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PC gross margins expected to decline as sales shrink, Dell goes private

post #1 of 29
Thread Starter 
The struggling PC market is forecast to go from bad to worse, as one analyst believes a number of market factors will push gross margins even lower in the already-cutthroat business.

Deutsche


"PC profitability is the next shoe to drop," Chris Whitmore of Deutsche Bank declared in a note to investors on Monday. He believes that pricing the PC market will become even more aggressive over the next few years, a trend that could be led by a newly private Dell.

Whitmore expects that overall PC sales will be down 8 percent this year, and 5 percent in 2014. He believes tablets, like Apple's iPad, will continue to chip away at sales of traditional computers.

The analyst cited an internal letter from Michael Dell that leaked earlier this month, in which the CEO suggested he plans to pursue growth at the expense of gross margins.

A private Dell without expectations from Wall Street would have "considerable flexibility to lower margins," Whitmore said. This would allow the company to grow and drive a scale advantage over its competitors.

"Consequently, we foresee a sharp increase in competitive dynamics in the PC market, which could result in greater profit declines across the industry," he said.

PC
The top five PC makers in the U.S. by market share last quarter, according to IDC.


Whitmore's negative outlook on the PC market comes on the heels of the steepest quarterly decline ever seen by IDC in tracking estimated PC sales. The latest data released last week found that the overall market declined 13.9 percent year over year in the first quarter of 2013.

Apple's Mac lineup has not been immune to this trend, as the company saw its sales dip 7.5 percent year over year. IDC's estimate for the March quarter follows a 17 percent drop in Mac sales that occurred during the prior holiday quarter.

Whitmore's take joins another bearish view shared last week by Maynard Um of Wells Fargo, who said he believes the PC industry is headed for a major shakeup in the coming years. He expects that some of the biggest players will begin to consolidate, leaving fewer companies controlling larger shares of the industry.
post #2 of 29

So the way to turn around your business that is struggling to be profitable is to make even less profit?  Since "making it up on volume" didn't work during the Dot Bomb Era, why would Michael Dell think it'll work now?  What's the point of having a larger share of a pie that has shrunk by more than you've gained?

post #3 of 29
The PC industry will continue falling so long as they keep putting out the garbage products that they have been selling since forever.

Thank you Apple for proving all the haters wrong. People want quality and service and have shown time-and-time again that people will pay that little extra for it.

What a concept.

Good riddance to the naysayers and losers.
post #4 of 29

As long as Apple still makes computers I'll be happy. Of course I would be happier if they made a new Mac Pro. Nevertheless no tears will be shed over Windows PC declines.

 

I do need to be able to build my kick ass Linux servers though. Lately I've been building 2U machines with Supermicro boards/cases and dual quad Xeons. Those are some real workhorses.

Life is too short to drink bad coffee.

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Life is too short to drink bad coffee.

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post #5 of 29

I remember back in the day Dell was the machine to have.  Then, they started yanking out all the parts that made the machine upgradable, and went south from there.  Their service was also state of the art for a while, and then same issue, just went down hill.

post #6 of 29
Quote:
Originally Posted by sflocal View Post

The PC industry will continue falling so long as they keep putting out the garbage products that they have been selling since forever.

Thank you Apple for proving all the haters wrong. People want quality and service and have shown time-and-time again that people will pay that little extra for it.

What a concept.

Good riddance to the naysayers and losers.

Bingo! :)

post #7 of 29
Quote:
Originally Posted by Applelunatic View Post

So the way to turn around your business that is struggling to be profitable is to make even less profit?  Since "making it up on volume" didn't work during the Dot Bomb Era, why would Michael Dell think it'll work now?  What's the point of having a larger share of a pie that has shrunk by more than you've gained?

 

Because then you survive while your competitors fold or merge - and when the market changes or you figure out how to make high margin highly desirable products then you are still around to make your comeback (if all goes well). 

post #8 of 29

Just a reminder  Anyone who partners with Microsoft will either suffer for a long time or completely die.

 

Eg: Seattle Computing, Sega Dreamcast (Used WinCE and got destroyed with licensing fees, then XBox comes out) , OS/2 (Stealing tech for Win3/95) , Apple, IBM,  PlaysForSure, the hundreds of PC OEMS whose names we forgot.  

 

And this has nothing to do with FUD, or the pure evil they did to kill competitors like BeOS.

 

Thank the DOJ for making M$ pretend to like Apple and not kill them completely.  

 

Also thanks, to Apple for creating Safari and iWork and turning the tables around on Microsoft.

 

post #9 of 29
Quote:
Originally Posted by lilgto64 View Post

 

Because then you survive while your competitors fold or merge - and when the market changes or you figure out how to make high margin highly desirable products then you are still around to make your comeback (if all goes well).

You don't survive your competitors by making little to no profit.  The only time when such tactics as you specify works is when you have something else to prop up your (near) loss leading effort in another market.  Or when you happen to be more efficient than your competitors and can still make a higher margin even at lower costs.  Dell has no other market that they are hugely profitable in in order to subsidize making thinner margins and they are clearly not more efficient if they have to lower margins to compete on lower price.  It's a ridiculous strategy for a company that is already making less and less profit by the quarter.


