8.25.2006

Where there's Smoke there's Fire...


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I tend to get many questions about Dell, especially lately in light of all the troubles that they have been facing. I haven’t written about them for many months because it’s a touchy subject. As you all know they acquired Alienware and they continue to expand their XPS line, therefore I view Dell as a competitor in our space.

There are many questions as to how Dell managed to turn around from the darling of Wall Street to being the punch line of many jokes not least of which is the battery scandal which started by a simple picture at the Inquirer. (for what it’s worth, Apple recently recalled a number of Sony batteries as well).

About two years ago I had a serious discussion with my bro about the future direction of Voodoo. We knew our brand was growing at an unreal rate, yet I was facing serious challenges in the area of product development as it related to creating new and fantastic products. He understood our problem better than anyone so it was easy for us to design a strategy together. My problem was that in order to create some serious out of the box innovations on the mobile side I needed to support enough volume so the ODMs in Taiwan would take us seriously and produce what we wanted. His problem was that he didn’t want Voodoo to go downstream in order to scale like our competition, which means we would lower our ASPs, increase our volumes, and potentially harm our customer base and brand.

The long story short is we both stepped away from the operations at Voodoo in order to build strategic relationships with certain companies which we hoped would foster into something much larger.

We spoke with a couple of key ODMs, and at least three of our vendor partners. I started to design conceptual product roadmaps for future products to which I believed could change the industry. In the meantime I was flying around from place to place conducting meetings with who we both believed were the right fit for our future strategy.

I went to Europe in mid 2005, and I started some discussions with a few different people on the ultimate strategy for Voodoo. I had planted the seeds to a strategy which could eventually allow us to innovate like no ones business; in the meantime I was polishing up some rough product ideas until they started to pop.

On November 11th out of the blue I received an email from someone claiming to be Michael Dell. I remember it well, because it was Rememberance Day in Canada. I was sitting at home in my cycling gear as I was getting ready to go on a ride to Bragg Creek. My first reaction was to write back a short note saying something to the tune of “if this is a spammer, get lost, if not I apologize, what’s up?”

..about ten seconds later I get a response explaining that it wasn’t spam - it was real (if you read the email address you would laugh), and he requested to get on the phone with me almost immediately to discuss some things. We spoke for about 15 minutes until I got on the bike for what seemed to be the longest ride I had in weeks. As I was riding down highway 8 towards Bragg Creek I was wondering what Michael Dell was thinking when he called me. He is one of the most respected people in our industry, so I was somewhat rattled at the time. It seemed as if he was on a fishing expedition trying to understand the gaming market, the size, and the importance to the industry.

I rode back a couple of hours later and we got on the phone again. We spoke for over an hour, and just as I thought he was fishing on the industry. I had a feeling that he was fuming - PC Magazine just released their much anticipated Issue 21 where Dell came in last place on the high end desktop segment. He started to ask who my competitors were, and he asked questions about them.

It was at that point that I thought it might not be a bad idea to speak with him about some of our ideas without giving away the entire strategy. I did just that - I told him what I thought of his company (good and bad) and how I believed that Apple was poised for incredible growth this year. I told him that I believed Apple was a very innovative company and I wanted Voodoo to become an innovator just like Apple. His response was something that I’ll never forget. Michael Dell said Apple spent the same amount of money as Dell did on innovation the year prior - and based on their sales Dell was more profitable.

While I understood the number issue behind his statement, I felt it was said with an heir about it, and it was coming from a guy who was about to face major competitive pressure against Apple. I believed (and still do) that as long as Steve Jobs remains at Apple they will be a huge threat to our market.

I also suggested that one of his biggest mistakes was staying exclusive to one processor – because it meant that they had to perform in order for him to perform. After the conversation I assumed he was knew that Dell would eventually have no choice but come around and allow AMD in as an alternative to avoid such situations in the future.

I remember in the weeks following Michael Dell and I would exchange many emails back and forth. He sent me some reports on the gaming industry that he wanted me to go over, so I did. We would email each other at odd hours of the night – it was neat to see that the “ol’ guy” was still so enthusiastic about his business. One of the email threads we were carrying was a friendly bet… I suggested that now that Apple was using Intel they would grow to beyond 8% North American market share in about 13 months. Michael suggested otherwise and wanted to bet on an OMEN Elemental. Let’s just say that we had many discussions which I won’t get into too many specifics – but over that time I gained respect for the man even though we never saw eye to eye on a vision. I was starting to question the validity of our strategy, but I realized that it wasn't our strategy that had a problem - it was the fit.

We met in December, I wanted to explore my broad product strategy to see how it might fit with Dell’s. My brother had other ideas, he believed that Dell lacked innovation, and their model would never fit with our strategy. To be honest Dell wasn't even on our radar for our strategy at the time. While he may have been right about a few things, I still thought there was hope that Dell would see what I saw – perhaps Michael Dell would realize that Apple was a bigger threat than he actually perceived. This was the first time ever that my brother did not get involved in a business discussions with me. No doubt we were at odds - so much so that my brother flew to Morocco on the week I was to go to Round Rock for the meeting with Dell.

Believe it or not I had no prior information that he was going to buy Alienware when I wrote the “Dellienware” blog. In fact I had no idea that he had spoken with them at all. I simply guessed correctly based on a number of the discussions we had that he was convinced that an acquisition needed to be made. There really wasn’t much of a choice for a potential acquisition, so I figured the article made sense. After posting the blog I was immediately flooded by hate-mail from the Alienware fanbase – and I was wondering if I had made the right guess.

I then received a call from an un-named source who said “How the hell did you know about this?” – I felt somewhat vindicated. The source confirmed that indeed that was going down, and that he actually learned about it from my blog and did some digging to confirm it. I could sleep easy without worrying about the short term fallout. I was excited by this acquisition in so many ways you have no idea.

