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Worlds still to conquer

A conversation with Michael Dell

By DAVE GUSSOW, Times Technology Editor

© St. Petersburg Times, published October 18, 1999

ORLANDO -- Those $400 rebates on a PC are a great deal -- for the companies peddling them, not consumers. Just ask Michael Dell.

The multibillionaire founder and chief executive of Dell Computer says that in return for the rebate checks consumers pay higher rates for Internet access, get locked into long-term contracts for slow dial-up connections and receive bare-bones machines that won't satisfy them for long. He gives consumers about 18 months to sour on the deals and create an uproar.

"We're doing our best to avoid it," Dell said. He's not sitting out the fad altogether, but he said his company will offer an Internet access contract shorter than the typical three years required by others.

About Michael Dell

Age: 34

Born: Houston

Founded Dell Computer: 1984

Dell revenues: Projected $26-billion this year, up from $18-billion last year

Personal wealth: More than $20-billion, ranking fourth in Fortune's annual list of the 400 wealthiest Americans.

Family: Married, four children

Dell has sold a lot of computers since he started his company 15 years ago in his dorm room at the University of Texas with $1,000 in savings. At 34, he still has worlds to conquer. He is pushing Dell Computer toward a No. 1 worldwide ranking by 2001. It's now No. 2 worldwide, behind Compaq, and No. 1 in the United States.

Dell was a keynote speaker last week at GartnerGroup's annual technology conference in Orlando. Before addressing thousands of information technology professionals, he talked one-on-one with Tech Times.

Dell's pioneering model of direct sales -- over the phone and increasingly over the Internet -- is the envy of the PC industry. Now, he is expanding Dell's horizons on the Internet, with more sales, services and support. He's also becoming somewhat of an e-evangelist, urging other businesses to go online -- or lose out.

He remains convinced of the PC's long-term future, despite Wall Street's worries that an array of information appliances and other innovations will make it obsolete.

GartnerGroup analyst Joe Barkan agrees that Dell has growth opportunities in the international market, but he thinks Dell is underestimating the impact of low-cost computers as well as the eventual adoption of information appliances.

Without mentioning the rival by name, Dell tore into low-cost competitor eMachines for offering what he portrayed as unreliable PCs that hurt the industry's reputation.

The only question he sidestepped was the strategy for his MSD Capital LP, a personal-investment firm that is putting money into a number of Internet and e-commerce companies, according to the Wall Street Journal.

Here are excerpts from the conversation with Dell:

Q. Do you see the pressure to cut prices affecting your bottom line?

Dell: We are the price pressure in the PC industry. If you look at the companies that are succeeding and those that aren't, we are the company that has the most ability to exert pricing pressure. What we're doing essentially is trading off that for growth. We want to continue to grow, and so the cost structure keeps coming down and that's enabled by the Internet. Now our consumer business is about 50 percent online; our business to state and local governments is about two-thirds online enabled. So you're seeing a broad move toward online activity, which is driving cost structures down, which allows us to sell machines at lower and lower prices.

Q. Did you learn any lessons from eMachines or Apple's iMac? Does that tell you anything about the way the consumer market is moving?

Dell: I think style and size have become more important in consumer PCs. Certainly the consumer is looking for more attractive forms and more creative expression in computing, whether it's in color or in style. So that's something that's starting to reflect in our products. We're already offering notebooks with different color options, and you'll see desktops with the same kind of thing.

Q. You've said that you expect PCs to dominate even with the advent of information appliances and mobile ways of connecting to the Web. How long will your growth continue when companies such as Intel are working to put chips in everything and Sun Microsystems is coming out with more of a network computer? How long do you expect the PC to be dominant?

Dell: A long, long time, at least another decade or so. Let's take the two things you mentioned. Intel is putting computing in lots of different places, but the vast majority where it goes is in personal computers. What you are seeing is sort of a broad dispersion of computing into any number of devices. The little devices we carry around with us, (in) cars, telephones, televisions, all these things have some Internet enablement to them.

