Dell Feels the Squeeze of Low-Cost PCs

Leading personal computer manufacturer Dell saw its profit slump by 28 percent in the third quarter of 2005, however it remains optimistic in the face of what looks to be an increasingly tough market for PC makers. Computer users are increasingly turning to lower-end systems that are powerful enough for basic tasks.

The problem with this trend is that manufacturers make less profit on each system they sell. Dell actually shipped a record number of PCs in the third quarter, but it did so at a lower profit margin due to the shift in the market.

For some companies who are looking to make an impact on the industry, such a market may be beneficial in the short term. However, for larger companies like Dell who are already established, it does little for their bottom line.

"Those who are targeting the low-end market are going to increase their market shares, but not their revenue," Current Analysis analyst Nicki D'Onofrio explained to BetaNews.

Instead, Dell must target the upper echelon of computer buyers, and while it may do less volume, the company will pull in higher profit margin. Thus, Dell said it only expected between 9 to 11 percent growth in the holiday quarter, compared to an average of 15 percent during the past year.

"The PC market is commoditizing. Price erosion is something that's having an impact on all players," D'Onofrio said. Dell's size also works against it. Ten percent growth for a company of the Texas computer maker's size is a lot harder to achieve as compared to a smaller competitor, she added.

Further hurting the company's bottom line was a $300 million charge Dell had to take in order to fix faulty capacitors that it had discovered in one of its business desktop lines.

In an attempt to combat the changing market, Dell is trying to lure consumers back to higher priced -- and more profitable -- desktops and notebooks. The company launched its line of XPS "luxury" systems in late September.

"They are trying to brand it as a Lexus-type product," D'Onofrio said, noting that it will not be enough to just focus on the high end. "They need to make sure they're offering value products."

It's also not clear if a switch in Dell's business practices could help its bottom line. For the entire history of the company, Dell has never offered its systems through retail channels; would a switch now change its fortunes? Probably not, D'Onofrio says.

"The retail market can be a bloodbath as well. It's hard to tell if they would do any better."