Getting to the point of this article, I believe that Dell lost its way a long time ago. I remember Kevin Rollins was once quoted as saying the Apple IPOD was a “fad”. You know you’re in trouble (or at least I did) when the CEO of one of the largest PC company's on earth didn’t understand the real strategy behind the IPOD; yet there were some of us who saw the light. I couldn't believe the CEO of one of the leading PC companies couldn't see the pending revolution behind something as iconic as the IPOD...! Like WTF?

I suggested to Michael that his company was losing its edge – and that the Direct by Dell model that we all knew was being taken down the wrong path. I said they had lost brand “karma” as a result of the public comments about customer service issues. I told him that I felt corporate blogging was very important, and that they shouldn’t ignore those who are vocal about their customer service issues. An interesting side-note, Dell recently started a blog for customer service/updates on the company, and I’m starting to see some of the things we discussed come out in some way shape or form.

I also suggested that they over-slashed prices in order to gain market share to the point where they may even inflict damage on their own suppliers. Growing market share by slashing prices is ultimately a losing proposition because eventually you'll hit a ceiling. I assumed that much of Dell's I.P. was supply chain management related and perhaps not product related. I told him that when I saw Dell in Costco and Wallmart I knew then that they had lost their way.

While I don’t know the real behind the scenes details - since Kevin Rollins took over the stock seems to have declined slowly. Perhaps I wouldn’t place blame on one person... Some might blame market conditions for this, but then that doesn't explain why HP is kicking ass. Some might even say that Kevin Rollins is doing a great job. Then again George Bush was once quoted as saying that “Browny was doing a great job” referring to Michael Brown, the ex-director of FEMA, in the aftermath of Katrina. It really depends on your perspective perhaps – we can all throw stones but unless we are on the inside we’ll never know. One thing I do know is as long as Michael Dell keeps an interest in the company I would assume that they will turn things around. In fact I would venture a guess that the stock would jump considerably if Michael Dell would become CEO again - after all, no one knows Dell better than Michael Dell.

I am still unsure what their strategy with Alienware is. No doubt I’m excited to see what happens, I am certainly enjoying the view from where I sit. :-)

51 comments:

M.Y. said...

Thanks for the heads up. As always, I find your thoughts to be very interesting and insightful. I've been thinking a lot about Dell lately and wondering if Michael truly has a handle on the issues that the company faces, and if so, how quickly (if at all) those can be addressed. Also, I am not sure if you were on the HP earnings call, but Mark Hurd that a very carefully crafted answer to a question on Dell and AMD. You are right. You cannot stop the peloton from moving forward.

This was the first question in the Q&A after the prepared remarks:

BILL SHOPE
There's been a lot of debate in the industry over the roll that AMD has played in some of the changes we've seen in the competitive landscape. Can you give us perhaps a qualitative read, at least, on how significant you think AMD has been to your relative cost structure improvements? As is being discussed quite a bit, if Dell begins to use AMD more aggressively in their PC line, do you think there's a risk that some of these improvements could be reversed or narrowed?

MARK HURD
Well, we think competition is good. I think competition drives a better market and a better overall ecosystem for the industry. So I think that it might sound strange to you, but we actually think that more adoption is actually a good thing, on a macro basis. So we would actually be encouraging that kind of thing to occur, as opposed to not looking for that kind of a thing to occur. The more industry adoption, the more competition, we think the better the market.


My read on the situation is that the Tier-1 guys now have enough confidence in AMD (technology, manufacturing) that they have more or less committed to getting the industry to at least a 30% duopoly. This should give AMD sufficient scale to effectively compete in the marketplace with Intel whether or not they want to play "fair." The end result is probably that industry margins come down, but with AMD grabbing a much bigger share of that pie. Also, I am not sure if you have any insights into this, but I have been spending a lot of time trying to look at structural gross profit margins between AMD vs. Intel, and it absolutely striking to me that AMD, despite being a wafer generation AND a geometry node behind Intel was able to earn higher gross margins. Part of this must be tied to yield differentials but also Intel's decision to reinvest its entire 65nm transistor dividend/budget into cache. So, now that AMD is closing the manufacturing gap, it makes me wonder what type of per unit cost advantage will emerge next year - 1000 basis points?

Juan S said...

Rahul, you have many fans on Wall Street! You hit the nail on the head again with this article and you forgot to mention that even in light of market conditions HP is still kicking Dells butt.

How do you think HP will fare against Dell with AMD selling to both sides now?

Anonymous said...

Rahul, very interesting article. You talk about Dell not understanding Apple’s real strategy behind the iPod. Are you referring to the ‘halo’ affect enabling Apple to sell more Macs? If so the iPod has been a huge hit for almost 2 years now and Apple’s PC market share gains have minimal. Also I question whether moving to Intel will allow Apple to ever realize the ‘halo’ affect.

Anonymous said...

"I had planted the seeds to a strategy which could eventually allow us to innovate like no ones business"

Dude, you assemble PCs from off the shelf parts. Just how could you inovate to change the industry?

Anonymous said...

So what is your opinion on the timing of Dell's addition of AMD processors. In my opinion the timing seems very wierd. Dell spent years relying only on Intel when their CPUs were sub-par and just when Intel regains the lead in mobile, desktop, and 2P servers, Dell decides to change tunes and add AMD processors. That seems counter-intuitive. In fact, it seems that Dell likes supporting CPUs that are not in the lead. It just doesn't make sense.

Even in 4P, Opterons still have the lead, but those Tulsa's are pretty decent due to their huge 16MB shared L3 cache. Heat and power may still be an issue with Tulsa, but those new Socket F Opterons are not as efficient as their S940 counterparts especially that 120W TDP SE part.

Anonymous said...

