Letter #198: Michael Dell and Bill Gurley (2003)
Founder of Dell and Partner at Benchmark | Churchill Club Annual Dinner
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Today’s letter is the transcript of a conversation between Michael Dell and Bill Gurley. This was a particularly interesting conversation because Bill and Michael had known each other for over a decade at this point, Bill had been a world class sell-side research analyst who covered Dell and since transitioned to being an early stage venture investor, and Michael would step down from Dell as CEO in just a few months. This meant Bill and Michael had a pre-existing relationship of mutual respect, Bill was a practitioner who had the appropriate knowledge to press Michael on the business, and Michael was more reflective and candid on his time as CEO of the business. As a result, the questions Bill asked were pointed, specific product, financial, and business model questions, rather than the typical philosophical open-ended questions entrepreneurs and CEOs are usually asked. Besides Michael’s imminent retirement, this was an interesting point in time where Dell was at the top of the PC game and mobile and cloud hadn’t yet taken off (although it was about to) and eaten into their business.
In this conversation, Bill asks Michael about whether culture has been a part of success, and if so, how he would define Dell’s culture, why he always seems to have mentors and the importance of sharing responsibility, how he chose his then-successor Kevin Rollins, the value of continues improvement, being an introvert, how to ensure peak performance of all leaders, and governance changes and how they have affected Dell. They then dive into more technical topics, starting with Dell’s supply chain and its economic benefits, when those benefits became apparent, why others couldn’t replicate the Dell model after almost a decade, channel conflicts and design cycles, how many computers they sell a day, market share and market size, how to measure success, competitors and positioning, whether Dell is a “one trick pony,” cranking the model down in terms of gross margins and opex, stealing oxygen from competitors vs delivering value to customers, if low opex indicates diminishing marginal returns, cutting edge product developments, why high spend isn’t necessarily a good indicator of success, business model patents, why MP systems haven’t lived up to their expectations, Dell’s relationship with Linux, Dell Services and why it’s important to Dell, the laptop business, Michael’s magic formula for recognizing when a market is ready to apply the Dell model, Michael’s ambitions in the consumer electronics market, and global issues and operations. Bill then opens it up to the audience for questions, who ask Michael about how he hires people and makes sure they are a cultural fit, how he ensures company culture remains strong across geographies, how Dell deals with spam as an enterprise issue, the Dell distribution model and their white box program, vision about the cell phone as a device that would mainstream and if Dell would enter that business, if he sees a threat out of China, if improved processor performance will still a main driver for consumers to buy PCs, who his personal heroes are, what’s been the most unpredictable experiences, and what surprises him most about where he is, why he is still working, and much more!
Michael Dell is the Founder, Chairman, and CEO of Dell Technologies, which he founded when he was just 19. Even amongst many of the IFOs I’ve studied, Michael is unique in his versatility, having been a world class technologist, operator, dealmaker, and investor. Some highlights include:
Taking Dell public (just 4 years after founding it) with a market cap of $85mn in 1988
Taking Dell private in a $25bn LBO with Silver Lake after fighting off Carl Icahn in 2013
Buying EMC (and a majority stake in VMWare) for $67bn in 2016
Re-listing Dell (just 5 years after taking it private) at a market cap of $16bn in 2018
Spinning off MSD Partners to merge with BDT & Co. to form BDT & MSD in 2023
Selling VMWare for $69bn to Broadcom in 2023
Building DFO Management to $31bn AUM as of 2024
Building Dell into a $100bn market cap company twice—first in 2000, then again in 2024
Bill Gurley is a Trustee of the Santa Fe Institute, and was most recently a General Partner at Benchmark, where he invested in companies such as Uber, Zillow, Nextdoor, Stitch Fix, and OpenTable. Prior to Benchmark, he was an investor at Hummer Winblad Venture Partners. He started his career in equity research at CS First Boston and then a year with Frank Quattrone at Deutsche Bank, and worked as the lead analyst on Amazon’s IPO. He started he career at Compaq as a computer engineer.
I hope you enjoy this conversation as much as I did!
