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Who Wants to be the Next Dell?
cybercomm writes "Tom's Hardware has a very interesting column regarding the future of beige-box manufacturers, such as Dell, gateway, Compaq, et all. I found this article really thought provoking, since the author has raised some really interesting issues, especially concerning the fact that the writer of the column compares reviewers to the lowest ring of the ladder, and asks one simple question: Instead of whining, why not do it? Why should you learn all the specs on the latest processor and slam the competition just because you may happen to own a P4? Why not start the same way that the Dell, Apple, Gateway, and other founders took by forming your own store, getting in touch with Asian suppliers who "are more than willing" to give you discounts, just so that they can get their foot in the lucrative N. American and European markets. Very interesting reading, that raises another what-if scenario (what if you succed and your business is based on Chinas' dragon CPU, XGI card, open-source OS...)."
...that the market for commodity systems is already saturated.
Trying to compete with companies like Dell only makes sense if you're the star of Brewster's Millions.
There is certainly money to be made in the computer industry. But the days when hardware firms could be started out of someone's garage are long, long gone.
Of course I'm sure there will be a whole army of dreamers and wet-behind-the-ears schmucks lined up to argue with me about this for the simple reason that the truth I speak is a threat to their pipe dream. Well I say they need to put that crack pipe down and start looking for sectors and markets that don't already have dozens of 800 pound gorillas stomping about. Just because you have a love for something doesn't mean you can turn it into a successful business, especially when that business would be servicing a competitive market with razor-thin margins.
The most anyone could hope for would to eek out a marginal existance selling highly customized systems built from hand-picked components for gamers and similar enthusiasts. (Most of whom can do it themselves, or at least think they can)
Lee
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I don't know. Possibly. But I doubt it. You can get a computer that can adequately perform all the tasks that "Joe Sixpack" wants for what, like three hundred or four hundred dollars now. And in all likelyhood, prices will continue to drop.
And if the things you mention - "internet center", "media center" - are so important to your "Joe Sixpack", computers will come with them preconfigured and simple to use.
So ten years out, why would anyone want to buy an "internet center" and a "media center" and an "et cetera", when they can buy all of them (and more) at once, for a low low price of $29.95?
You see the problem with hardware is all about margin. Unless you are moving a huge amount of goods you will loose your ass. Software on the other hand is all margin, big profit ratio's. Why do you think so many restarants go out of business? Small margins, same goes for grocery stores.
While it's true that the margin on hardware is virtually nothing, your average restaurant will be worrying more about turn-over than margin; the bulk of costs for a restaurant is in the fixed costs (i.e. renting a place, taxes, employees, fresh ingredients that you have to stock in case people do show up, but that expire quickly whether they do show up or not).
Ever notice how just about every "meal" at a fast food restaurant costs about the same? That's because they're in the business of extracting $5 per visitor rather than being interested in the exact margin on stuff. That's also why fries and a coke are thrown in their meals for a relatively low price, and they cost a lot more separately -- it's all about discouraging sub-par revenue customers. (Grocery stores (or Fast Moving Consumer Goods Retailers as they like to call themselves) have things slightly better than restaurants in that they sell a lot of non-perishables as well - stocking more and more non-food items has been an ongoing trend in supermarkets and grocers' for ages now).
Of course, fixed costs are also a big barrier to entry for any would-be competitors of Dell. Spending a few million here and there to set up a plant and do distribution is peanuts to Dell since they're shipping insanely large volumes, so even relatively large fixed costs translate to a small cost-per-unit. Plus, they can get volume discounts from OEMs. Without a large initial investment it's pretty hard to suddenly gain such a big market share that you can compete with the economies of scale that Dell enjoys. Dell is the Wallmart of PC systems.
Added value is the only way to go for smaller would-be competitors; e.g. better after sales service, warrantees, real life expert human salespeople, full-service-one-stop deployment, etc. Of course, it may well turn out that it's cheaper for you to only offer the added value and buy the systems themselves from Dell!
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Fortunato has hit most of the nails right on the head. There are a few he didn't even swing at.
I started selling computers in college. Opened a storefront. Did it for 8 yrs. Was a success in every way except financial. We kept our heads above water most of the time.
Margins went from passable (1990) to total crap (late 1997). Margins seemed to move in inverse proportion to my sales. It gets to the point where even doing decent volume and being reasonably well connected isn't worth the time.
98% of my customers are what I now refer to as "End Users" (this is NOT a compliment). Clueless losers who wanted everything for free. When they break something, it's my fault.
Most people have no clue when they go into business. There are LEGIONS of government agencies that show up at your doorstep. Every year it seemed that there was a new agency that I needed to pay protection money to. Tax reform is the best thing ever, if only it happened on the state level where it would make more of a difference. I can't imagine how bad it would have been in California or New York instead of Alabama.
People I meet find out that I ran a business, and will usually end up saying something about how that would be so great (it was, for a while). I then spend 30+ minutes educating them on what they're getting themselves into. I change a lot of minds.