Dude, you assemble PCs from off the shelf parts. Just how could you inovate to change the industry?

So does Dell. So does Mac.

Most people buy systems rather than build their own systems.

Voodoo innovates with the whole 'experience' of buying a PC, not to mention bringing high performance machines to the public with liquid cooling systems, professional paint jobs, and all sorts of cool modifications.

Sure, YOU could do that, but you'd have to learn how to machine parts, to paint, find someone to build you one-offs and wait months later to buy cutting edge components wheras Voodoo can get them 6 months quicker.

I bet Rahul and co. spend a lot of time just thinking of unique ideas to implement into their systems. Not an easy task, look through a PC Gamer magazine and look at all the PC manufacturers that simply modify their plastic cases to stand out from other systems.

Although they're not figuring out ways to incorporate a PC into a t-shirt, they're still innovating.

Nisar Butt said...

Voodoo has an innovative productive strategy? I'm intrigued also like Mr Anon....? Whats this if not promo for your business of building gaming PCs from stock high end parts. Nothing wrong & good luck with your business but it devalues everything else you sat even if it has merit....

Anonymous said...

I just saw the link on Mark Cuban's blog. It's a great motivational story, thanks for sharing! It's nice that you took a constructive position on the entire story, I would love to hear more about your future products.

Anonymous said...

Rahul,

Love the blog. Your insight is unique. How long do you think it will take Wall Street to realize that MPU manufacturing is moving towards a duopoly? AMD seems in a much position than they were just 6 months ago, yet their stock is down 40%. Any idea what Wall Street is waiting for? Maybe to get their money out of Intel?

Please keep up the great blog!
Erick

Sharikou, Ph. D said...

Michael Dell is quite young, but his thinking is getting old and outdated. He is stuck with a PC mentality, while the focus of computing has shifted from clients to servers. It's the network computing age. DELL should have focused on enterprise server business and converted its commercial desktop customers into server customers. That requires DELL to have some real understanding of computing and make some serious investment. But DELL is stuck with selling cheap PCes at high volumes and razor thin margins.

All DELL people, Michael Dell, Kevin Rolins and Jim Shneider are very arrogant dudes. They only toned down when their profits were down and stock crashing. They failed to realize that DELL is just a screw driver company. I can give a screw driver to any Joe Bloe and he can learn to make a PC in minutes... Zero barrier of entry.

I gave numerous unsolicited advices to DELL based on my accurate projections:

INTEL and DELL have become each other's liability
,
Intel's predicament,
DELL will spit at INTEL and kneel to AMD soon
,

Intel should establish a uniform pricing scheme
,
on AMD-DELL alliance
.... and many many more.

I predicted that unless DELL goes AMD64, it will face a Enron scenario due to lack of growth and subsequent crashing of its stock. You have to realize that DELL has almost zero assets, all its value is based on hyper growth. Once growth is gone, all you see is a company with $3 billion shareholder equity, 6% of DELL's market cap.

I suggested to DELL that he should switch to AMD before Intel makes the inevitable move of establishing a uniform pricing scheme. That way, if Intel stopped giving DELL discounts, it would be viewed as a punishment for DELL going AMD, which would be bad for the lawsuit. By doing that, DELL can enjoy some Intel discounts at the initial stage of transitioning to AMD. But DELL waited too long, Intel made the first strike...

Going forward, DELL's future is quite bleak. Unless it can show double digit growth, its stock will continue to fall, and its cash will continue to burn. AMD64 market presents to DELL a 30% growth oppurtunity. DELL has one last chance, but it needs to act quicker.

I suggest DELL folks go to AMD HQs and take a week of crash course on basics of computer architecture and the future of network computing. AMD camp has all the grand masters in server computing: lead architects of Alpha, PA-RISC, Sun UltraSparc, PA-RISC, Itanium, Power4, PowerPC, RS6000...and Opteron are all in AMD camp. Intel will be totally crushed by AMD. There is an imbalance of brain power there.

Anonymous said...

I'm curious how anyone can think the having Michael move back to CEO would improve Dell's business. They promoted the 2-in-a-box management style for years, so if theys are bad its BOTH Kevin and Michaels burden. As for innovation, what some companies like Apple, Google and others have done is encourage and reward their employees to develop new and interesting products, processes, etc. Dell's work force knows that Michael only has an employee base becasue he has yet to find a way to run the business without any employees. If you don't love your company and what you do, how passionate are you to find ways to change or grow that business.

kshipper said...

Now this is the kind of Blog post I like to read. Excellent job Rahul =)

Anonymous said...

Sharikou, your posts are about as lame as your "predictions". You always turn it into a pro AMD discussion and you already buried yourself with your blatently STUPID "Intel is going broke prediction." You are an idiot, you are not a PHD, and your axe has been grinded to the nub. You have zero credibility. You are actually hurting AMD everytime you post.

No one cares what you have to say, find another industry to write about.

Sharikou180 said...

Rahul - great blog. It's sad that Michael believes spending the same amount of money on R&D directly results in their being more profitable. If this is what he's getting for his money he needs to fire his R&D guys. This is such a typical statement coming from the "old sillicon valley boys club". They believe because they created the industry that means they will forever drive it's direction. Strange as it feels, I agree with Sharikou. Take Dell's screwdriver away and they are nothing more than a Newegg.

Apple is all about user centred innovation. And now their Woodcrest servers are cheaper than Dell. I completely agree w/ you - that Apple will start to gain share...first in mature markets where consumers are more receptive to them becoming the centre of their digital entertainment...content and hardware. And then they will head to China. With Leopard they will really have a chance to win Windows users. Nobody is doing as much to simplify the consumer experience as Apple is.

Jim Kukral said...

I learned a lot from this post, thank you. Very informative.

The branding... do you think that a company like Dell can climb out of this declining brand swing they are riding?

