors and in the process have managed to become rated as the number one computer maker in terms of units sold, but at the cost of profitability.

At least one analyst did note that the job cutting indicates that Dell is aware that PC sales are going to be weak for much of 2001, if not the rest of the year.

"...the fact that they are cutting additional jobs seem to signify that they are expecting demand to remain weak and for the price war to continue"
-- David Bailey, analyst for Gerard Klauer & Co.

And what is the view like from inside of Dell, aside from Little Mikey's personal delusions, of course? Well, At least one anonymous person working for Dell is not happy with Little Mikey's megalomania. In an article posted at Austin360, "A monument unto himself", by "Dellengineer" tells some inside dirt about Dell, like the "Crush Compac" (sic) signs plastered all over the buildings. With thousands of jobs dumped because Dell is unable to make the payrolls because of the price war instigated by Dell and all PC makers hurting (including Dell), production moved overseas (you didn't really think Dell actually made their own branded stuff... did you?) Dell still engages in the lunacy of having two Chief Operating officers (Two?! Why?), one of which is paid US$38 million per year. You can only wonder where that money is coming from to pay the deadwood at the top.

In short, "Dellengineer" feels that the end result of this lunatic price war Dell has been waging may very likely result in the demise of Dell computer.

Somehow I have some difficulty disagreeing with that assessment.

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