Edited by Applelunatic - 4/15/13 at 12:17pm
post #10 of 29
Quote:
A private Dell without expectations from Wall Street would have "considerable flexibility to lower margins," Whitmore said. This would allow the company to grow and drive a scale advantage over its competitors.

 

 

So in effect, Wall Street is no good for businesses, nor consumers.  Interesting.

post #11 of 29

The only intelligent decision is to run away from a business where, as L Ellison said, "one third of the profit goes to the chip maker, and another third to Microsoft" (the "one third" turning into 50%, as the global margin shrinks, and neither the chip maker nor Microsoft are willing to take it into account). This is why IBM decided to quit this business.

post #12 of 29
That's the problem with a race to the bottom: eventually you'll get there.

"Apple should pull the plug on the iPhone."

John C. Dvorak, 2007
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"Apple should pull the plug on the iPhone."

John C. Dvorak, 2007
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post #13 of 29

Wow, a series of declining quarters, finishing with the worst quarter in history ... and they say that "trouble might be ahead."  

 

These guys are geniuses!  1smile.gif

post #14 of 29
Quote:
Originally Posted by Gazoobee View Post

Wow, a series of declining quarters, finishing with the worst quarter in history ... and they say that "trouble might be ahead."  

 

These guys are geniuses!  1smile.gif

 

That's why they get quoted here often :P 

post #15 of 29
Quote:
Originally Posted by Applelunatic View Post

So the way to turn around your business that is struggling to be profitable is to make even less profit?  Since "making it up on volume" didn't work during the Dot Bomb Era, why would Michael Dell think it'll work now?  What's the point of having a larger share of a pie that has shrunk by more than you've gained?

 

I agree that it's mostly business double-speak but the theory here is that the market is shrinking dramatically, so a lot of the current players will be history soon.  

 

Dell is not so much hoping to "making it up on volume" as he is hoping to be in the correct position to eat up all the other fishies in the pool, as the draught continues and the pool gets smaller and smaller.  Then when he is the only one left, margins grow again.  

 

Seems like a wild bet, and only an insane person would invest in this strategy IMO, but there are more than enough "players" (to those who think they are), in the market to finance such a deal.  I'm pretty sure that once the dust has cleared and the industry has consolidated, and there is only one or perhaps two PC makers left in the world, that neither of them will be Dell.  

post #16 of 29
Quote:
Originally Posted by Gazoobee View Post

 

I agree that it's mostly business double-speak but the theory here is that the market is shrinking dramatically, so a lot of the current players will be history soon.  

 

Dell is not so much hoping to "making it up on volume" as he is hoping to be in the correct position to eat up all the other fishies in the pool, as the draught continues and the pool gets smaller and smaller.  Then when he is the only one left, margins grow again.  

 

Seems like a wild bet, and only an insane person would invest in this strategy IMO, but there are more than enough "players" (to those who think they are), in the market to finance such a deal.  I'm pretty sure that once the dust has cleared and the industry has consolidated, and there is only one or perhaps two PC makers left in the world, that neither of them will be Dell.  

Yes, but to actually be able to survive you have to be able to make money.  Which as I said in the other post means you have to be able to either subsidize these margin cuts with some other business that is making enough profit to cover or you need to be more efficient so lowering your costs doesn't lower your margins. I don't see Dell having either of those and thus it looks like this will do nothing but further accelerate their profit margins going to 0 and under.  Do they really have enough spare cash to burn through long enough?

post #17 of 29
Quote:
Originally Posted by Suddenly Newton View Post

That's the problem with a race to the bottom: eventually you'll get there.

Wow - Acer has not got far to go. 1% net profit margin? Woah.

post #18 of 29
I thought the Dell deal still had to be approved by shareholders. I didn't see that anywhere.
post #19 of 29
Quote:
Originally Posted by MessagePad2100 View Post

Also thanks, to Apple for creating Safari and iWork and turning the tables around on Microsoft.

IE6 was once heralded as the end of the World Wide Web. Microsoft at one point said there would "not be an IE7". Now look at them: complaining about WebKit becoming the "new IE6." My how the tables have turned.

"Apple should pull the plug on the iPhone."

John C. Dvorak, 2007
Reply

"Apple should pull the plug on the iPhone."

John C. Dvorak, 2007
Reply
post #20 of 29
Quote:
Originally Posted by Applelunatic View Post

So the way to turn around your business that is struggling to be profitable is to make even less profit?  Since "making it up on volume" didn't work during the Dot Bomb Era, why would Michael Dell think it'll work now?  What's the point of having a larger share of a pie that has shrunk by more than you've gained?

