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Will Dell's Up-Market Move Compute?

By Louise Lee Dell has become synonymous with the promise of low-price personal computers. With good reason. For years, the world's largest PC seller has trumpeted its rock-bottom prices with pitches like "Double Steal! Bag a great PC and a free printer for one amazing price."

Now, Dell (DELL) is shifting gears. While it still sells machines for as low as $299 after rebates, the Round Rock (Tex.) company is unveiling on Sept. 28 a new higher-price line of consumer PCs. Marketed under the existing "XPS" name, the new machines, Dell says, combine "the ultimate in performance, experience, and service."

The now-expanded XPS line, says Michael George, Dell's vice-president of the U.S. consumer business, is aimed at three groups of consumers: One is those with extensive technical savvy, and another is gaming enthusiasts who demand lots of power and graphics features. A third category includes people who likely own "an MP3 player, two or three PCs, have a wireless network in the home, and have two printers," he says.

RAISING THE AVERAGE? Why Dell's newfound affinity for the up-market PC crowd? They're likely to be affluent and willing to spend big bucks on computing. More important, hoped-for demand for the XPS line could fuel recovery from the slip that led Dell to miss its sales target in the most recent quarter, which ended July 29. The mistake: Selling its consumer PCs for too low a price, a move that helped pump unit sales but didn't sufficiently increase Dell's actual revenue. With XPS, Dell is reaching out to a more affluent, and demanding, customer who wants snappier features and isn't terribly picky about price.

A lot is at stake. When Dell, which sells more than 8 million consumer PCs a year and has almost 30% of the U.S. consumer PC market, said on Aug. 11 that it didn't hit fiscal second-quarter revenue targets, it also projected that sales for the current third quarter would rise 13% to 16%, scaling back an earlier forecast (see BW Online 8/25/05 "What's With the Dell Doldrums?").

If the XPS computers fly, they'll help raise Dell's average selling price and shore up efforts to meet its revenue goal. "Dell already does well with the first-time, low-end, entry-level buyer," says Stephen Baker, a director at market researcher NPD Techworld in Port Washington, N.Y. Aiming at groups that tend to spend more money and "offering options of higher-level products makes sense and could bring in more revenue and gross margin," Baker says. The XPS line, "isn't a volume play," he adds. "It's a revenue and margin play."

NEW AURA. Prices for the three models of XPS-brand desktops start at $1,099, almost three times the $400 opening price for Dell's existing line of Dimension desktops. The XPS notebook computer starts at $2,699, more than five times that of the $500 entry-level price for the existing Inspiron notebook line.

Dell's George declines to discuss the XPS line's expected profit margins or other financial targets for the brand. But analysts figure the new line carries fatter margins than Dell's existing consumer PCs. Overall operating margin for Dell's U.S. consumer business, the bulk of which reflects PC sales, is a skimpy 6%. The XPS line likely will boost that figure. "They want to trade people up," says Roger Kay, president of Endpoint Technologies Associates, a research and consulting firm in Concord, Mass. "The total margin is better."

To kick off XPS sales, Dell aims to create an entirely new marketing aura. "We talk about buying an XPS as 'the XPS experience,'" George says. Consumers shopping for an XPS online, for example, can browse in a "showroom," complete with interactive product demonstrations, that's more elaborate than existing online displays for Dell's older products. Unlike Dell's advertising for its Inspiron and Dimension lines, ads for the XPS will place far more emphasis on the products' features and benefits, which include souped-up speed, lots of storage, as well as a 17-inch display on the notebook.

SHORTER QUEUES. In an added appeal to the high-end market, Dell is offering a buffed-up service package for the XPS machines. Their standard warranty is one year, compared with just 90 days for Dell's other PCs. Plus, Dell gives XPS customers a special phone number to call for service and support, which is supposed to put them in short phone queues and help them avoid the long hold times that irk many existing Dell customers. (George claims that, through hiring thousands more phone representatives, Dell has cut overall hold times in half in recent months.) The XPS technicians, whom Dell says are "highly trained" and based both in the U.S. and overseas, support only XPS products, helping them gain expertise in the product line.

Dell's overall customer service and tech support to the consumer market has been spotty in recent quarters, according to some independent studies. Most frequently, customers complain about long hold times and say technicians aren't responsive or helpful. Dell says its own internal measures show significant improvement in customer service.

Regardless, some say Dell could find it challenging to deliver the quality of the service and support that it's promising to XPS customers. For instance, because the XPS line is designed to attract both the most computer-savvy gamers and affluent but far-less-savvy users, Dell's XPS technicians will need to have an unusually high level of versatility to be able to serve both groups effectively.

CHANGED IMAGE? "The technicians need to be able to speak to the alpha-gamers and then talk gently, with a beautiful bedside manner, to the others, but still not talk down to them," says Kay. "My question is, where is [Dell] going to get guys like that in large quantities and not break the bank paying them?"

Dell counters that its XPS technicians have "robust case-management tools" that will help them solve problems fast. If Dell can successfully deliver the service it's promising, consumers as a whole might begin to associate it with far more than just cheap computers. If not, Dell's image as the PC maker dangling the "double steal" at an "amazing price" will continue to prevail.

Lee is a correspondent in BusinessWeek's Silcon Valley bureau

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