Related Resources
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Transcript
Moderator: It's my honor to introduce our speakers tonight -- Bill Gurley and Michael Dell. Bill has been a partner at Benchmark Capital since 1999. He spent four years on Wall Street as a top ranked research analyst focusing on the personal computer hardware and software businesses. In both 1995 and 1996, Bill was a member of the institutional investor All-American research team. Prior to his investment career, Bill was a design engineer at Compaq Computer and received his MBA from the University of Texas. Michael Dell, Chairman and CEO of Dell Inc., also attended the University of Texas where in 1984, with $1,000 in startup money, he started Dell with an unprecedented idea, to sell computer systems directly to customers. Today, Dell Inc. employs more than 44,000 people and has reported revenues of $39.7 billion for the most recent four quarters.
Michael Dell became the youngest CEO of a company ever to earn a ranking on the Fortune 500 and is now the longest tenured CEO in the computer industry. The company currently ranks No. 4 on Fortune’s Most Admired list and in 2003 Dell was named among the top ten most trusted and respected companies in a Wall Street Journal poll.
Ladies and gentlemen, please join me in welcoming to the Churchill Club Michael Dell and Bill Gurley.
Bill Gurley: I've known Michael for about ten years and feel honored to be here tonight and to ask you some questions. I thought we'd start with softer topics and then cover products and strategy. Your company has been successful for so long now, and many people in the Valley spend a lot of time talking about the right culture. Has culture been a part of Dell's success, and if so, how would you define Dell's culture?
Michael Dell: It has been a big part of our success. What we’ve done is fairly well studied, but the cultural elements are much harder to duplicate. We have a culture of responsibility, of setting very high targets, of continuous improvement, of being pleased but never satisfied and of continually looking for ways to improve.
At Dell, we have a program called BPI - Business Process Improvement. This past year we've had about 18,000 teams across the company complete BPI projects designed to save the company money and improve our processes. Our teams come from manufacturing employees, finance and marketing and research, anywhere across the company, and we generate roughly $1.2 billion in savings from the BPI program.
Our culture says not to complain, but to fix things, improve them, make them better. And we have a best of breed process in our company. We take all of our businesses, we look at them, we measure things relentlessly and we drive to get to the best performance we possibly can. And we're never finished; we’re never satisfied.
Bill Gurley: One of the things I find unique about your leadership is that you always seem to have a mentor. Lee Walker, Mort Myerson for a while, Mort Topfer -- and now Kevin Rollins. Is that intentional? Is that a strategy?
Michael Dell: Whenever you've got a big job like this and a company to run, you need the most talented people to succeed. And there's way too much to be done to try and do it all myself.
Bill Gurley: But a lot of entrepreneurs certainly would prefer to take that latter strategy.
Michael Dell: I've never had a problem in sharing responsibility. Certainly I can't do everything myself and many times there are people that are far better at doing certain things than I am. And we become much more successful, much more effective when we've got the most talented team we possibly can. Kevin and I use a two-in-the box strategy. We have some other key roles in the company where we have two people leading a large part of the organization and it works well for us.
Bill Gurley: Tell us how you knew Kevin was the guy you needed to bring in.
Michael Dell: Well, Kevin started working with Dell in about 1993 and it became very apparent that he was just a really bright guy and he had tremendous insights into the business. So we started to try to hire him. That took us actually several years. It turned out he was working at Dell every day anyway, so eventually we convinced him to come.
Bill Gurley: It may have been more expensive when he was billing by the hour.
Michael Dell: Definitely. Take out the middleman. (Laughter) So we went direct and Kevin joined the company. His first job was running the Americas, which is our biggest business.
He did a great job with that for several years and then moved into a role to take over for Mort Topfer. If you ask who is really running the operations on a day-to-day basis, it's more Kevin than me. We have shared responsibilities as well and it works extremely well. We’re very pleased with the relationship and he's an enormously talented guy.
We have very talented leaders across our organization. Paul Bell runs our European business, Ro Parra and Joe Marengi run our Americas business and John Hamlin runs Consumer. Bill Amelio runs Asia and we've got a great CFO in Jim Schneider, so we've got a talented team.
Bill Gurley: One of the keys to having a great culture is the notion of continuous improvement. A recent Business Week article talked about some of the secrets to Dell. They mentioned - I find some of this hard to believe – that through an evaluation Michael realized he was shy. Is that accurate?
Michael Dell: I'm actually quite introverted. It's a natural tendency for me to be more introverted.
Bill Gurley: What did you change as a result of this?