It's gonna take more than a blog to do that. Or buying a hip company like Alienware.

I love Dell's, been buying them exclusively for 5+ years now.

Thanks for blog post.

Anonymous said...

Hello from Frankfurt. Your Pcs are much nicer than Dell for what its worth. I heard that Alienware is losing many employees from an aquaintance who was working there. I wonder how they will do in the future? I was thinking of buying an Alienware at alienware.de.

Egil said...

Rahul, as usual you are spot on.

I was looking at Alienware as a serious contender before buying my VooDoo Omen. The final decision maker for me was that Alienware sold out to Dell.

I have both Alienware and Dell computers but don't want any more Dells.

However, that said, VooDoo also needs to keep its eye on its brand image less it gets tarnished. It does not take much to get things rolling down hill and it is very difficult to turn around. Responding to customer concers with a 'come on guys, someone help this customer' without following up to see if it was done is not acceptabe. Waiting for over two months to get a basic, for VooDoo, system is unacceptabe.

VentStation said...

People are prepared to pay a lot more for a product if it is perceived as "cool", so maybe that's what Dell was thinking with the Alienware acquisition.

Justin said...

Alienware and Dell both sell gaming rigs at half the starting price of Voodoo. You seem to think this hurts them more than helps, and don't believe it would be a good idea to scale down your line. Can you please explain further why this is?

I do think that Voodoo is the most innovative company in the game, more than even Apple. I do think you have a nice line of computers that are seperated by design, not price. However, I also don't think I would get any of them except for their design, and I believe price then becomes an issue. I like the idea of a fanless quiet gaming rig, but I can't see it being worth $4000 to me when I can put up with the sound in a rig that performs just as well for $2000 from your competitors. That is why I'm typing this from an Alienware. And actually, it was $1800.

I have always said that Voodoo is the Mercedes of personal computers. I also don't plan on ever getting a Mercedes.

A_Pickle said...

Wow.

That has to have been one of the best blog posts I've read in a long time. It's insightful, and it's about a company that I really do respect, admire, and hope for the best with.

Most tech sites that I routinely frequent would usually label me as the Dell fanboy. It's fantastic. I really admire the fact that Michael Dell started the business out of his college dorm with $100 to make the largest PC maker yet. Added to that, they make some pretty darn good computers, for the most part.

Anyways, what you've said about Dell (to it's founder, no less) is outstanding, and true. While I maintain that Dell makes good computers, I hesitate to say they make the best computers. One look at my friend's HP Media Center desktop powered by an E6600 is enough to give Steve Jobs some nightmares.

Dell just doesn't cut it, on the desktop front. They have good desktops, but not great ones. HP implements some genuinely useful stuff, such as component connectors, s-video, USB, Firewire and whatever else on the front. Dell? Just USB. Maybe some Firewire.

Dell exceeds in laptops, but could still do better. They have yet to integrate webcams as a standard to compete with other laptops, and there's absolutely no reason why their 17-inch laptops don't have numpads. They don't make a 15.4-inch widescreen notebook with a good graphics card (X1600-esque), and they don't focus enough on lightening their high-end notebooks.

Dell could improve, and definitely needs to. I also detect that the company seems to be somewhat bloated and slower to react, suggesting that it may be time for Dell to start restructuring the company to be more nimble, if it expects to keep the top spot away from HP.

RichardatDELL said...

Dear Rahul,

I read your blog with much interest. Given our being in the same industry sector, your perspectives and approach to a specific segment of the market are most interesting. Indeed, the issues of growth, quality production, product development, protection of your brand and strategic directions for the business are sort of constants in all our worlds, I think.

Your recent post “where there is smoke” notes that Dell’s XPS line continues to expand and that our acquisition of Alienware, which continues to be run and operated as an “independent” business, makes us a competitors. Therefore, I suspect the article had more to do with competition that any particular insight.

It seems to me your blog posting is less about “insight” related to Dell and our businesses, as it is an attempt to seed doubts in the mind of purchasers when they are making a buying decisions.

Not only does it seem to be a blatant play to seed doubt in the customers’ mind, I thought it also sounded a little envious. I had to wonder if the Dell-Alienware relationship is not almost the ideal situation you were looking for about two years ago. As you know Alienware continues to operate as its own business. At the same time, the issue you pointed out of having “enough volume so the ODMs in Taiwan would take us seriously and produce what we wanted” sort of dissipates when you have the benefits of accessing Dell’s global supply and manufacturing operation that is part of our core business, not contracted out.

Lots of business leaders in many industries share “private” thoughts with each other. Ones I know often share them in confidence. As a fellow Canadian, you know how we are known for our civility, politeness, and kind competition. Your blog seems to break all those rules, as you seek a competitive advantage.

I suggest we stick to competing on product lines.

Anonymous said...

I am an old techno-trog (as in troglodyte -- over 50 and still proudly techno-illiterate!) living in Austin, TX. From 1993-2004 I bought 4 PCs and 3 laptops, all from Dell because at first their customer support and warranty service was absolutely fantastic.

Sadly, that "customer support" has by now gone completely to hell. My last experience trying to deal with Dell was so frustrating that when I needed a new laptop last year, I went with HP instead.

Dell's arrogant contempt for their "consumer" (vs business) customers has lost me to them forever, and it's no surprise that their stock price has been more than cut in half recently. Permanently alienating your once-loyal customer base is no way to run a successsful business!

IT Kitty Cat said...

Rahul,

Great post. But I think this time I am going to disagree with you. For one, I think Dells XPS line will threaten your business big time if Dell does it right (big if).

The Dell business model is at the end of its life cyle. While the PC industry has grown, Dell business model stayed static. Customers are becoming smarter and better informed. Some customers believe different pc models do not offer much greater differentiation or value over each other. So, they are actually changing their shopping criteria to a "nice looking design" rather than a cheap PC or one with higher power.

