Dell Can't Ditch Consumers

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 Lenovo, Hewlett-Packard (NYSE: HPQ), Toshiba, or Apple (Nasdaq: AAPL) instead. On top of that effect, Dell also saw component costs increase. Memory sticks, LCD 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.