Michael Dell: In order to reach peak performance for all our leaders, we engage in a 360 evaluation. On a regular basis, all our leaders, myself included, seek out reviews from many of the people we interact with. I got quite a bit of feedback from our team in a number of areas. One of the areas that's pretty consistent is they want to be taught, not simply told what to do, so we continue to focus on that.
I wouldn't say I have a lot of performance problems - (laughter) - but I'm like anybody else, I've got areas where I can improve. Every time we do a review we find new things that we can get better at. It also sets a powerful example inside the company when everyone knows that no one is exempt from this process and we all have areas we can improve.
I share my 360 results with our team. Every time we have our quarterly meeting a couple of our folks will stand up and share areas for improvement and what’s being done to address those areas. It’s a good process that works well for us.
Bill Gurley: Before we move into the product area, would you talk about some of the governance changes that have happened recently as a result of market issues and Sarbanes-Oxley? What has that meant to Dell?
Michael Dell: Not a whole lot, to tell you the truth. The reason that it hasn’t is that we had those processes, like controlled self-assessment, already inside the company. Our regional leaders were already signing off on their P&Ls and submitting them to the company. Many things required by Sarbanes-Oxley were already in place. There was some burst of activity to get everything we do on a form that complies, but we didn't have a lot of changes.
Bill Gurley: Was there some mention of an executive account shift?
Michael Dell: Yes, unrelated to Sarbanes-Oxley. Like many companies, we have begun the process of reducing the use of stock options. We also have a lead director and the board meets from time to time without me. We’ve always encouraged these types of practices, but now there are official agenda items. Not a lot of changes, though.
Bill Gurley: Let’s talk about the model. Everyone in the world understands that the Dell model is a metaphor for a well-run supply chain. The question I'm most curious about: Was it intentional?
Michael Dell: Did we plan this or did we just get really lucky?
Bill Gurley: Did you know early on about the economic benefits of the model?
Michael Dell: No.
Bill Gurley: At what point did it become apparent?
Michael Dell: There were some things that were intuitive. It was intuitive to know that not having dealers and resellers was a good thing. What I didn't really know, as a 19-year-old dropping out of college after my freshman year, was that the information we would have from customers would give us a strategic advantage and allow us to have structurally lower inventory. And that the cost of materials was declining rapidly and that would create a massive structural advantage. I had no idea.
Bill Gurley: If I remember correctly, it became very clear that the direct model had huge economic advantages leading to better gross margins, better asset utilization, higher return on invested capital, less waste. Everybody knew that in 1995. Here we are eight years later and it's not clear that anyone else in the industry has figured out how to execute the Dell way, yet everybody understands it. Why can’t they replicate it?
Michael Dell: That’s probably a better question for a different group of CEOs. If you look at the presentation we gave on our IPO road show in 1988, it said substantially all of those things about the advantages of our business model with respect to capital and supply chain and cost structure. It’s been elaborated on since then, but the advantages were known. It was in about 1992 or 1993 that our principal competitors started to try to copy the business model. The fact that it hasn’t been replicated is a combination of underestimating what we really do, having a different culture, and combining that with the inertia of different business models. Trying to change those things is incredibly difficult to do.
Bill Gurley: The channel conflict and how to go from a batch to a per unit inventory system overnight.
Michael Dell: We now have 20 or 30 design cycles of designing products to be manufactured to be built to order. And we're not a static target. We keep improving everything all the time.
Bill Gurley: So how many computers do you sell a day?
Michael Dell: It depends on the day.
Bill Gurley: What’s your market share today?
Michael Dell: I think of our market share in a large context. We have about 5 percent of the $800 billion IT computer systems and services market.
Bill Gurley: That's a big net there. What if you narrow it down to U.S. desktop PCs?
Michael Dell: Around 30 percent.
Bill Gurley: What are the natural limitations on that?
Michael Dell: If you look at companies with more than a couple hundred employees it's about 44 percent. There are parts of the market where it's even higher. I think we can continue to grow. Our worldwide desktop share is in the high teens, so there's a lot of room to grow.
Bill Gurley: Do you think there's a limit. Can you get to 80 percent of the U.S. desktop market?
Michael Dell: That would be nice. (Laughter) We're a long way from that. It’s more important for us to capture share in the servers and storage and services and printing markets than to go straight to 80 percent of desktops.
