Dell Will Rule The Consumer Electronics World, And Look Ugly Doing It

Yesterday, Dell confirmed what many technology analysts had long suspected: it plans to follow the trend established by PC manufacturers like Apple and Gateway, and begin manufacturing consumer electronics. (You can read the official Dell press release here; alternatively, you can peruse the general media’s take on the subject at Google News.) In short, Dell believes that its direct sales model will enable it to dominate the consumer electronics business the same way it has been able to dominate the PC business, and plans to launch new handhelds, an iPod-esque JukeBox player, an iTunes-like digital music download center, and an LCD TV model to help it do so. Assuming that these products prove successful, Dell CEO Michael Dell hinted that more consumer electronics would be forthcoming from the company.

The big question today, is whether or not Dell will be successful in its foray into the consumer electronics world. Our opinions on the matter are mixed—examining things from a strictly economic perspective, we expect Dell to eventually dominate the competition. However, after looking at Dell’s, uh, somewhat less than stylish product line--in particular, what’s up with the design on the “digital jukebox,” anyways--we’re also fairly certain that Dell’s eventual success in this business isn’t going to come as easily as it did in the PC industry.

Let’s start with the economic reasons that will enable Dell to dominate consumer electronics manufacturing. By now, we all know that Dell’s direct-to-customer business model works by “eliminating the middleman,” and allowing Dell to produce machines much more cost-effectively than its rivals, while selling them at the market price. These lower costs ensures that Dell’s margins are much better than its competitors on the whole. Moreover, Dell’s model has proved to be insanely difficult for its competitors to copy—as Gateway, Compaq, and HP have all found out at various points in the last ten years. Not only is Dell just much further down the learning curve when it comes to knowing how to make electronic devices as quickly as possible (it currently holds about 2.3 days of inventory, as opposed to its nearest competitor, HP, which is at 11-12 days of inventory), its cost structure is exceptionally hard for an established rival or new entrant to copy. For example, its rivals are all saddled with the high costs of maintaining relationships with dealers, resellers, mainstream retail channels, and partnerships. This means that should rivals try to copy Dell and go direct, Dell simply has to lower its prices to a point where its rivals lose money, but Dell still makes money (thanks to its lower prices). Since lower prices tend to result in more sales, Dell’s volume increases while its competitor’s losses mount in a scenario that resembles death by a thousand cuts for Dell’s rival.

Although consumer electronics is a tough business to be in—
featuring razor-thin margins, short product cycles, and intense price competition across the board—the nature of competition is highly similar to that of the PC industry. In particular, other consumer electronics manufacturers sell through retailers and resellers, and have yet to go direct in a big way thanks to the problem of channel conflict. From the outset, this means that incumbents in the consumer electronics industry have higher costs than Dell, since Dell is direct-only. Moreover, the types of consumer electronics products that Dell is initially manufacturing aren’t too different from those that it already makes—the LCD TV it will sell, for example, is really little more than a variation on an LCD monitor it already produces, while the hideously ugly digital jukebox it will make is nothing but a hard-drive with headphones. By avoiding—for the time being, at least— more complicated CE devices, such as 50” plasma TVs, for example—Dell’s costs will remain far lower than established consumer electronics manufacturers for the foreseeable future. These lower costs should allow it to gain substantial share at the expense of others: not only can price its products slightly lower than competitors in order to gain volume, should a price war occur, Dell should still be able to turn a profit, while its rivals will destroy wealth.

The biggest threat to Dell is if the superior brands, and better looking products produced by MP manufacturers like Apple, compensate buyers for the lower prices Dell will be able to offer. Although we hate to admit it—we’re inclined to paraphrase Steve Jobs’ famous comment about Microsoft, and boldly state that Dell has no sense of style—we don’t think that the better-looking, but more expensive, iPod will win against the cheaper but uglier Dell Digital Jukebox. Dell will win because it produces machines that are the equivalent of a Honda Civic: they’re not the prettiest products, but they tend to be very reliable and have minimal problems to boot. We’d guess that unless the Digital Jukebox violates Dell’s long-standing track record of producing pretty durable, and easy-to-use machines it will probably more than satisfy the demands of mainstream consumers and dominate the majority of the market. There will probably be a market for iPod at the higher ends of the MP3 player market—much as there’s a market for Apple’s computers in the upper echelons of the PC market. We’re wondering, however, how quickly Dell quickly could have overrun the consumer electronics market if it knew the meaning of the word “aesthetic.” In closing, we like Dell, but if Dell was a person, they’d be an all-achiever desperately in need of a Queer Eye for the Straight Guy makeover.