Dell feels crunch from pricing, competition

Dell is squeezing itself with its aggressive price cuts, and mounting pressure from HP, Lenovo and system builders could force the direct PC giant to take a different strategy, channel executives and industry analysts say.

Dell isn't necessarily the lowest-cost computer provider at the table any more, and that factor contributed to the company’s announcement that it expected to miss earnings estimates for its most recent quarter, partners said.

“They are getting banged by HP and others in certain accounts,” said one US-based solution provider who partners with Dell in public-sector accounts.

“Dell’s model was to go out and underbid competitors and then raise the margins over time," said the solution provider, who requested anonymity.

“But a lot of accounts no longer have long-term contracts and just keep bidding deal by deal, and Dell’s chance of raising margins down the road isn’t happening. Lenovo and HP are starting to match them on price, so they are getting squeezed.”

Dell's earnings announcement came after weeks of signals in the market that the company was facing trouble.

Lexmark, which lists Dell as its biggest OEM customer for printers, reported much lower OEM sales than it had anticipated for its first quarter. And Intel, which lists Dell as one of its biggest chip customers, posted first-quarter results showing microprocessor sales below expectations.

Last month, Dell slashed many of its computer prices, including the rollout of a US$749 dual-core notebook in the US that significantly undercut consumer market pricing. The move came after Dell had suggested it was hurt late last year by steep price cuts.

Cindy Shaw, an analyst at financial firm Moors & Cabot, in the US has been among Dell’s harshest critics in the financial community and has dropped her rating on the PC maker’s stock to sell.

“I think in February, they figured out they had serious problems on their hands,” Shaw said. “They started taking some pretty aggressive price actions in March to solve that.”

Dell also is still reeling from plunging grades in customer service - once a Dell bragging point - that top company executives admitted they began to see last year, Shaw added.

“One of their big problems is they are losing customers because of support issues,” she said.

In fact, one of the reasons for Dell's quarterly shortfall were company investments in support infrastructure, as well as hastened price cuts, according to a statement by Dell CEO Kevin Rollins.