Bill Gurley: When HP and Compaq merged, they immediately passed you in market share in the U.S, correct?
Michael Dell: When you put them together. Worldwide, not in the U.S.
Bill Gurley: And how long did that last?
Michael Dell: About three quarters.
Bill Gurley: What's your sense of how that merger is going? (Laughter)
Michael Dell: It’s a question of how you measure success. In our case, over the last two years our market share has grown about 40 percent and we've continued to grow profitably. The rest of the industry has grown about zero and hasn't been profitable.
Bill Gurley: Is there another profitable PC vendor out there today?
Michael Dell: Certainly there are some profitable PC companies. Apple is profitable. Legend is profitable. I understand HP had a profit this quarter. I'm not sure if it covers their cost of capital, but I guess it qualifies as a profit. (Laughter)
Bill Gurley: Let me spice things up a little bit. Your competitors like to talk about Dell apparently, so if you could, respond to this quote from Carly Fiorina. She says, "Dell is a great company but they are a one-trick pony."
Michael Dell: We’re actually a two-trick pony. (Laughter) We manage to save customers a lot of money and make a profit, so we've got two tricks. (Laughter)
Bill Gurley: Here's one from IBM that perhaps you can interpret for us. They say, "They're the best in the world at what they do. The question is will they be at the next big thing." What's the implication?
Michael Dell: Obviously IBM is a great company. They're out there selling different visions and I guess they're trying to suggest that maybe we won't be good at the things that they're good at.
Bill Gurley: We’ll talk about R&D in a little while, but maybe that's what they were hinting at. This one is particularly spicy. A guy named Jeff Clarke at HP says, "Dell is going to hit a wall. We view them as low tech and low cost. They are the K-Mart of the industry."
Michael Dell: Well, I don't think there's a lot of basis for that statement. I don't think we resemble K-Mart much. I guess I would say I hope they believe that.
Bill Gurley: Because it would imply they're not paying attention?
Michael Dell: It seems to me that the last thing in the world you'd want to do if you had a capable competitor is to try to underestimate what they're really doing. But if that's what they want to do, more power to them.
Bill Gurley: One thing that’s really impressive is how you continue to crank the model down. I don't remember the exact numbers, but I think back in the mid '90s when I followed the stock you had 30 percent gross margins and 20 percent of Opex and now it's 22 in gross margin and 10 percent Opex, right?
Michael Dell: 18 percent gross margins and 9.6 percent Opex.
Bill Gurley: Is that intentional that you crank it down like that?
Michael Dell: We believe that as we scale our business with lower gross margin percents and more gross margin dollars, and scale our operating expenses over a much greater volume, we're able to save customers money and drive a lot of value.
Bill Gurley: And take oxygen away from the competition.
Michael Dell: No, we don't want to do that. We want to deliver more value to our customers.
Bill Gurley: But it also does the other though, correct?
Michael Dell: Our intention is to deliver value to our customers.
Bill Gurley: Do you know of any other company where Opex is below 10 percent, just as total expenses in the company?
Michael Dell: There are companies that have Opex below 10 percent. They tend to be in the distribution business as opposed to manufacturers and companies that design things.
Bill Gurley: Could you potentially be reaching diminishing marginal returns? Your inventory turns, I read, are 100 times a year now, something like 3.6 days of inventory. And vendors are delivering in 90-minute windows. So like if you tighten that up much more, they won't be able to drive back and forth fast enough. (Laughter)
Michael Dell: There’s a lot we can do in the supply chain in terms of continuing to improve quality, working on continuity of supply, working with our suppliers to continue to drive down costs and further integrate things for us to help deliver more value. We don’t look at these as if we’re finished, let’s move onto something else.
Bill Gurley: Do you literally want to go to 200 turns and 45 minutes, or is that overkill?
Michael Dell: Certainly, there could be other things you could spend your time on where there might be greater leverage, but still within the supply chain. There’s plenty for us to do.
Bill Gurley: Are you lucky, but unlucky, to be a vendor of Dell because you have to live up to all those things, or has it worked better for your business as well?
Michael Dell: If you look at the progression of the industry, the one thing that can pretty much assure our vendors is that if they're working with us they're likely to be gaining market share in their category. And we don't apologize for wanting highest quality, the greatest value. We think those are the things that are important to our customers. We do have a very high concentration of revenue among top vendors that have really supported us and grown with us.