I started my business to do something I liked doing: Working on computers. The last 2 years I spent 75% of my time pushing paper. 80 hrs a week because there was too much to do, and I couldn't afford the extra employee to make up the difference.
Things I got by working for someone else (that I didn't have for 8 yrs):
Health insurance, life insurance, retirement, vacation (8 yrs is a LONG time not to take more than a 3 day weekend), 40-50 hr work week, respect, 8 x increase in pay...
AND - 99.8% fewer End Users. (I'm a network admin - 2 layers of support to go through to get to me)
Yup, most suppliers have to warehouse their product near Dell factories. JIT inventory was pioneered by Toyota. Do a quick search on google and you'll find information about it. Interesting stuff.
"Karma can only be portioned out by the cosmos." -Homer Simpson
I have to agree here. My partner and I started a successful business right out of grad school doing consulting work and building clusters. We did it without VC funding and haven't really needed to borrow much along the way except to buy parts for larger projects when we couldn't fund it internally. This will not make you Bezos rich, but it isn't a bad life. Honestly, I don't know how much faster I would want to grow. More money means more headaches. Just being comfortable and busy is good enough for me.
Please don't underestimate the ignorance of the people either. Aside from reasonable prices your next biggest item should be the best tech support money can buy. Without good tech support people will just go elsewhere. You WILL get people calling you that don't understand how to plug in their color-coded cables or even how to turn it on even though it's clearly explained in a 3 foot by 3 foot fold out poster in very simple pictographs. This isn't 1990 when most of the people using computers were either businesses with support personnel or very techie home users who were used to dealing with DOS and drivers, boot disks, config.sys, etc. The majority of people today using computers are complete and utter morons. That is the problem with success: Once you've exhausted your techie base you're left with the common cattle to support your profit margins.
If you want to start a business, identify a real problem or need, and develop a product or service to address it. If you want to build computers, don't try to copy Intel and Microsoft. Design a computer that does something new and unique, or does it significantly better than existing systems.
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I own one of the oldest computer stores in North America - we started in the Spring of 1982 - and we have been building White Boxes since 1985. We have seen a lot of Dells and Gateways come and go over that time.
..., cheap Compaq's killed Gateway and Micron, cheap HP's killed Compaq, cheap eMachines killed HP, cheap Dells killed eMachines and cheap what is going to kill Dell? Oh yah, some of these companies still exist but they will either be sold to someone else, find specialized nitches or the product lines simply dropped.
The big weakness of such companies is their size and thin margins. These companies cannot take a sales hit for any reason without bleeding red ink all over the place. Lets face it, cheap Packard Bells killed Leading Edge,
Many of these companies helped in their own demise. After a while they found they had to support the cheap c**p they sold and that is expensive, very expensive. When you are growing rapidly and most your computers out there are right out of the box, it seems manageable. But when sales start peeking and machines start aging it becomes a real problem, an expensive problem. (Why do you think Dell has moved it's customer support to India?) These companies' heydays rarely last more than 2-3 years.
And selling White Boxes? Well, we can sell twice the machine a similarly priced Dell sells for - so Tom is right. And we can save people's data if the HD starts going bad - something the Dell's won't even try. But frankly, most people can't see value when it is staring them in the face. So everytime a new Dell comes along, sales slump and then steadily grow as people become disenchanted. Then another Dell comes along and it starts all over again. Few people ever learn. Even people who have bought our computers will buy a Dell, eventually admit their mistake and buy another of our computers. But they bought the hype and the Dell anyway. They can't tell the difference until after the sale. And they'll do it again, you can bet on it.
So, if you want to be big, at least for a couple years, put a fast processor in the cheapest (slowest) box you can find and pay the pc magazines to rave about your box and company. Stuff your money in a foreign bank account and close the company as soon as repairs exceed profits.
But I have a question for you all. People don't believe a small store can match or beat the big boys for value even though they can easily do it. So people don't even ask or look. If we advertise like they do, then we would have to sell the same c**ppy computers. So what is the solution? You might say "amazing support" (which we have) but the average person doesn't think about support until they need it - after the sale. So, what is the solution?
** For those of you who take things too literally, I'm using the word "Dell" to represent any company that has reached the top, however short that stay was.
A week later, I'd get a call on the phone. The user got his machine from Walmart because it was a couple hundred dollars cheaper, and now he's having a problem with it, and would I help him out over the phone.
No thanks.
From the article:
Actually I prefer Glowing Box vendor, but what the hell. With WindowsXP and a bunch of free and open source programs (Fire/Thunderbird, etc) a small time vendor can do alot more than any time in the past ten years to provide a safe and good user experience to the massses. And I'm too busy trying to be a small time vendor working from home while my wife works outside the home, keep the two tech savvy friends who work as my full time road techs working (and one more part-timer/trainee), and get my new 2004 website online to actually sit down and write something about it.
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