But if you look at the most popular sort of appliance device, it's the PalmPilot. Do you know the biggest button on the PalmPilot, the most important button on the PalmPilot? It's the button that allows you to synchronize it with your PC, which really tells a whole lot. The most important feature of the PalmPilot is the fact that you can take all this data from your PalmPilot and take it back to your PC, and from your PC take it to your PalmPilot.

In fact, you don't really find people who use the PalmPilot all by itself because it doesn't really do much all by itself. So these things are sort of tentacles on a connected network that we all use together. I think what these other devices do, whether it's Web-enabled phones or Web-enabled pagers or PalmPilots, whatever, is they addict us to information more than we were already addicted. But they don't necessarily take away the role of the PC.

Q. When your kids are your age, what do you expect them to be using?

Dell: That's a little hard to predict. My youngest is 3 years old so that's 31 years from now. Clearly the interface is going to start to change. I think in computing we're sort of on a journey to make the computer disappear. In other words, to have computing be so easy that you don't really know that it's computing. And we're a long way from that. If you think about voice response, if you think about intuitive interfaces, we're still not there. We still have function keys and weird things, and the interface between the human and the computer is still pretty arcane. I think until we can sit across the table from our computer and have a real, live conversation, I think we have a long way to go.

Q. Many of our readers say PCs are too difficult to understand, they crash too often and tech support is less than wonderful, as an industry. Do computer crashes frustrate you?

Dell: Sure, especially when they come as a result of things that are rather controllable. Let me give you an example. If you look at the hardware that we use in our products, we have pretty strict requirements for the quality of the components that we use. And we go through a tremendous amount of testing to ensure that the products we deliver are highly reliable. One of the companies you mentioned earlier often buys products that don't meet Dell specifications. And as a result, they subject their users to an inordinate amount of intermittent problems, and they're continuously showing up at the bottom of end user satisfaction reliability studies.

For what purpose? For the purpose of supposedly saving money because these components cost less money and after the fact they're lower quality, they're seconds if you will. That sort of approach to trying to cut costs has a price. And, of course, the problem that the new user has, looking at 10 computers, is to say "Well, gee, they all look about the same. How am I supposed to know which one is better than the other? Which one has better support?" It's kind of like if you take somebody who'd never been in a car, never seen a car, didn't know what a car did, said pick a car, any car. Well, looks like they got four tires and doors, and steering wheels, I'll take this one. Everybody knows now you get the wrong kind of car and you can have a problem. The same is true in computing.

Q. Is the technology industry guilty of putting products on the market before they're ready?

Dell: Oh, sure, it does it all the time.

Q. Why do you think consumers tolerate that?

Dell: Well, certainly many consumers don't tolerate it. But the reason that it occurs first of all is that it can occur because the technology improves so quickly or it evolves so quickly. For example, six or seven years ago, there was a big computer show . . . and the sole intended purpose of that computer show was to espouse the benefits of something called pen computing, a thing that actually didn't really work. That's an example of the industry getting really excited about something for which customers had no interest in buying because it didn't really work. One of the things we believe is that our direct relationship with the customer gives us an ability to stay away from those things that are actually sort of nonsensical inventions.

Q. You have taken a higher public profile, doing your own TV ads.

Dell: I did agree to do this ad. Our internal marketing teams have been asking me to do it for many, many years, and I refused. And they finally caught me in a weak moment, and I decided to do it. I don't necessarily like to promote myself. I like to promote the company, and so I previously refused to do it. But they convinced me it's a good idea. . . . I'll believe it when I see the data.

Q. You said recently, 'We're fast approaching the point at which there's really no distinction between the dot-com companies and traditional businesses.' Is a Web presence crucial for any size business?

Dell: The beauty of a small business is that it can specialize and it can provide a unique service. And with the Internet, of course, it can offer that service to really anyone in the world, assuming it's valuable. One of the things that is also very exciting about the Internet is it gives the consumer the ability to eliminate the part of commerce where they used to get fooled. When somebody would go to buy something in the past, usually they could only consider merchants within sort of a geographic area that was close to them. And if all those merchants decided to have things that weren't any good or to price them high, they didn't have any choice. That's all you could get.