Bill Gurley: One of the things that seems somewhat serendipitous for Dell is along comes the Web. What are you seeing recently on the Web that might be helpful to other people with their businesses? What percent of your orders right now are online?
Michael Dell: It's about 60 percent, so close to $25 billion online for Dell. What we're seeing is a continual movement toward machine-to-machine commerce spreading across the entire customer base. And there's still a long way to go there.
Bill Gurley: What does that mean, machine-to-machine?
Michael Dell: It means a customer's ERP or procurement system communicating with our manufacturing system. It means automatic configuration verification. It means essentially the people work on the relationships instead of the transactions. And that drives a tremendous amount of reliability into the process and drives cost out and that's a good thing. And obviously we do that on the supply chain as well.
Bill Gurley: What are some of the cutting edge things you’re doing with Premier Pages – your customer-specific Web pages.
Michael Dell: For larger customers, we create a unique customized Web environment that is specifically for the things that are standardized for their environment, the software, the peripherals, the image loads, the exact configurations that they want as a company.
Bill Gurley: How many of them do you have?
Michael Dell: Tens of thousands. What we find is that you can't necessarily apply a standardized online model to larger customers. And to say we do this business online is really not explaining the whole thing. If you look at a customer like General Electric, we have about 150 people around the world who service GE as a company.
Bill Gurley: Dell employees focused explicitly on GE.
Michael Dell: Right. And so everywhere where there's GE, from plastics to medical to every division in every country everywhere in the world, those people focus on the relationship and the opportunities and the services - the things they really need to become effective. We have the computers do the transactions. The Web helps us drive the transaction costs down, increase the reliability and we've been able to drive that throughout the entire business. The same is true on the supply chain side.
Bill Gurley: I think your competitors are always looking for something to say because you keep going up and up and up. One of their latest criticisms is you only spend 1.2 percent of revenue on R&D and they spend 3, 4, 5. How do you respond to that criticism?
Michael Dell: Higher spend isn't necessarily a good indicator of success. There have been some that have claimed that Dell does no R&D. Well, I might draw your attention to the United States Patent and Trademark Office where Dell has over 1,000 patents dating back to 1988. Also, we have about 3,600 people in our product development organizations that design and develop products every day. Our R&D budget is about the same size as Apple's, so we do spend a fair bit in R&D. We sell a whole lot more than Apple, but the last time I checked that's a good thing.
Bill Gurley: Is one of the implications they're trying to protect the high end, the mainframe, midrange? Does that market still exist? Is there anything to protect?
Michael Dell: There are a number of companies who spend a fair bit on R&D protecting proprietary inventions. And while that's a legitimate business model it's not necessarily something that benefits the customer. The half a billion dollars that we spend goes almost exclusively into actually saving the customer money. So if you create something at Dell that saves the customer money you're a hero. If you create something that's really cool but nobody wants to buy it, we don't care. We're focused on the things that make a difference. And we believe innovation doesn't just occur in R&D. It occurs in supply chain, in sales and marketing and logistics.
Bill Gurley: Some of your patents are business model patents I understand.
Michael Dell: Yes. In terms of the enterprise market, if you look at the server market, the market for four-way and two-way servers this past year grew about 20 percent, but the market for eight-way and above was down 17 percent. If you take SQL Server, for example, .15 percent of all SQL Server installations are on servers with more than four processors. That means there are about 42 of them. We’re not focused on the .15 percent; we're focused on the 99.85 percent of the market.
Bill Gurley: Why is that? Why have MP systems not lived up to their expectations?
Michael Dell: Several reasons. First of all, as the microprocessors get faster and faster you just don't need eight processors. Four and two can work just fine. A lot of these systems are really IO and bandwidth limited, disk limited as opposed to processor or transaction loaded. And as you get into dual cores and multiple cores going out in time - even less of a problem for four-ways and two-ways to handle. And then you've got scale out, which continues to be embraced by the leading software companies and OS companies in the world. Trends really point toward using high volume industry standard servers running Windows and Linux and away from the proprietary systems, which are pretty costly. And the price performance just isn't there.
Bill Gurley: You mentioned the word I think the audience would be interested in talking more about, Linux. How much Linux is Dell selling right now?
