Dell plans relentless diversification

The PC maker says that its direct business model will fare well with all sorts of new product lines, from PDAs to services. Analysts advise to take this rhetoric with a grain of salt

Dell is confident its direct business model will keep it moving forward profitably -- regardless of product line.

The company's refusal to use traditional resellers, distributors or the retail channel (though it once toyed -- disastrously -- with the latter) has allowed it to maintain profit margins, a unique feat among the leading global PC makers these days.

However, as it enters areas such as PDAs, printers and networking -- burning bridges with specialist partners in those areas such as Palm, HP, 3Com and Cisco -- pundits have claimed the company is biting off more than it can chew and thinking it can simplify complex areas of IT.

In response to the first allegation, Dell chairman and chief executive Michael Dell last week said, "You can look at many points in our history and say the same thing. It's an easy statement to make about a company that is growing and expanding. We do worry about that. We try to find the right time and products where we're really going to make an impact. We're not going after every opportunity we see."

That said, eyebrows were raised when Dell recently said it would start manufacturing point of sale devices, and it may find it difficult to maintain its traditionally healthy profit margins in markets where it will compete against angry friend-turned-foe vendors.

Brian Wood, vice president and general manager of Dell's public sector business, said that for networking, printing and PDAs, Dell "can apply the exact same [direct] model" but it "must handle the complexity" in those markets.

It even thinks it can apply the model to services, though some experts think the company's windy rhetoric belies its inherent pragmatism.

Clive Longbottom, research director at analyst house Quocirca, said: "Although Michael Dell is a big proponent of the direct model, he realises the big-end stuff is not a direct sell."

Dell's line is that partnerships with EMC, for storage, or Getronics or Unisys, for services, are part of its direct model. However, Longbottom adds: "The story that Dell is 100 per cent direct is total bunkum. Dell is as agnostic as IBM as to how and where it gets its money."

For its non-traditional markets, Dell will be concentrating on segments that have been or are being commoditised. In other words, shipping simple switches -- as Dell already does -- is profitable in the direct, manufacturing-efficient model but offering high-end routers and associated consulting services may be something for the long term. Likewise offering $100, or £60, inkjet printers is likely, whereas digital imaging services may prove tricky.

Will Dell over-stretch? "We wouldn't know where that point is until we cross it," Wood added. "But we know we must keep expanding into other areas to continue growing quickly."

And despite eschewing distributors and other go-betweens for its own hardware, Dell is happy to act as a channel for other companies' products, especially software -- even if there is no direct Dell hardware purchase associated with such transactions.

Dell has set up hundreds of 'Premier' websites for large customers around the world and already sells third-party software from companies like Microsoft, Symantec and Veritas.

Steve Felice, vice president and general manager for large corporate accounts at Dell, said: "We can perform an effective single point of contact for a customer. Our challenge is to make sure it is accretive to Dell. Our software business is accretive. It's not as profitable as hardware but it's worth it."

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