Convincing Customers to Upgrade
Selling up customers interested in standard fare PCs has also become more difficult as well, said Steve Baker, an analyst at NPD Group Inc. Dell has traditionally enjoyed having higher PC selling prices thanks to its ability to entice clients with upgrades, Baker said.However, problems arise if the upgrades offered become less enticing. Some, such as larger hard drives and DVD players, have been more available on even low-price desktops of late. "What is the value of moving up on a processor? Not a heck of a lot these days," Baker said. "For most mainstream users, a standard processor is going give you pretty much everything you need. So theres less incentive to upgrade. Its similar with hard drives and optical drives." Rollins, citing a 3 percent increase in Dells average PC selling price during the third quarter, along with a 30-40 percent growth rate for XPS PCs, said he was confident that Dell can continue to compete in the market as well as sell upgrades to customers. "Weve been able to compete very aggressively, sell a good balance of low, medium and high" level PCs, he said. "Were very comfortable that the [Dell] models fundamental strategic advantages will remain intact." Those moves could help offset the lower than expected sales in the U.S. consumer space it saw in the third quarter. The company also said the U.K. public sector hurt sales, leading to a surprise third-quarter earnings warning issued earlier this month. At that time, Dell said it would miss its original guidance of revenue between $14.1 billion and $14.5 billion. It reset the bar at about $13.9 billion, a figure that it met on Thursday. Its 25-cent earnings per share were pulled down by a $442 million charge. Layoffs, earnings warnings and missed expectations have been a way of life in the PC industry over the last several years. But they have rarely touched Dell. Part of Dells $442 million third-quarter charge including about 1,000 job cuts, some related to the consolidation of its U.S. consumer and SMB operations, and a program to replace faulty motherboards in a number of business desktops, the company said. Click here to read about a Dell PC that can potentially run with a Linux desktop. The company is also hedging its bets in 2006 by refreshing vital business products, including servers, storage systems and notebooks. It will deliver its ninth-generation servers in 2006, based on dual-core chips, alongside a new line of SATA (serial ATA) storage systems and a new line of Latitude corporate notebooks, Dell executives told analysts on the earnings call. But the XPS brand appears to hold the keys for the future of Dells consumer PCs. Dell will continue to speed the XPS systems, company executives said, hinting at plans to beef up the line with new dual-core chips from Intel Corp. that are expected early next year. If successful, the brand could help Dell rise above issues such as questions about lackluster service, analysts said. And, to boot, "The XPS brand gives Dell a way to segment away form the standard PCs into premium models where they dont have to worry as much about people upgrading," Baker said. Thats because "the upgrades are already built in. Youre locked into those higher average selling prices right form the get-go." Check out eWEEK.coms for the latest news in desktop and notebook computing.
"You go in to buy X and come out with Y, which is a few hundred dollars more than you thought you might pay," he said. "If you manage them well you can make a lot of money by offering people certain kinds of upgrades."