Another Downer for Dell

Investors pushed the stock lower Thursday amid news that the PC maker have lost further market share to rival HP

Information technology research firms had disagreed in October about whether Dell (DELL) lost its spot as the number one personal computer maker to Hewlett-Packard (HPQ). But new statistics suggest more clearly that Dell's CEO Kevin B. Rollins has been forced into a corner to keep up his profits while his rival, CEO Mark Hurd, turns HP into a more effective shop.

Gartner had already seen HP nipping on Dell's heels in October, when the consulting firm said HP had moved into the No. 1 position for worldwide PC shipments in the third quarter for the first time since 2003. Around the same time IDC had calculated that HP's volume was only larger than Dell's by roughly 28,000 units, putting the two at a "statistical tie."

Now the two consulting firms mostly agree that HP has a firm lead. IDC published statistics on Jan. 17 showing that Palo Alto-based HP had 18.1% market share during the three months ended December, while Round Rock (Tex.)-based Dell had only 14.7%. By Gartner's count HP had 17.4% market share and Dell takes second place with 13.9%.

"Dell was unable to recover from a slow third quarter and stumbled through the end of the year," IDC said in a report Jan. 17. "Dell's focus on profitability over share is coming right at a time of aggressive competition." Dell was the only vendor among the top five, which include Lenovo, Acer, and Toshiba, to have fewer computer shipments during the quarter.

After the news investors sold Dell 1.6% to $25.43 in early afternoon Nasdaq trading Jan. 18. But HP shed only 0.1% of its value to trade at $24.56 per share on the New York Stock Exchange.

Founder and chairman Michael Dell had long been king of the PC industry after inventing the idea of selling his products directly to customers instead of through retail stores or resellers. But now CEO Kevin B. Rollins and Dell are faced with a maturing personal computer market and the need for new ideas. So far they've taken steps like talking about installing Google (GOOG) search software on Dell computers. But analysts say Dell should spend more on research and development (see BusinessWeek, 2/23/06, "It's Dell vs. the Dell Way").

While it appears that Dell has opted to preserve its profits instead of its market share, "the continued deterioration in PC shipments suggests that Dell's attempts to repair its business are not yet bearing fruit," JP Morgan analyst Bill Shope said in a research note Jan. 18. He kept the stock rated underweight. (JP Morgan has done business with Dell in the past 12 months but Shope certifies the accuracy of his research.)

HP's CEO Mark Hurd has cranked up his earnings by cost-cutting and simplifying his company' operations. He's pushed through a 15,000-person layoff, for example. But he's also taken steps to boost his staff's morale since he took the reins nearly two years ago. He gave the heads of HPs main businesses far more control over such things as their own sales forces and marketing dollars, for example. He killed projects that seemed designed to gain PR rather than profits, such as reselling Apple's (AAPL) iPods. And he demanded accountability (see, 10/09/06, "Controlling The Damage At HP").

Louise Lee, Peter Burrows, Robert D. Hof in San Mateo, Calif., Adrienne Carter in Dayton, Lorraine Woellert in Washington, and Moira Herbst in New York contributed to this report

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