Dell Can't Ditch Consumers

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When Dell (Nasdaq: DELL  ) reported unremarkable fourth-quarter earnings last week, my Foolish colleague Anders Bylund argued that Dell should follow IBM's (NYSE: IBM  ) path and dump its consumer products business. He raises some good points:

Dell's consumer products division reported strong sales of $3.5 billion but at an operating margin of 0.2%. The holiday quarter tends to bring in an avalanche of consumer sales while also lowering margins, because without generous promotional pricing, Dell's prospective customers would be further enticed to get a system from LenovoHewlett-Packard  (NYSE: HPQ  ) , Toshiba, or Apple  (Nasdaq: AAPL  )  instead. On top of that effect, Dell also saw component costs increase. Memory sticksLCD displays, and graphics cards were all in short supply and high demand during the quarter, which drives up the cost of building a system.

Those are all excellent reasons to part ways with PCs and bear hug servers and other enterprise systems. Trouble is, there's more to selling to consumers and businesses than components. Marketing differs. Sales techniques differ. Channel partners differ. Unplugging isn't easy.

There's little evidence that Dell would be able to extract itself at this point. Business customers buy PCs, and those machines need servers to connect to. Accordingly, Dell's "large business" e-commerce site sells laptops and server-based virtualization technologies on the same page.

Also, if Dell wanted to be serious about ridding itself of low-margin consumer business, it never would have agreed to build a smartphone for China Mobile (NYSE: CHL  ) .

Dell's mini3i is a consumer device that's competing against other consumer brands, including Apple's increasingly dominant iPhone. Research In Motion (Nasdaq: RIMM  ) is the rare smartphone seller whose devices are officially approved for business purchase. Microsoft's (Nasdaq: MSFT  ) Windows Phone 7 has the makings of resuscitating that mobile OS among business users, but we'll need some months of observing before we know for sure.

Research tells us that consumers will have to adopt Windows Phone 7 and the mini3i first, as they have the iPhone. That's the nature of the smartphone market at this stage.

Are consumers good for Dell's business? Perhaps not. Right now, the company has little choice but to deal with them.

Will Dell ever dump consumers? Should it? Share your thoughts using the comments box below.

Apple is a Motley Fool Stock Advisor selection. Microsoft is a Motley Fool Inside Value pick. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He had stock and options positions in Apple and stock positions in IBM and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy likes this truck. Shiny!

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 26, 2010, at 11:52 AM, Aviq25 wrote:

    Unfortunately Dell is stuck with the consumer business.The consumer business can be profitable managed but ell needs to dump the overpaid Motorola crew. It is trying to pursue multiple strategies with no coherent direction. Did Michael not know when he hired all the Motorola crew as to why they were let go - because they made good looking shinny prod. at the wrong cost.

    Adamo has been a big failure there are too many chiefs. There is no accountability at Dell, you wonder what are these executives getting rewarded- bad retail strategy; bad consumer prod. strategy; making o% margin

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