Dell’s dilemma: A Kmart rep in a Macy’s market

Apple is netting more on iPads than Dell is from consumer PCs. The numbers speak volumes: Apple sold $6 billion worth of iPads in the quarter ended June 30 — a greater sales total than Dell amassed for all of its consumer PCs. If you’re one of the people who still considers tablets to be a fad, think again. There’s more to these numbers than the rise of the tablet.

Apple’s sales of Macs rose 14 percent in that same quarter, pulling nearly equal to Dell’s consumer PC sales in terms of income. Those figures suggest that another sea change is occurring: the inexorable decline of the Windows PC.

Of course, Macs cost much more than PCs until you get to the high-end models, where they tend to equal out in cost. As a result, Apple’s revenues come from sales of fewer Macs or iPads than the number of PCs that Dell sold.

That is precisely what should worry Dell because it means that its PCs are considered less valuable than iPads or Macs to their owners. Dell’s once mighty reputation as a producer of quality PCs is gone, marred by cheapo PCs that became the fashion a decade ago, in a race to the bottom that saw the likes of E-Machines. When all was said and done, Dell succeeded in becoming the Kmart or Denny’s of PCs — offering low, low prices for items that just wouldn’t last. In fact, that cheapness was considered a strength for a while, as it kept PC sales hot due to the initial low price and the repeated waves of replacements as they failed.

Buyers’ expectations have changed, but Dell’s products haven’t Something has changed, and quality and innovation are both back. iPhones, iPads, and Macs are not at all the cheapest wares, but they are all growing phenomenally in sales. The “churn it out” feature phones are fast disappearing, the iPad is quickly becoming to tablets what the iPod became to MP3 players, and the Mac is growing market share, whereas powerhouses such as Dell and Hewlett-Packard are losing PC market share.

Hardly anyone today thinks of Dell as a place to get great PCs, and you’re unlikely to think of Dell at all when you want to get a smartphone or tablet. Yes, Dell execs say their business PCs are quality products (though many business customers would beg to differ) that will let the company get higher margins — meaning higher prices — for PCs as well as attract businesses looking for smartphones and tablets. Never mind the reality of the absurdly mediocre Dell Streak tablets, or the fact Dell spends just a third of what Apple does on the R&D that funds product innovation, even though their revenues are the same.

Of course, that’s what Hewlett-Packard, Nokia, and Research in Motion have all been saying about their mobile ambitions: Businesses will favor them because of their familiarity with the brand. But all the evidence shows that familiarity is not helping. Perhaps years of cheapo, me-too products from the established business vendors, coupled with Apple’s combination of cool factor and reputation for quality, have turned the tables. Both individuals and businesses are looking for long-term value, not a bargain-basement product that will need to be replaced soon.

Admittedly, Apple’s rep for quality is not always deserved, as anyone who owns a MacBook Pro with defective charging circuitry can attest. Apple’s laptops had this flaw for several years, and the company never owned up to it. Every MacBook Pro bought at InfoWorld from 2006 to 2008 has this flaw, for example.

But on the whole, Apple’s quality is much better, it’s innovation much more compelling, and thus its perceived value much higher. Despite the price premium, Apple is growing sales substantially. Dell may hope to charge a similar premium, but without a sustained strong value proposition, it’s likely to be as successful as Kmart would be in trying to charge as much as Macy’s.

Is Dell quietly shifting out of the PC business? Dell may understand that its consumer PC business is a declining one. At a June 29 financial analysts call, its execs said they’ve significantly curtailed consumer PC R&D spending as consumer PCs’ contributions to the company’s profit margins have declined from 50 percent in 2005 to 36 percent today. They said they were banking on a move from Dell’s traditional base of consumers and small businesses to high-margin enterprise storage and consulting services to grow revenues and profits, and so its investments are mainly in those enterprise businesses.

In finance-speak, Dell is managing its PCs for profitability. In plain English, it means riding that horse as long as they can, with as little investment as possible, until the horse dies.

The question, as Dell tries to remake itself, is whether its Kmart reputation and business approach will harm the desired Macy’s reputation. Its competitors have all faced a similar dilemma but responded differently.

• When IBM saw its PC business as a drain on its future, it sold out to Lenovo and cut the ties.
• When HP began to see the corrosive effect of its cheapo PC strategy, it jettisoned its Compaq brand — but HP had been wise enough to keep the Compaq brand separate, so after it denigrated that once-proud name, it could kill it without affecting the HP brand.

That paid off handsomely for Apple, as the current sales and profit figures show. But as the PC market shifts to something more iPad-like, does Dell have the same luxury of time to shed its Kmart reputation? Or does it need to pull an IBM? One thing is certain: A Kmart product is not what people are buying any longer.

This story, “Dell’s dilemma: A Kmart rep in a Macy’s market,” was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.