Can Dell Make Money Selling AMD PCs?

PERSPECTIVE Yesterday, the leading manufacturer of made-to-order PCs in the world finally rolled out the first in a long-awaited line of AMD-based desktop systems for the value and mainstream market segments. Dell will likely sell plenty of Dimension E521 models, with CPU options ranging from AMD's dual-core Athlon 64 X2 3800+ up to the 5000+, the latter of which has seen limited availability elsewhere.

Yet Dell's success with this new rollout isn't the issue of late. Among all the other problems Dell has been facing -- poor financial performance, investigation by the SEC, mixed reviews in the customer support department, inability to ship XPS performance PCs within five months of the order date -- the company appears to be falling victim to its own pricing practices.

As Dell executives admitted during its last quarterly conference call, the company been cutting its margins so low (the watch-word used here is "aggressively") that even when it does see a successful product line, it doesn't reap much revenue from it.

Despite promises from Dell executives to investors that this trend must and will reverse itself, yesterday's Dimension rollout displays evidence that the marketing department is continuing to display signs of aggression.

In a test Wednesday morning, BetaNews used Dell's online "configurator" to price an E521 full-size (half-tower) desktop system with a slightly upgraded, though still basic, set of customer options. We configured the system with an Athlon 64 X2 4200+ on-board (in place of the 3800+), 1 GB of DDR2 SDRAM, a 250 GB hard drive, a single DVD burner, a 17" flat-screen monitor, and an nVidia 7300 LE graphics card with 256 MB on-board.

We let the sound stay integrated on the motherboard, and we had Dell forego accessories except for the standard keyboard and mouse. Dell quoted a price of $989 USD, with an estimated ship date of October 2 - just under three weeks.

We compared this system with a very similarly equipped HP Pavilion, with the same 4200+ CPU, the same graphics card, and the options basically stripped to the bones. HP quoted $1,019.99 USD - only $31 more, but in today's market, that could be a veritable gulf. HP's estimated ship date is September 19 - only one week.

Among value-conscious buyers, a $31 difference could make or break the sale. Dell's margins appear to come in just under HP's at the moment, which gives Dell the edge today. The problem is, those margins could come at a cost. Like a gas station franchise that has to sell beverages to make up what it loses from sales at the pump, Dell may find itself having to sell more accessories -- speakers, custom mouse devices, TV tuners -- to offset what it's not making, or what it may even be losing, with each computer system sold.

There are less expensive alternatives. This morning, TigerDirect offered a Systemax Ascent system with the 4200+, and arguably with less expensive construction and standard accessories, although with an nVidia 7300 GS card - the next step up from the LE. TigerDirect quoted $869.97 USD, and promised shipment in up to five days.

On the other end of the pond, custom builder Velocity Micro is known for high-end systems, but it also offers more mainstream alternatives with more durable construction -- for instance, a custom aluminum case -- and, some say, personal attention to detail. This morning, we priced an AMD Athlon 62 X2 4200+-based Vision 64 system that also has an nVidia 7300 GS card, albeit with 512 MB GDRAM on board (it's not available with less from Velocity) and a 500 W power supply (again, nothing less is available). Velocity's price is $1,659 USD, and its shipping date is just over two weeks.

Though dealers such as Velocity sell to a much smaller segment of the overall PC market than Dell or HP, they're in an enviable position right now, in that they appeal to buyers willing to pay a premium. You start to see the logic behind Dell's acquisition of Alienware.

During Dell's August 17 conference call, analysts pointed out Dell was losing market share, mainly against HP, despite its own acknowledged aggressive pricing. CEO Kevin Rollins disputed the declining market share claims, although with regard to coming up with a pricing strategy for the post-holiday season, Rollins admitted, "We don't think we did a good job of that."

"We were overly aggressive in a slowing marketplace, and in a situation where component prices didn't come down as we had thought, so we had margin squeeze. In the future, we're going to be a bit more circumspect on our pricing strategy, more careful; however, we are not backing off and moving into a margin harvesting and loss-of-share situation; we're going to continue to gain share, but we're going to do it a bit more thoughtfully and more carefully," Rollins added.

Dell executives used that term "margin harvesting" in February 2004 to outline its strategy toward digging itself out of exactly the same dilemma it finds itself in today. Almost no one else uses this term, and although no one at Dell has explicitly defined it, so we can presume it means using low margins for the short as a tool to acquire more customers for the longer term.

When Rollins talks about component prices failing to decline, he's probably referring to Intel, which until recently was Dell's exclusive CPU supplier. AMD has a reputation for selling at lower costs to compete, but Dell's eventual warming up to AMD comes at a time when Intel's dual-core CPU introduction helped it reclaim the price/performance advantage.

With both declining market share and declining investor confidence, Dell is finding it harder and harder to build some breathing room. Its own premium line of PCs, the XPS series, has met with unprecedented shipping delays, and as long as XPS systems don't ship, new ones don't sell. Dell needs that premium to offset what it's not making in the value segment. So now, Dell faces a dilemma: Does it raise its margins before Christmas, and perhaps give up the #1 spot to HP, if the customers it retains help it increase revenues?