First off, I'd like to welcome TMF Gibson as our new Rule Maker co-manager and editor, which means, according to tradition here at the Rule Maker Portfolio, I must violently disagree with him on something. Now is as good a time as any.
The success of Dell (Nasdaq: DELL) was the single greatest factor in the success of the Simpleton Portfolio. Trying to understand why Dell did so well led me to investigate Merchant Kings (as opposed to "Cash Kings," which is what we called all our Rule Makers back then). I consider Merchant Kings to be a variety of Rule Maker, but I seem to be alone in this belief. Oh well.
Dell is a Merchant King, an efficient, low-cost distributor of other people's merchandise. Cash Kings create goods and services, Merchant Kings distribute them. Dell has prospered in a business where the value of inventory drops 50% every 18 months (Moore's Law) by playing hot potato: It gets rid of stuff as fast as it comes in. "Quick, pass it on!" Inventory doesn't have TIME to depreciate in Dell's care, so Dell isn't losing money due to it. Instead, Dell has a constantly improving product line, clearly superior to what it used to sell even a few months ago and its biggest asset when it comes to stimulating repeat purchases.
As for keeping up to date with the latest industry trends, Dell can transition product lines easily because it clears out all its old inventory in a matter of days. With no baggage, it can be nimble. If people want set-top boxes or PDAs or Web-surfing cell phones or wristwatches with a pager in them, Dell can stock it. The main consideration Dell has is what areas it wants to do business in.
Dell has been keeping up with the cutting edge pretty well, even if it hasn't always led the charge. Dell tends to let other companies break new ground, then come in and clean up afterward. The Linux-powered device produced by an alliance between America Online (NYSE: AOL) and Gateway (NYSE: GTW) was just an opening shot on the Web access device front, followed today by a similar Linux-based offering from Oracle (Nasdaq: ORCL). Considering that Michael Dell is personally delivering the first keynote address at the sold-out LinuxWorld Expo in August, I think Dell is on top of this new technology.
Similarly, although IBM (NYSE: IBM), NEC, Fujitsu, and Hitachi have all announced plans to use privately held Transmeta's new Crusoe chip, Dell and Compaq (NYSE: CPQ) have decided to wait until the second generation of the technology before shipping products. While Dell can certainly move faster than IBM, this decision is not about an inability to adapt quickly but instead about risking an investment in the first generation of a promising but untested new technology.
The mantra of "the times, they are a changin'" applies to any technology business driven by Moore's Law. Interestingly, Richard is worried about Dell being unable to adapt to changing markets and technologies, but promotes Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) as examples of companies important because of ties to an existing installed base. Yet, those are the very technologies being gradually eliminated. Which is more important, a proven track record of flexibility and rapid adaptation, or a Maginot Line of entrenched installations?
Intel, at least, has made a career of advancing its own technology before competitors do. The newly announced Pentium 4 will make obsolete its current bread-and-butter Pentium III, and the new iTanium (the processor formerly known as Merced) will eventually make obsolete both of them. (That press release is remarkably content-free. The technically inclined may wish to go here instead.) Intel's vaunted installed base is compatible with alternative processors from a half-dozen competitors, and Intel's momentum, manufacturing prowess, and brand name are all more valuable to it than the installed base of existing processors it has already sold.
Personally, I'm far more comfortable with companies that have already proven they can swim with the sharks in a free market for commodities than those who have walled off a stagnant monopoly pool where they rest on their laurels. Don't show me how high you've built the walls around your customers, show me your fangs and your claws that keep you at the top of the food chain out in the jungle.
I could probably mix that last metaphor a bit more if I tried, but I'll stop now.
For an up-close look at the well-oiled machine that is Dell Computer, check out analyst (and Rule Maker co-manager) Zeke Ashton's Motley Fool Research Report.
And remember, tomorrow is the last day to sign up for our Rule Maker Online Investment Seminar, hosted by Motley Fool co-founder Tom Gardner and the Rule Maker managers. Don't miss it!
--Oak
