By John G. Spooner  |  Posted 2006-05-19 Print this article Print

Even so, a price war is likely to erupt, numerous Wall Street analysts believe. "We believe that Dell is entering a new phase in which growth will be tougher to achieve than it has been historically. We have some concerns that Dell will struggle to regain consistency over the next six to nine months," wrote Kevin Hunt, an analyst at Thomas Weisel Partners in Boston, in a May 19 report. "In addition, Dells comments seem to suggest that a price war may be a real possibility in the PC space over the next six months."
Rollins and Schneider said during their conference call that a Dell focus on increasing profit margins gave competitors room to maneuver and that it would thus need to re-establish itself using its tri-fold plan, which includes beefing up tech support while accelerating its cost savings plan with the aim of attaining $3 billion in savings this year.
"Our conclusion from all this is that Dell might be reinvesting this savings to become more price-competitive, which is not a very good sign for the overall industry," Hunt wrote. Given that it could take anywhere from several quarters to several years for Dell to sort out its service, support and product quality, the immediate impact of Dells plan may be muted, Richard Gardner, an analyst at Citigroup in San Francisco, wrote in a report. "It appears that price cuts will be focused mostly on U.S. and European small-to-mid-sized business [and] high-end consumers, but only selected relationship bids," Gardner wrote. "While we understand managements decision to price more aggressively, we are concerned that the cuts may not produce the level of near-term revenue growth necessary to achieve [second quarter] revenue and EPS guidance." To be sure, Rollins said that Dells plan is designed to work over time. "Were planning to be able to move to a position to grow," Rollins said. "I dont think we have a timeline. Were going to stick with the pricing moves as long as we deem its necessary to strategically light the business up and create a change in the overall market dynamic. Were prepared to make price cuts this year, next year." However, he said, "I think all were saying is we believe our growth has slowed because we kept margins too high. We need to accelerate that growth. Price is one catalyst, but well have to do other things. It really is a multi-pronged activity." Still, "Dells earnings call left us with more questions then answers on many levels," Andrew Neff, an analyst at Bear Stearns in New York, wrote in a May 19 report. "Dells strategy seems to be contradictory—i.e., [it] plans to expand warranties and scope of services but also reduce warranty costs; announces efforts to accelerate cost improvements while simultaneously increasing investments in customer service/support and new products/technology." In addition, "the company noted that it will implement selective yet across-the-board pricing actions to reassert its brand and value proposition," Neff wrote. "At the same time, the company insisted that it is not launching a price war, only using price as the first lever to pull. From a larger perspective, what is concerning to us is lack of a clear direction or strategy coupled with a change in the underlying industry conditions that appear to be less favorable to Dells model—i.e., 1) PC growth is being driven by strength in international markets (channels are largely indirect) where Dells direct model has less reach, 2) strength has primarily come from consumer where Dell has limited focus, and 3) component pricing has been declining at a less rapid pace." But not everyone was concerned by Dells plans. "We believe Dell missed [its original first quarter earnings projections] largely because it focused for the first 2/3 of the quarter on futilely trying to sell expensive dual-core chips to U.S. consumers," Clay Sumner, an analyst at Friedman, Billings, Ramsey & Co in Arlington, Va., wrote in a May 19 report. "HP won the U.S. consumer battle by simply selling cheaper single-core product at competitive prices." That means Dell might not have to slash prices on its PCs. Instead, it has to deliver a mix of lower-priced machines, Sumner wrote. Check out eWEEK.coms for the latest news in desktop and notebook computing.

John G. Spooner John G. Spooner, a senior writer for eWeek, chronicles the PC industry, in addition to covering semiconductors and, on occasion, automotive technology. Prior to joining eWeek in 2005, Mr. Spooner spent more than four years as a staff writer for CNET News.com, where he covered computer hardware. He has also worked as a staff writer for ZDNET News.

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