Dell failed in innovation of product design! Can you name a nice looking Dell laptop or desktop (compared to HP, Apple, ...).

How about them failing in the area of consumer device market.. Where is their iPOD killer.. By the way, the iPod is a proof on customers changing their buying habits. If customers had the same mentality they had 10 years ago, iPod would have lost its edge a long time ago.

They also failed the people who they sold product to with poor customer service (I agree with you there)

Dell problems stem from the commodotization of the PC industry. IBM realized this early and thus exited the industry.

HP is successful in gaining market share now because Dell is failing and not because they are innovating better. The PC prices are still falling down. HP is eating Dell's lunch..

Moving forward, Dell switch to AMD processors was a move to please wall street. It is meaningless if they continue with their dying buiness model... Be careful what you take credit for!

Anonymous said...

If you look at Dell vs. Voodoo, one could say that they are not in competition in general.

Voodoo (I'm surmising) sells its machines to emotional buyers with little regard for money but want the best machine they can get, even if it IS only 10% faster than another machine. Plus they may buy into the appeal of a Voodoo's aesthetics.

Mac sells Macs to a similar market. People who don't understand or care about money vs. performance. They buy a Mac because it IS a Mac and they may be willing to pay more for a machine that is merely adequate, functionally speaking.

People who buy a Dell are average people. Money is a primary concern, and having the best performance/aesthetics is not the primary motivation behind their purchase. Or they buy an XPS because it's the best bang for their buck and they are incapable of building their own similar machine.

XPS's appeal to enthusiasts - not fanboys, diehard PC performance freaks, or bling-bling types.

To put Voodoo, MAC, and XPS in the same category would be just plain dumb. I don't think the majority of people who would buy a Voodoo would ever buy from Dell.

I don't think that the majority of people that consider buying from Dell would look at Voodoo as an alternative either since they buy based on price more than anything.

And I don't think people that generally consider buying a Mac first would consider buying a Voodoo or a Dell because they are not clearly educated or knowledgable about the pitfalls of owning a Mac, so just don't understand computers in general and wouldn't see any benefits to owning an XPS, Alienware, or a Voodoo.

Also, as a prestige issue, Dell and Alienware are virtually accessible to the common person who has a few bucks. They are not prestigous...an Alienware machine can be owned by any turd who happens to come into a few spare dollars.

Voodoo, with it's high prices, is inaccessible. You look at BMW or Mercedes - they are not worth what you pay. They have four wheels, a nice interior, and they get you to where you are going. However, branding plays a huge role in the justification for the markups.

For a company like Voodoo to succeed, they need to bump their prices HIGHER to get them far from the little Alienware world, but they need to do this in a justifiable way since their brand isn't strong enough yet.

Otherwise they will die at the hands of Dell/Alienware, who command the lowest prices and 'value-priced' high performance systems.

For you, Richard at Dell, to be pissy at Mr. Sood for being passive-aggressive using this blog to change minds, well, he SHOULD!

You two are in different markets. Different worlds. Different ballgame. Relax.

WorthW said...

Couldn't agree more with the last poster.

A good friend of mine once told me that he read that the best way to price perfume is to figure out what it "should" cost, and then triple it.

Just because they're made up of 80% of the same parts doesn't mean Honda can get away with selling a Civic for 100k. Mercedes obviously can. It didn't happen overnight.

Anonymous said...

The world is changing! The consumer markets are shifting. Buyers are becoming more selective in their choices. That is bad news for Dell, definetly!

While it was about the price in the past, it is shifting to another criteria nowadays since prices are coming down so hard that they are becoming almost irrelevant to many many consumers.

Although I would like to pay the lowest for a laptop for my son, I would not buy him a Dell. Yes, I will pay $100 more to get him a more reliable cooler looking one.

Justin said...

But, Mr Anonymous, a Voodoo laptop is not just $100 more than a Dell, which is the point. A Dell laptop could be had for under $1000, while a Voodoo can't be had for less than $2000. Price differences between the company are the big difference. The most expensive Alienware is only 1/3rd the price of the most expensive Voodoo. While Dell may have aquired Alienware in hopes of being a competitor with Voodoo, I don't think either will be in the same market. Dell mass produces cheap PC's, while Voodoo pushes lower quantity, higher quality machines. They are the ferrari of personal computers.

Personally I would never get a ferrari, even if money wasn't a problem. My lancer goes 30mph just as fast as a ferrari, and if you can figure out the wisdom in that you might see the big picture.

Sh'Nilz said...

Great insights Rahul- but I feel like you're trying to keep the iPod strategy a secret. My thought was always that if Apple would establish a rock solid base of iPod users, then in a new gen they would begin making iPods work exclusively with Macs- but now it seems like Apple is going the opposite direction- their iPods run on both OSs, and their computers run Windows as well. I'm not sure if their iPod strategy is much deeper than to sell mini hard drives at high margin.

Unfortunately this blog is tarnished by Shakirou again- somehow I KNEW he would find a way to turn this into a pro-AMD argument. Why don't you just block him from posting- I mean even you must realize how biased and ridiculous his statements are. Shariko- have fun running your PC with an FX-62 while my Core 2 Duo E6600 tears up your PC in every bench mark, for less than half the price.

But on the subject of Dell timing with the AMD switch, I think it may have more to do with price. Dell has always been more of a low price wonder for the bargain bacement shoppers, and a processor from the Core 2 line would be half the cost of one of their computers.. with AMDs price cuts Dell gets rock solid performance for a lower price. However, they are smart enough to use Core 2 in their XPS line.

Anonymous said...