Michael Dell: We sell about a proportion to what the market sells, which means we're No. 1 in Linux in the U.S. because we're No. 1 in servers in the U.S. And it's continuing to grow. We have relationships with Red Flag in China and SuSE in Germany. It's mostly on the server side and we're seeing that continue to grow.
Bill Gurley: What's driving that? Do you have a sense of that?
Michael Dell: It's mostly UNIX conversions. I would say 90 percent are UNIX to Linux conversions. In fact, in our professional services group we have a whole group dedicated to migration services from UNIX to Linux.
Bill Gurley: You're seeing fairly significant performance boosts at lower costs, right?
Michael Dell: If you look at Oracle, for example, Oracle 9i RAC, and compare a Linux installation versus a UNIX installation, you'll see an 80 percent improvement in performance at 75 percent lower in price, so really dramatic.
Bill Gurley: I don't know if it's true or not, but I heard somewhere Ballmer had said many years ago that, "We'll know if we need to be worried about Linux because it will run over Sun first." (Laughter) But that seems to be the case based on what you're saying.
Tell me about Dell Services. It seems like you are talking more and more about services. It would be easy to criticize that. It’s not the direct Dell model with the high inventory turn, it's people billing out at hours. Why is that important to Dell?
Michael Dell: When you sell a lot of computers you have a natural opportunity for services. We have a great product support services business that goes along with our products, the warranties and those kinds of things. That's really embedded in the product business. Then we have the extended or discretionary services and it's about a $2.6 billion business. It's managed services. It's the development and design. We have a couple hundred thousand seats that we manage for the New York Department of Education. We have 150,000 seats for AXA for managed services. We have a large Boeing contract. We've got Cable & Wireless. We do a lot of semi-custom work around Microsoft and Oracle-type applications for customers. Professional services is growing nicely for us. We've got several thousand people in the services group.
Bill Gurley: And you'll continue to grow that?
Michael Dell: I think it will grow at about double the rate of our product business for many, many years.
Bill Gurley: A quick stop on laptops. I think the thing people focus on most these days is 802.11. What's your percent integration right now on laptops?
Michael Dell: It's pretty high. There are some customers that for security reasons don't want 802.11, but outside that it's pretty much there.
Bill Gurley: Some people have been saying that they've seen a trend where laptops are actually outpacing desktops, a market share shift based on 802.11. Is that true at Dell or have you sensed that?
Michael Dell: There's no question notebooks are growing faster. Our consumer notebook business grew 67 percent last quarter in the U.S. The notebook business in China was up 70 percent. There’s a shifting from desktops to notebooks all over the world. One of the reasons is 802.11. Another reason is that one of the big cost differences was the LCD. Now most desktops have LCDs too, so that cost difference has gone away.
Bill Gurley: You've been quoted recently as saying your magic formula is recognizing when a market is ready to apply the Dell model. You've made three pretty big moves and then a fourth one we're going to talk about separately: storage, networking, printing. How are those going?
Michael Dell: Storage grew 68 percent last quarter in revenues. We have the Dell-EMC relationship. We're on a $1.7 billion run rate for external storage. It's growing very, very well.
Bill Gurley: Where does that put you in the industry as a storage provider?
Michael Dell: Certainly notching up relatively fast but still a long way to go.
Bill Gurley: What about networking? When does Cisco start throwing barbs at you like Carly?
Michael Dell: Well, you know, John’s a gentleman.
Bill Gurley: So he wouldn’t do that? (Laughter) How is networking coming? I think a lot of people here are involved in markets that are more peripheral. There are not a lot of Valley companies focused on the PC business, but when you start moving into these other markets everyone wonders what it means to them. So is this something we should expect to continue as one of your ambitions?
Michael Dell: We're working with a number of Valley companies that make the silicon ingredients that help us move into certainly layer two, now layer three managed switches. Switching is really where we're focused right now. Networking, as you know, is a very complex category where there are many, many different product areas. I wouldn't expect us to go into a whole bunch of them real fast.
Bill Gurley: So which businesses will you go into?
Michael Dell: We're going to stay focused on switching for a long time. The other areas are really not ready.
Bill Gurley: And what makes a market ready for Dell?
Michael Dell: It's a combination of our own bandwidth, because we can't take on all of these things at the same time. We focus on the ones we can absolutely execute along with the size of the market, the profit opportunity, how adjacent it is and what the long-term potential is.
