A Dell Smartphone Would Face Big Hurdles

Instead of rushing to compete with the entrenched iPhone and BlackBerry, Michael Dell & Co. should consider making larger mobile Internet devices, or buying Palm

Dell CEO Michael Dell has done little to dispel rumors that his company is working on a mobile computing device. In fact, he all but confirmed them while traveling in Japan on Mar. 24 when he said: "It is true that we are exploring smaller-screen devices."

What form those devices will take remains a matter of heated debate. Talk is that Dell (DELL) plans a smartphone that would compete with Research In Motion's (RIMM) BlackBerry, Apple's (AAPL) iPhone, and the various devices running software from Microsoft (MSFT), Nokia (NOK), or the Google (GOOG)-backed Open Handset Alliance. Prototypes of a Dell-made smartphone are being circulated in the wild and, according to Kaufman Bros. analyst Shaw Wu, got a cool reception from mobile-phone carriers including AT&T (T) and Sprint Nextel (S).

Dell has tried its hand at smartphones before, with little success. The company discontinued its Axim personal digital assistant in 2007 following several years of lukewarm sales. "They didn't have a particularly exciting portfolio," says Neil Mawston, director for wireless device strategies at consultant Strategy Analytics. Carriers that reviewed its most recent effort saw little to set Dell apart from the competition, Wu says. "There's some interest, but not a whole lot," he says. Meantime the market is growing crowded. Rival PC makers such as Acer, Asus, and Lenovo have all jumped into the smartphone market. Palm (PALM) is about to release a much anticipated device, the Palm Pre. Apple is expected to unveil a dramatic hardware upgrade to its iPhone this summer. "Trying to sell into that sort of publicity could be a little bit of a problem" for Dell, says Will Stofega, program manager at IDC (IDC).

A Jammed Smartphone Market

Maybe now is not such a good time to launch a smartphone. Instead, Dell might want to introduce a different kind of handheld known as a mobile Internet device, or MID. These machines are larger and more powerful than smartphones, yet they're far smaller and of lighter weight than even the tiniest notebook computers known as netbooks.

Consumers are amenable to using MIDs in place of smartphones, according to a recent survey by consultant ABI Research. The category is just emerging, so less competition would allow Dell to stake ground early. Companies such as Dell "will find a much easier time entering the [market for] 4- to 8-inch-screen devices," says John Bruggeman, chief marketing officer of Wind River Systems (WIND), which helps companies match hardware and software for handsets and MIDs. In contrast, even existing cell-phone makers, including Motorola (MOT) and Sony Ericsson, are struggling in the smartphone market. "The incumbents are entrenched, it's difficult to break in," says Ashok Kuman, an analyst with Collins Stewart.

Demand for MIDs is also expected to rise more sharply than for smartphones. Global shipments of smartphones are expected to rise 3.4% this year, according to researcher IDC. But MID sales may surge to 200 million devices in 2013—from 10 million units in 2008—generating $27 billion in sales, according to ABI Research. Dell wouldn't comment on its mobile-device plans. Nor would AT&T and Sprint discuss whether or not they are evaluating any products from Dell.

There are other reasons for Dell to consider MIDs. That market would place less pressure on the company to build a network of software developers that could create a library of tools, games, and other applications. Apple's iPhone is tied to the iTunes App Store, which offers more than 25,000 applications. Research In Motion, Nokia, and many other handset makers are revving up software efforts as well. But Dell lacks a large mobile-software ecosystem. Catching up could take months, even if Dell uses the Android software developed by the Open Handset Alliance. MIDs depend on software from Microsoft, Intel (INTC), and a large stable of developers, and expectations for app support aren't great just yet.

Dell Has Mighty Procurement Leverage

Gaming expertise from Dell's Alienware division could also be brought to bear, helping the company create gaming MIDs that might compete with handheld game consoles made by Nintendo (7974.T) and Sony (SNE).

Dell could also capitalize on its relationships with suppliers to negotiate better deals on components. "Dell has a lot of procurement leverage," says Eric Pratt, vice-president at components researcher iSuppli. On memory, for instance, "they get some of the best pricing on the planet," Pratt says.

Of course, Dell may yet unveil a smartphone. But the company might need to step up innovation of software and hardware to catch carriers' attention. Dell doesn't lack for ideas: Back in March 2007, it received a patent on a removable PDA that can be housed inside a PC.

Dell may need to strike partnerships with Web service sites to come up with unique software features. An example: INQ, a subsidiary of Hutchison Whampoa, has worked with Facebook to build a social networking phone that notifies users when friends add photos to their Facebook profiles. Perhaps Dell could link up with another social network. Or it could put out a phone intertwined with a music service, as Rhapsody has done. In 2007, Dell purchased Zing Systems, which provided wireless download technology for MP3 players.

Further acquisitions could help Dell expand its distribution and scale. Tom Taulli, founder of valuation consultant BizEquity, figures Palm could be had for less than $1 billion. Another possibility: HTC may give Dell an in with international carriers, Mawston says. Or perhaps Dell could prop up Sony Ericsson, which some believe is on the verge of breaking up. On Mar. 23, Sony Ericsson's North American chief resigned.

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