Michael Dell built his $18bn (£11.2bn) empire by offering reliable, no-fuss machines that people could afford. He also bypassed the traditional retail channels to sell them direct to customers.
The concept helped the Texan entrepreneur to make his mark as the youngest ever chief executive to have his company ranked in America’s Fortune 500 league table, not to mention becoming one of the richest men in the country. But the heady days of rapid growth are over.
Competition from manufacturers in emerging markets and soaring demand for newer tablet devices has driven the price of PCs downwards, and helped players such as China’s Lenovo to leapfrog old-guard technology giants like Dell to become the biggest PC makers in the world. Dell is no longer the budget option but it is still not top of the range neither fish nor foul. It has to find a new way to grow.
That the company faces a dilemma is something Michael Dell knows only too well. “What we do today is very, very different from what we did even five years ago,” he says, speaking in one of his company’s numerous offices scattered on various business parks in Austin, Texas.
“If we went into a company 10 or 15 years ago and said: 'What is IT?’, they’d say: 'Well, it’s this thing in the back office and we have these computers and they crank away. That’s IT.’
“Now you really can’t be a retailer or a manufacturer [without IT]. You think about the way a hospital works or a supply chain works. IT is taking on a much more important role in the evolution of every business. That’s how Dell (HKSE: 4331.HK - news) expands. The problems that our customers face require more than just products. They require software and services.”
His chief information officer, Adriana Karaboutis, puts it straightforwardly. Dell is edging closer to becoming a management consultancy, she says. “It’s like looking at the blueprint of a house and saying, how are you going to use the house?” she adds.
Dell is not the first old-school computer maker to chart this journey, of course. The same dilemma has already forced its competitor, IBM (NYSE: IBM - news) , once International Business Machines, to abandon the hardware it was named after.
Hewlett-Packard, another computer giant, also threatened to stop producing PCs altogether. That announcement, last year, sent HP’s share price tumbling, and it has been forced to do an about-turn since, but the message remains clear. These businesses might have earned their places as technology giants through selling hardware, but they are going to have to come up with a new trick if they want to stay there.
Many industry watchers think Dell has been too slow to move, fatally so, but Michael Dell is having none of it. “I don’t accept that. Our industry today is $3 trillion in revenue. The biggest company in our industry has maybe 5pc or 6pc of the $3 trillion. That argues against this point that it’s too late. But more importantly, you’ll find there are about 10 companies in the world that have more than 1pc of the $3 trillion. Dell happens to have about 2pc.”
He argues against claims that his company has fallen behind the likes of IBM, which shipped its last computer nearly a decade ago.
“IBM is a fine company [but] we’re on a path to build something quite different from our three-letter competitor. We are a company that was born in the micro-processor age, and we do not have a legacy of mainframe computers. We have no allegiance to those architectures, so we can fearlessly innovate in new areas,” he says.
Dell’s services arm accounted for 14pc of the business last year. In the last quarter to October, Dell’s revenues fell 11pc to $13.7bn, while its operating profit nearly halved to $589m.
It might be fearless it is a word Michael Dell repeats often but with a decline like that, is Dell evolving fast enough?
“Fast enough for who? I don’t understand,” he shoots back. “We’re a 28-year-old company, not a 128-year-old company or whatever [IBM marked its centenary last year] and we’re evolving pretty rapidly. More than half of our gross margin dollars come from these newer areas of Dell.”
For Michael Dell, those 28 years are also his entire adult life bar two-and-a-half years to 2007 when he temporarily stepped down as chief executive while remaining chairman.
He started the company while he was a pre-medical student at the University of Texas, using $1,000 of capital.
“I’m 18 years old, about to turn 19, and I’m a freshman. Just tell me, exactly what do I have to lose?” he laughs, recalling the period.
The company was originally called PCs Limited, and was incorporated by one of his customers, a lawyer, who did the paperwork in exchange for a hard-disc drive. “It wasn’t my natural instinct just to name the company after myself,” he says.
He was eventually persuaded to use his own moniker because PCs Limited was too generic, but for a man who shares his name with an $18bn business, Michael Dell remains a very private man.
His entourage warns against asking any questions about his home life, and he recently made his daughter delete her Twitter account after she posted a photograph of her brother eating from a lavish buffet on board the family’s private jet, en route to Fiji.
“I would not like to have been his kid that day,” says one of Michael Dell’s PR men. No wonder. Filings at the Securities and Exchange Commission reveal that Dell spends around $2.7m a year on his family’s security.
Michael Dell is also hyper-careful about the company’s administration expenditure, parsimonious, some might say. The company’s offices are surprisingly shabby, filled with the kind of one-man work cubicles that many companies phased out in the 1990s, and a far cry from the zany, beanbag-filled open spaces of new-generation tech companies.
But this tight grip on the purse strings probably helped Dell to avoid a few disasters. Michael Dell reveals that Autonomy (LSE: AU.L - news) , the British software company founded by Mike Lynch, was “shopped” to him before it was sold to HP for $10bn and became the centre of a major controversy.
HP has accused the company, which specialises in searching “unstructured data” such as texts, voicemails and video, of serious accounting improprieties, and written down its value by half. Lynch (AMEX: LGL - news) , who denies the allegations, has fought back, saying that HP had all the facts when it bought the company and that the value has been wrecked by poor management.
Michael Dell questions HP’s due diligence. “I can tell you that as the founder of our company and the largest shareholder of our company, whenever we make an acquisition, I spend a lot of time thinking about that and treat every single dollar as if it were my own. A lot of them are my own, actually,” he says.
The Autonomy deal didn’t get too much consideration, he says. “Not at that price. That was an overwhelmingly obvious conclusion that any reasonable person could draw.”
Dell has been spending some cash, however, buying up around 20 companies over the past four years to help build its expertise in services, such as fighting cybercrime. “This year we have spent about $5bn on acquisitions and there has been a pretty meaningful shift in the mix of our business. We’re going to continue that transformation in an aggressive way.”
Could that aggressive pace of change eventually include abandoning computers altogether? Such a move is sufficiently on the cards that Dell’s senior bench of executives declines to answer, passing the buck to the man with his name above the door. But Michael Dell is categorical that such hardware will remain part of its long-term future.
“You can reconfigure parts of the industry any way you want, but essentially there are three core elements that make up information technology. While the fastest growth is in services, you can’t have services without software, and while software is growing faster than hardware, you can’t have software without hardware,” he says.
Analysts might disagree, but for Michael Dell, there is life in those cut-price, reliable PCs for some time yet, even for a high-margin business in the US. “It’s as simple as that,” he says.
= Michael Dell CV =
Family Lives in Austin, Texas with wife and four children
Education University of Texas
Career 1984 Founded Dell as PCs Limited; 1992 Dell ranked as one of the 500 largest US companies; 2004 Steps down as chief executive, while remaining as chairman; 2007 Returns as chief executive at board’s request
= Dell facts =
Seed money with which Michael Dell started his empire
Revenues in 12 months to February 3, 2012, the last full-year available
Market capitalisation of Dell today
Market capitalisation of Dell a year ago