Bill Gurley: So why go into printing?
Michael Dell: Printing is a large adjacent market. It's a very profitable market. And it's pretty easy to sell printers. They're not like storage area networks. There's not a lot of connectivity with printers. We sold a million Dell printers in the first six or seven months we were in the business, so we’re off to a very good start. We'll grow sequentially about 80 percent again from the third quarter to the fourth quarter in printing. And we're broadening the product line. We go all the way up to the 45 page-per-minute network laser for about $1,249, all the way down to inexpensive inkjets and all-in-ones. We have about 12 percent of the all-in-one inkjet market in the United States after about six months, which is pretty respectable.
Bill Gurley: That's pretty impressive. Do you think you can get to 30 percent in that market as well?
Michael Dell: Sure, why not.
Bill Gurley: Recently you’re on the cover of Fortune in a story about consumer electronics. What is the extent of your ambition in that market?
Michael Dell: We sell a lot of these LCD monitors and increasingly users are using those as televisions with TV tuner cards. It’s really not that hard to put tuner technology into these LCD monitors. If you go to Japan, 50 percent of consumers use their LCD monitors also as televisions, so it's a fairly natural extension. We've introduced 17, 23, 30-inch LCD multifunction monitors, LCD TVs. We also offer Media Center PCs where the monitor is effectively a television. All of all these things emanate from the PC itself. The PC is playing a larger role in the digital home of the future. And Dell is a leading company in the consumer PC market though it’s only about 15 percent of our revenues. That's a logical thing for us to be doing.
Bill Gurley: One natural response people have to the notion of the PC playing a larger role in the living room is that people don't want it to take five minutes for their TV to boot and they don't want the occasional reboot that's necessary with the PCs. Is boot time an issue? Is stability an issue? Is simplicity an issue to move more into the living room?
Michael Dell: Certainly there are improvements and there's been a lot of work done in improving the interface and things like Microsoft's Media Center and our own Media Experience product that goes along with our products. I think standby and resume have gotten down to a few seconds instead of five minutes. These products are definitely evolving. The advantage the PC has is pretty clear in terms of the programmability and the power and in terms of storing and forwarding information. Tivo makes a great product but if you look at the momentum in home consumer electronics, the PC is often the epicenter for connecting all these different devices together.
Bill Gurley: Do you see the PVR as a competitor to Dell?
Michael Dell: I don't necessarily see that as a massive competitor today. I mean, you've got products like SnapStream you can put on your PC. You've got Media Center PCs that have that functionality. But this is a big market.
Bill Gurley: Gateway has a DVD player that's wireless and allows you to share photos. Would Dell sell a non-Microsoft box into the living room?
Michael Dell: Sure.
Bill Gurley: If there was demand?
Michael Dell: We sell lots of non-Microsoft boxes.
Bill Gurley: Linux, but other things?
Michael Dell: Printers are non-Microsoft boxes. (Laughter)
Bill Gurley: Today. One more HP comment here, not as spicy as the last, but in your move towards consumer electronics they say, "But no matter how good their Web site is, customers can't touch the products." I know they've said that about PCs and all, but does that matter more in consumer electronics?
Michael Dell: We started seriously going after the consumer PC market in the mid to late '90s and we did it online, we did it over the phone and we captured about 30 percent of the U.S. market, the largest market in the world. And I think a lot of people have really underestimated the power of the business model that we have.
Bill Gurley: Will that continue?
Michael Dell: If and only if we continue to deliver great value, and we respect the trust that we've earned with customers.
Bill Gurley: As you move from selling large servers that can be connected in grids all the way down to consumer electronics products, do you have to think about your brand and your sales and support method differently?
Michael Dell: Sure. We have an enterprise command center in Austin, Texas that tracks and deals with enterprise critical issues. That's a very different kind of support than the individual consumer gets.
Bill Gurley: Can the brand cover such a broad array of products?
Michael Dell: I think it can. We do have to be careful, because there are companies who have been challenged as they've tried to expand across a wide number of areas. We have to think about it carefully. As we go into new markets, we approach the business market first and consumer second in terms of geographies, because the business market is far larger. It's 80-plus percent of the opportunity. And we don't want people to get distracted with small shiny objects that are easy to understand but don't really represent a big portion of our revenues.