I am technically literate, and I've been a Mac user since 2002. I even play games. I recently bought a new Mac Pro, but Voodoo's OMEN was my other consideration. Why a Macintosh instead of a Voodoo? On my first analysis, I can come up with three reasons:

1. OS X. It's simple to use, but not limited by its simplicity. It's stable. The maintenance is non-existant. There are excellent programs available only on for OS X. It is well thought out.
2. Design. Not better than a Voodoo, but more in line with my taste, and therefore my space.
3. The Apple Store. I like the size and customer connection I see )as an outsider) at Voodoo better, but having a place to go and get hardware repaired or switched out on the spot is more valuable. I recently swapped out a 30" Cinema Display twice in two days. The broken product is excusable because the support was present and competent, and extremely fast.

There is nothing that is merely adequate when compared to my last experience with Windows. My Mac allows me to get more done, and worry less about my computer, because of both the software, and the support. I've hand-built many machines, so again, I do not have a technical literacy problem. I just have a strong desire to never have to deal with my computer's hardware or software (which is also why I'm not a Linux user).

On games: I play RTSs and I play games with friends (who play FPSs and WoW). WoW, Homeworld 2, C&C Generals, EV Nova, Starcraft, and WarCraft III together take up more time than I have. If they didn't, I have consoles. Am I going to install Windows on my Mac Pro to try it out? Yes. Will I keep it? I don't know yet. I'm eager to try EVE, and some of the non-marketable RTSs. And I have at least two friends who will play some sort of Windows-only FPS also, but I don't know how much more gaming variety my life actually requires. In that aspect, the Macintosh may be merely adequate (only offering more games than I can ever play, instead of more games than 60 hour/week gamers can play), but in ways that are more important, it is much more functional.

For the record, I drive a BMW, I have a mechanical Cartier watch, and I buy high-end audio equipment that most regard as over-priced, but I certainly do not (it does actually sound significantly better, and it looks better too). Design is personally important to me, and support to me is worth 100% the cost of components, more if the product is technically complex. I could hand-build two computers for the price of one expensive, well-supported computer, but then I would have two computers, and I would have to deal with set up and trouble.

If Apple screws up badly, I will buy a Voodoo and no other PC, unless Voodoo simultaneously screws up... or I have bad hardware and Voodoo doesn't make it right. I would, at this point, rather live without a recreational computer than hand-build.

As a post script to a long message (apologies), the scariest aspect of switching back to the PC world is obsolescence. I love (with all my heart) the fact that my original PowerBook from 2002 can still run every application that I use regularly. I don't still use it, but I could, and that is something that is important.

By "well-supported" computer, I don't mean only that the company is easy to talk to in times of failure. I mean that whatever I want to run is able to be run, period. I don't want to follow the microprocessor industry, or the graphics card industry, to know how well a game will work. I like system requirements that read "Macintosh with FireWire". I would pay $9,000 for a chassis whose innards will last 1-2 years (but whose metal and PS would last 8 or more), plus a maintenance fee of maybe $1,000-$1,500 for upgrades and support every year or two so long as when I'm in the store, the only system requirement I need to pay attention to is "PC with Windows".

Again, sorry for the long response, but reading these boards for a while, I haven't seen many Mac users who actively consider purchasing Voodoos represented. I wish you the very best at Voodoo, and please continue to cultivate your smallness, your transparency, your attention to design, your attention to support, and, of course, your emphasis on performance and silence.

Anonymous said...

But, Mr Anonymous, a Voodoo laptop is not just $100 more than a Dell, which is the point. A Dell laptop could be had for under $1000, while a Voodoo can't be had for less than $2000. Price differences between the company are the big difference. The most expensive Alienware is only 1/3rd the price of the most expensive Voodoo. While Dell may have aquired Alienware in hopes of being a competitor with Voodoo, I don't think either will be in the same market. Dell mass produces cheap PC's, while Voodoo pushes lower quantity, higher quality machines. They are the ferrari of personal computers.

Personally I would never get a ferrari, even if money wasn't a problem. My lancer goes 30mph just as fast as a ferrari, and if you can figure out the wisdom in that you might see the big picture.



Right. A Dell laptop can be bought for half the price of a Voodoo laptop. We all know that for the most part laptops are bought from the same manufacturers and then configured in-house.

Dell then puts in lower quality RAM. A lower quality HD, a lower quality DVD, and sends it out the door with no paint job. System 11145678 has shipped.

So do you think the person who bought a Voodoo FEELS that his Voodoo is the same as a Dell? No way. Right from day one, he can call up Voodoo, talk to their techs, thell them exactly what he wants his machine for. They will configure his OS and tune his components for his needs. They will paint the laptop any color that the person wants.

Then in three months if he has an issue with his PC, he can call Voodoo directly and talk to Bill, the guy that assembled his laptop and ask him questions. You can't do this will Dell/Alienware/anyone else.

How can you say that these two laptops are in the same market (meaning that the same customers that would buy a Dell would buy a Voodoo)?

And yeah, I wouldn't buy a Ferrari or a Voodoo either, but that doesn't mean everyone thinks the same as us. A lot of people will pay the extra money for something they FEEL is superior.

Justin said...

I'm not saying they are in the same market, I'm saying they are in completely different markets. To me, they are the same. A dell XPS with the same configuration as a Voodoo Envy costs $1200 less. I don't care who you are, you do not pay $1200 for a fancy paint job on your laptop. That is a chunk of change that means something to most people.

I don't mean to rain on Rahul's parade as I'm sure he has a handle on his portion of the market, but I don't understand:

"His problem was that he didn’t want Voodoo to go downstream in order to scale like our competition, which means we would lower our ASPs, increase our volumes, and potentially harm our customer base and brand."

How does making affordable PC's hurt your brand?

Anonymous said...

"How does making affordable PC's hurt your brand?"???

That's a joke - right?