But now, of course, the consumer can compare anywhere, so that the merchants, whether they're online or offline, are kind of held to a higher standard, not only of performance and pricing, but also of the experience that they deliver to the customer. So, yeah, I think it's absolutely critical, and I think the businesses that take advantage of this will be the ones that succeed. They've got to figure out how they can go beyond just basic information. They've got to create an experience that is better than the experience in the physical world. If they're a physical world business, they've got to create something that is better than an online experience. It's definitely going to affect every business out there.

* * *

Q. Does that mean that there's going to have be a combination of "brick and mortar" and virtual presence?

Dell: It depends on the business. I think the physical businesses need the Internet as a way of bringing customers in. I think there are certain kinds of online businesses where you don't necessarily need a physical presence. You kind of take the example of Disney World, which is a very experiential thing, where you go to Disney World and you feel that you experience it, and you could not create that online. Now think of a drugstore. Who wants to go to a drugstore? Is that fun? Is that where you go to see your friends? Is that a place for social interaction? If you could get everything you could get at a drugstore online, would you rather do that than actually go to this place, stand in line, have people buying embarrassing things all around you? This is not necessarily what people like to do. But in the physical world, there was only one choice. You needed something, you go to the drugstore.

Q. In your speeches, you talk about market capitalization for some of the new media and online companies versus traditional companies, Yahoo versus the New York Times, Schwab versus Merrill Lynch, eBay versus Sotheby's. Steve Ballmer of Microsoft recently said tech stocks are absurdly overpriced. Do you agree?

Dell: If you look at the new Internet companies people are getting excited about today, a significant percentage of them won't necessarily be in business 10 years from now because this is a rapidly changing environment. . . . But there is a tendency for people to get overly excited about things when they don't know what they are. It's kind of like in biotechnology if somebody said, "Hey, we've got something that might be a cure for cancer." Well, let's see, that's not worth zero, it's not worth 10-billion. How about 3-billion? You sort of pick a number in the middle. And sometimes they're right and sometimes they're wrong. That's how markets are made. But in some of these new companies it can be fairly speculative certainly.

The other thing to keep in mind is that a company like Microsoft has a tremendous incentive for their stock not to go up too quickly. Because if it goes up too quickly, it's very hard for them to attract new people into the company and it's also very hard for them to retain the people they've already attracted. Steve actually has a purpose behind his message, even though he might not be willing to say it.

Q. In the early '80s, PCs were your focus. Is the Internet where Michael Dell builds his next empire?

Dell: We've been building on the Internet for five years, and it's certainly a major part of our business, not to say that we've conquered the Internet or the Internet has passed us. We see plenty of ways to continue to evolve what we're doing. E-support is a great example. Today when you have a problem with your PC, you get frustrated or you call somebody on the phone. But we think we can solve all those problems with self-healing systems and ways of doing that support online that can save the user time and save costs through the entire process. We think that we can move more and more business online, and we also think we can use Dell's expertise in this sort of online business to help other companies bring their businesses online.

Q. At current growth rates, it's projected that you will be the No. 1 computer company in the world by 2001. When you become No. 1, you get to be a bigger target. How do you protect your turf?

Dell: That's easy. Find a bigger market. Actually, if you think about Dell's business, we're today pretty much in the hardware business, although there are several adjacent businesses we're getting into, the services business, the content business, the access business, and sort of the e-services, the hosting, Web-consulting kinds of things. If you look at that entire market, we have only 4 percent of that entire market, so that gives us plenty of headroom to grow, even though in the U.S., we're already No. 1 in the PC business.

Q. Your parents were unhappy when you dropped out of school --

Dell: Whose parents would be (happy)!

Q. What are you going to do if one of your kids wants to drop out of school?

Dell: If they're trying to drop out of kindergarten, I'd be very upset, let me tell you, which is where most of my kids are right now. They're in second grade or kindergarten or preschool. I'd be very upset, let me tell you. I think like any parent I'd be pretty upset. My parents were upset and then about a year later, six months later, they got over it because they saw that I was doing something that I loved doing and that I was having fun doing and enjoyed doing.

Q. Are you still having fun?

Dell: Absolutely. Yeah, yeah.

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