Dell Goes High-end and Hip

With its purchase of Alienware, the PC maker is going for the lucrative gaming market. It may also signal a different strategy on chips

Dell may be breaking out of the box. Often criticized for garden-variety PCs that differ little from competing consumer brands, Dell on Mar. 22 said it would buy Alienware, a maker of high-end computers popular among gaming enthusiasts -- and anything but ordinary.

Pressure on Dell (DELL) to break with some longstanding traditions is high. Hewlett-Packard (HPQ) and other competitors have vastly improved product performance and customer service, while Dell's service ratings are in the doldrums and recent sales have disappointed investors. Dell CEO Kevin Rollins and Chairman Michael Dell are on the hunt for ways to jump-start growth.

The Alienware deal is indeed an unusual move for a company that had made only two acquisitions in its 22-year history. Buying Miami-based Alienware may be well-timed, given that recent efforts by Dell to revitalize its high-end product line have failed to wow analysts.


  In September, the PC maker staged a splashy relaunch of its XPS line of desktop and notebooks, which -- like Alienware's machines -- are aimed at affluent households and hardcore gamers (see BW Online, 9/23/05, "Will Dell's Up-Market Move Compute?"). Dell said in February that unit volumes of XPS machines rose 20% in the most recent quarter from a year earlier, but didn't elaborate.

Some analysts, however, don't see the XPS line, which starts at about $1,000 for a desktop and $2,000 for a notebook, as bringing much benefit to Dell. "We don't think it's an important driver of growth," says Pacific Crest Securities analyst Brent Bracelin. "XPS is a low-volume product," says Charles Wolf, analyst at Needham & Co. "If you're going to spend that kind of money, get a Mac." A Dell spokesman says despite the Alienware purchase, the company is "not backing off its support of XPS."

Alienware takes Dell in a new direction on chips, too. Dell for the first time will sell machines that run on AMD (AMD) microprocessors. Dell has purchased all the chips for its computers from Intel (INTC). But recently, consumers and business customers have increasingly demanded machines that run on AMD chips. Alienware buys chips from AMD and Intel, and Dell says Alienware is likely to continue its supply agreement with both vendors.


  In an interview with BusinessWeek in November, Alienware CEO Nelson Gonzalez said, "We use whatever's the best. Whether it's Intel or AMD doesn't matter to us."

At least one analyst believes that Alienware provides Dell a "backdoor" way to sell some AMD-based products without alienating Intel, which pays Dell hundreds of millions of dollars a year to use Intel chips. "The simplest way (for Dell to sell AMD-based machines) is to buy another brand that already uses AMD," says Caris & Co. analyst Mark Stahlman.

Dell appears to want to rock the boat at Alienware as little as possible, at least for now. A Dell spokesman says Alienware will operate "as a separate entity" and that the two companies won't cross-market or cross-promote products. Alienware is expected to maintain its existing tech-support center. Like Dell, Alienware sells only through "direct" channels, distributing via the phone and Internet and bypassing retailers and resellers. In that respect, Dell "is the company to follow. Their model is what works," said Gonzalez last November.


  But Dell likely will help Alienware become more effective in managing its supply chain and negotiating with vendors, moves that could make it more efficient and help it increase production. "There's no reason why the Alienware brand can't be as large as the Dell brand, given the right resources," says Stahlman.

And possibly the most important contrast between Alienware and its new parent: growth. To be sure, Alienware's sales volume, which according to Gonzales was about $172 million for the fiscal year ended last September, is a mere drop in the bucket to Dell. Sales at the PC-making giant totaled $55.9 billion in the most recent fiscal year, which ended Feb. 3. Alienware's sales increased 50% in most recent fiscal year.

Dell expects sales growth of 6% to 9% in the current quarter, a big drop from the 16% a year earlier (see BW Online, 2/23/05, "It's Dell vs. the Dell Way"). And Dell certainly doesn't want to make a tradition of slowing sales growth.

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