The answer is immediately evident in Dell's problem (which is the same one Wal-Mart has). They have made things so "affordable" that they have poured all their energy into that single brand element and now they only stand for that.

Now the other mainstream brand like HP, Sony and Apple have an advantage because they too stand for "affordable", but they also stand for something else:
HP=imaging
Sony=CE integration
Apple=iTunes
Dell= ???

btw, great blog Rahul. love the dialogue.

Anonymous said...

How does making affordable PC's hurt your brand?

Like the poster above said, that would put Voodoo into Walmart territory. Or in other words, Voodoo would have to compete with Dell directly. And Voodoo will never have the buying power of Dell and now Alienware.

Rahul is best off taking his company higher and higher and making his machines less and less accessible, and therefore more and more desirable to those who want something that the average person can't afford.

This moves them well out of the cheaper is better market and into "only the rich can have" territory. It's the only way they can survive. Otherwise people are always going to say, "Hey! Dell's PC and Voodoo's PC have much the same components but Voodoo's are $1000 more."

Voodoo will have to justify the price increase though. Customer support will only work to add a certain amount of value. Packaging and the presentation will only be able to account for a certain amount of value as well.

Voodoo PC modifications will have to account for the majority of the markup that's needed, but you can only stick one liquid cooling system into a machine or overclock it so far or make the chassis so funky before you've stretched to your limit. This could move Voodoo further from Dell and Alienware, of course, but yet still accessible to people who stumble into money.

Perhaps flying a techncian out with every machine to set it up could add value. Or coming up with special upgrade packages, or finding a new untapped situation for the PC to be in, like a media PC. Something to that effect.

You don't want to compete with Dell though. You see a lot of PC builders in magazines that try to make low cost high end PC's to compete with Dell, but these companies don't last. All they do is come up with a fancy looking molded plastic case.

Even good solid companies that have been around for ages have a hard time competing with Dell. Acer, Compaq, even HP have had to come up with a better way to market their products to keep away from Dell. Some got right out of the direct-selling market and put their PC's on store shelves. Most companies folded or had to get out of the PC game though.

The Voodoo 'brand' would definitely go to hell if they tried to make affordable PC's. They should eliminate any PC lines they have with an ASP under $3000 or so and they will do better.

Sharikou, Ph. D said...

The VP said:
Unfortunately this blog is tarnished by Shakirou again- somehow I KNEW he would find a way to turn this into a pro-AMD argument. Why don't you just block him from posting- I mean even you must realize how biased and ridiculous his statements are. Shariko- have fun running your PC with an FX-62 while my Core 2 Duo E6600 tears up your PC in every bench mark, for less than half the price.


The above is living proof that some Intelers are dishonest, malicious ad retarded. 1) There are plenty of benchmarks where FX62 frags Con E6600. 2) Intelers want to deprive others' right to express, while they spread lies. 3) Intelers are retarded, they exposed themselves in 1) and 2) in public.

All I am trying to do is to make correct analysis in a scientific fashion. So far, most of my analysis on DELL-AMD-INTEL are quite accurate.

The prediction that is yet to be proven is that Intel will BK in 5 to 7 quarters. Basically, 5% of Conroe units made 95% Pentium D totally junk, which will result in massive operating losses for Intel. In fact, Conroe is not enough to feed Intel's workers, and a large number of them will become jobless and on welfare.

Why did this happen? Because Intelers are retards and won't listen to my analysis. I pointed out in 2005 that the only way for Intel to survive AMD's capacity expansion is to ramp down and hike prices. Intel chose the exact opposite. They ramp up and caused a price crash, while AMD is quickly gaining market share. As a result, Intel is piling up unsold chips, $8 billion and increasing Intel is seeing drastically lower ASP and lower units. BK is inevitable due to its lack of cash.

http://sharikou.blogspot.com

Anonymous said...

Sharikou,

Please refer to any benchmark sitet that compares FX-62 to Conroe. Here is one:
http://www.hexus.net/content/item.php?item=5692&page=3

You will see that FX-62 is nowhere near as powerful as a Conroe. Especially in terms of practical applications such as games. In terms of frames per second, a FX-62 pumps out only 70% of the frames per second of a similarily equipped Conroe.

I don't care either way which is more powerful - I have no love for either company. However, based on all empirical evidence AMD is trailing behind Intel in terms of best-processor performance.

The FX-62 retails for approx $900 USD while the best Conroe retails for approx $600 USD.

Again, AMD is trailing in price/performance.

I don't see how you can so blindly set aside reason to champion something that is so obviously inferior in most if not all respects.

Sharikou, you defy all logic. You are about the most blindly fanatical person that I have ever seen and you're looking like a fool every time you post. Maybe in 6 months you can say that AMD's processors 'frag' Intel's best, but for the time being you are just proving what a dummy you can be.

mihai said...

While you're right about the power of Conroe versus Fx, still, chill on the price difference. If you insist on comparing top-of-the-line chip on both side, then use the correct price.

Meaning:
AMD FX-62 - 742$ and
Intel X6800 - 1.119$ but not
Intel E6700 - 529$, witch you imply.

(Just quick-searched them on newegg)

I know sharikou is exagerating, but please don't do the same. Keep the dialog straight.

Anonymous said...

wow, how did we get from "strategic positioning in the PC market" to this lame ass crappy commodity "my-mips-are-better-than-your-mips" conversation?

How ironic that the "commodity thinking" that got Dell into trouble is exactly what has polluted this thread. I bet most of you are Dell employees or wanna-be Dell employees.

What a shame. I was actually enjoying the refreshing conversation Rahul started about marketing and branding. All this techno-jargon that <1% of the universe cares about is the exact same crap that's in eWeek, PC Mag, etc...

thanks for ruining a good blog.

I'm out.
Rack me.

Sharikou, Ph. D said...