The problem these company had when they get so big is they have suck a large fix set of assets they are trying to cover, the only way is to ship more product so they can spread the costs over a larger numbers of shipped products. but some time you can not stop the death spiral.

post #21 of 29
Who cares about profits. Market share determines winners! /s
post #22 of 29
Quote:
Originally Posted by Applelunatic View Post

Yes, but to actually be able to survive you have to be able to make money.  Which as I said in the other post means you have to be able to either subsidize these margin cuts with some other business that is making enough profit to cover or you need to be more efficient so lowering your costs doesn't lower your margins. I don't see Dell having either of those and thus it looks like this will do nothing but further accelerate their profit margins going to 0 and under.  Do they really have enough spare cash to burn through long enough?


Revenue neutral or small profit is better than a loss. You live to see another year and hopefully things will turn around.

It sounds to me a gambit to outlast the competition and hopefully things will be better when the dust settles.

That's still a big gamble though. They need to own an emerging market, it's hard for a big player to survive a dying market.
Edited by JeffDM - 4/15/13 at 3:47pm
post #23 of 29
Quote:
Originally Posted by TeaEarleGreyHot View Post

 

 

So in effect, Wall Street is no good for businesses, nor consumers.  Interesting.

Never has been, especially today. Mergers and acquisitions have one of two reasons. Make a quick buck for investors by saddling businesses with debt so investors reap substantial profit while raping the company and its employees -- this is what Icahn wants to do to Dell. Second is to create monopoly to prevent competitors coming into the market by keeping prices so low, competitors cannot enter the market. This how Amazon works for books, and why Apple's deal with publishers was very good for the business and productivity, and why Amazon's is bad, because under the Amazon model, new publishers cannot make the money to either start up or stay in existence. (And why DOJ's attack on Apple's deals are wrong in every possible way).

 

This is also why consumers' demands for cheap, cheap, cheap is precisely why there are no jobs, jobs, jobs. 

post #24 of 29
Quote:
Originally Posted by JeffDM View Post


Revenue neutral or small profit is better than a loss. You live to see another year and hopefully things will turn around.

It sounds to me a gambit to outlast the competition and hopefully things will be better when the dust settles.

That's still a big gamble though. They need to own an emerging market, it's hard for a big player to survive a dying market.


Western Digital remains profitable in spite of the number of HDD vendors that have dropped out, so it can happen. I'm not sure it will work out the same way with PCs. Part of it is that some of these companies may be too big for the size of that market going forward.

post #25 of 29
Dell has made some major strategic acquisitions in enterprise. Sonicwall, Wyse and appassure to name a few. It's a cloud strategy. They won't need to make money off of the endpoints, they're part of a total solution. That's the plan, anyways.

http://www.pcworld.com/article/2019590/dells-acquisitions-not-yet-paying-dividends.html
post #26 of 29
Quote:
Originally Posted by Gazoobee 
Wow, a series of declining quarters, finishing with the worst quarter in history ... and they say that "trouble might be ahead."

These guys are geniuses!

They say that about Apple too though after a series of record quarters.
Quote:
Originally Posted by Gazoobee 
I'm pretty sure that once the dust has cleared and the industry has consolidated, and there is only one or perhaps two PC makers left in the world, that neither of them will be Dell.

Especially not when Intel makes their own low price computers now:

http://www.amazon.com/Intel-Computing-Gigabit-i3-3217U-DC3217IYE/dp/B0093LINVK
Quote:
Originally Posted by JeffDM 
I thought the Dell deal still had to be approved by shareholders. I didn't see that anywhere.

It hasn't been approved yet so Dell isn't private:

http://blogs.wsj.com/deals/2013/04/09/southeastern-dell-doesnt-need-to-go-private-and-kick-us-out/
http://www.theinquirer.net/inquirer/news/2260524/dell-shareholder-moans-that-michael-dell-wants-to-buy-his-firm-on-the-cheap
Quote:
Originally Posted by hmm 
Western Digital remains profitable in spite of the number of HDD vendors that have dropped out, so it can happen.

That's a good example but I think we still have to see the full impact of SSD. People will always need computers in some form and the question is will they always put cheap ahead of quality (in the HDD example, do they put capacity ahead of performance and durability). It's clear that's not the case with the iPad as the iPad vastly outsells tablets that are much cheaper.

Apple's in the best position because they own the high margin segments and they have a couple of buttons they can press to increase volume at the expense of profit. Dell already pressed their buttons and undoing it would be difficult.
post #27 of 29
Quote:
Originally Posted by JeffDM View Post

I thought the Dell deal still had to be approved by shareholders. I didn't see that anywhere.

Last I heard was that there were two 11th hour counter offers, one by a group headed by Carl Icon. Nothing has gotten to a shareholder vote.

post #28 of 29
Quote:
Originally Posted by hmm View Post


Western Digital remains profitable in spite of the number of HDD vendors that have dropped out, so it can happen. I'm not sure it will work out the same way with PCs. Part of it is that some of these companies may be too big for the size of that market going forward.

Did WD go private? Talks started after Dell's initial overtures. If they did, it's too soon to be conclusive.
post #29 of 29
Quote:
Originally Posted by JeffDM View Post


Did WD go private? Talks started after Dell's initial overtures. If they did, it's too soon to be conclusive.

 

I don't think so, at least not yet. I was going by recent quarters.

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