It is well known that K8 has superior FP performance. Recently, SUN showed AM2 had 38% lead over CORE2 in FP performance. If you look at
tweaktown's independent results
(unlike paid pumpers ), FX62 beats CON XE6800 in a number of tests, including but not limited to sciencemark and cypher tests. Although Conroe is faster than FX62 in gaming, the lead was only 10% on average.

K8 has about 10-15% lag on integer performance compared to Conroe, however, Rev G will have 60% improvement on integer, which will lead Conroe by 40%. On FP performance, Rev G will be 200% faster than Conroe.

Anonymous said...

wow, how did we get from "strategic positioning in the PC market" to this lame ass crappy commodity "my-mips-are-better-than-your-mips" conversation?

I was actually enjoying the refreshing conversation about marketing and branding. All this techno-jargon that <1% of the universe cares about is the exact same crap that's in eWeek, PC Mag, etc...

thanks for ruining a good blog.

I'm out.
Rack me.

FJ Lewis said...

interesting

Anonymous said...

Sharikou,

You are censoring people from pure insults on your blog and you come and insult them here.

Very Mature and respectable from you.

NOT!

Anonymous said...

I like this blog because anyone can leave their opinion here, without even signing up. very open and friendly, i'd say. However... i would place sharikou on par with the kind of person who get banned from calling 911. maybe he'll have to be the rare (or unique) case that is banned, for the good of the blog.

he manages to take any story and turn it into some extremely biased pro-AMD rant.

i bet Rahul could have just written "I was sitting at home in my cycling gear as I was getting ready to go on a ride to Bragg Creek" and Sharikou would have been all over it, with something about how conroe doesn't work in the river or something like that...

anyway, back on topic.

Dell has lost a LOT of customer support and will be hard pressed to get it back. companies generally go where the money is- that's all fine and dandy. Dell, however, seems to operate on a slightly different model- the defecate where the money isn't.

businesses buy Dell. regular consumers are treated like crap. first-time buyers don't know this, and honestly i don't know any second-time buyers. a first-time buyer who gets a recommendation from a friend who's somewhat knowledgeable in computers (who doesn't know someone techy, anyway?) will get steered away from Dell.

the main problem is just as Rahul said: the computers are TOO cheap. so cheap, they lack nearly any ability to upgrade, use low-quality parts, have pre-installed advertisements... etc.

I honestly don't know where the XPS line is going. high-end gaming may be a niche market, but high-end gaming for first-time buyers is an extremely niche market, i'd say. They've already established themselves as the crappiest consumer computer company, and anyone who's spent a decent amount of time in the PC gaming (or just PC) community will know to stay away from Dell, even if it's just to avoid a bad reputation.

Where should Dell go? customer service, to start. a happy customer is a returning customer- most retail stores have figured that out already. get rid of those damn advertisements that bog the system down. the bottom line, in any case, is lower margins for a while until they've re-established themselves as a decent company- one that i would actually recommend a friend to buy if they wanted their first computer or something.

Anonymous said...

After a few months of watching with frustration as people flock like a moth to the flame hoping to drill sense and logic into Sharikou, I've decided to act. For those who are interested, I've started a blog that allows intelligent discussion and logical analysis on the semiconductor war and it's impact on the technology industry. Appropriately (or inappropriately) I've titled the blog "The other side of Sharikou". It can be found at:

http://sharikou180.blogspot.com

So if you're interested come on down.

James said...

I agree with you Rahul, and it will be interesting, what will happen to Alienware? Well, yes, they make good quality hardware, but small details are missing, like the bits of dried up coolant you find everywhere.

BTW, I love your blog, it is an interesting read. You are a talented writer!

http://james-tech-blog.blogspot.com

Dan said...

Sharikou strikes back. Bro your a moron and need to get a life. Nobody cares what you are saying and all the sites are basically saying the same thing. Conroe is a AMD killer for now.

Get used to it and bite the pillow.

Dan said...

Sharikou,

You posted a numbers from tweaktowns test but you left out the big final comments made by tweaktown.

You like to take good numbers from certain test and blow them out of proportions and hail AMD the king and end of all Procs. Any enthusiasts would look at the totality of the test and make a honest conclusion. By your comments you just solidified yourself as the AMD FANBOY.

Not impressive at all. If you want people to take your seriously then you need to come with better comments. Not cut and paste numbers from other websites to prove a point. Next time why dont you tell everyone what the final conclusions were on tweaktowns site.

Anonymous said...

well it looks like HP has bought Voodoo so I wonder how this deal will work, and what does it mean for the company?

Aaron said...

So where is the blog about how HP fits in with the "Industry Changing" ideas at Voodoo.

Oh wait, consolidation is an industry changer.

I'm curious how it is so bad that Dell buy Alienware, but it is fine for HP to buy Voodoo.

I think I would rather be bought out by someone who has actually worked on the inside of a computer. :)

Miguel said...

Do not leave out the software out of the equation. Very soon, on the consumer side, hardware is not going to be the center of the discussion anymore.

Anonymous said...

I'm a 35 year old finance exec with a $1.0 billion company. I'm about to drop $10k on a sweet PC. Quad core, Direct X 10, 30" display...amazing... Voodoo OMEN. ...but then, two letters, HP. No way. After the board room stunt, I'm out. I'm glad Rahul got paid, he deserves it. He should quit, start the clock on the non-compete, and do it all over again. I bet it happens.

AlienInsider said...

this is a late entry but after so many months after the aquisition the atmosphere at Alienware is FEAR. Budget cuts and downsizing have destroyed the careers of people who have been here for years. Rahul, there are many of us who came out losing when Dell took over. We poor our sweat and blood into our jobs and then like that it's over. No more growth or advancement is possible. Now only Dell people get the good jobs around here. Hey, that's life. But we should have been warned so we could have moved on. But that's not how business works I guess.