Bill Gurley: The last thing I wanted to touch on was global issues. Dell is selling now all over the world. Which country was the hardest for you to execute against relative to your expectation and then which was the easiest – the one that surprised you at how well you did so quickly?
Michael Dell: I would say Germany has been one of the more challenging markets. This last quarter we grew 20 percent in Germany. We have a profitable business in Germany that we've been growing steadily there, but it's a challenging market.
Bill Gurley: Why is that?
Michael Dell: There are a lot of computers sold in grocery stores there and I think it's really disrupted the brand message of what a computer really means. We've done well in the business market there. Some of the more transactional markets have been tougher.
Bill Gurley: And in which market were you just shocked at how well you did?
Michael Dell: China.
Bill Gurley: And what was the key? That's not necessarily an easy market to go sell into.
Michael Dell: I think we were surprised at how fast it took off and it continues to grow rapidly. We had 59 percent growth last quarter.
Bill Gurley: Is it a wholly-owned subsidiary?
Michael Dell: Yes. We manufacture in China for China. For the first nine months in China this year, unit growth has been in the 60, 65-percent range.
Bill Gurley: One of the things that you hear a lot about these days is job outsourcing and high-tech jobs moving offshore. Is Dell looking at that as a way to save costs? You're very cost conscious.
Michael Dell: We’re not moving jobs offshore. We're adding jobs all over the world. We added a couple thousand jobs in the U.S. this past quarter on a year-over-year basis. We added jobs all over to support our growing business. My own view is the negative perception of offshoring is much worse than the reality. Jobs have been moving from one country to another as long as there's been electricity and telephones and transportation.
Bill Gurley: But you don't see a day when Dell has to move their call centers for U.S. support offshore just to be competitive? You're constantly cranking down other cost items on your competition. Could that happen there?
Michael Dell: We’ll have call centers in the U.S. forever. We'll have call centers all over the world. And those will be balanced based on how our business is developing and growing.
The U.S. has incredibly talented people and this is not just a question of wage rates, it's a question of productivity and skills. Silicon Valley has incredibly talented people. There is going to be demand for those people no matter what. New skills may have to be developed, for example, in terms of working with people all over the world. So your job may change from staying in one place, to interfacing with people all over the world and managing projects with resources that are spread out.
Bill Gurley: Why don't we take questions from the audience?
Audience Question: Can you tell us more about the people you hire and how you hire them, make sure they fit with your culture? And if you have people in your company that are incredibly talented but don't fit the culture or they're not your management style, do you decide to fire them or do you try to live with really brilliant people that don't fit the culture?
Michael Dell: We try to spend a lot of time up front explaining what our culture is, in the full disclosure mode. If you want things that are never going to change and always stay the same, don't come here, because that doesn't happen in our company, probably doesn't happen in our industry. In the last five years the vast majority of our new vice presidents and directors have been internal promotions. We've been emphasizing that inside the company. We've been hiring a lot more people in the more mid and entry level kinds of positions. We have a consistent culture around the company and I think we do a pretty good job on-boarding people. We spend a lot of time when we're interviewing people to make sure there's a strong fit and the right fit, make sure they're successful. We spend a lot of time in performance management and in making sure that the expectations are clear about what we look for in our business. We’re ultimately a performance-oriented culture.
Audience Question: How do you take your culture to other countries? If you open an office in China, how do you get your culture in that other country?
Michael Dell: When we started some of these businesses, oftentimes we would have people from the U.S. driving that. Fortunately, we have quite a few foreign nationals in the U.S. who work for Dell that want to go back to their home country. We’ve made a point of involving them in the process as we've launched some of these new countries.
Countries where we've been for a while now, like Japan, are fully national in the sense that the leaders there are all Japanese. They’ve also been with Dell for 12 years so they understand the culture, they understand the values.
Kevin and I do a lot of training ourselves of the senior leadership team from around the world explaining what it is we do. When we hire an executive for a foreign assignment, oftentimes we bring them to Austin for several months to make sure they understand the business model. It takes time. And remember our business is very different from others; we don't go to a country and find a few dealers and leave. We build the relationships one customer at a time in every country, so it takes longer to get these countries going, but the end result is very positive.
Audience Question: How is Dell dealing with spam as an enterprise issue?
Michael Dell: Internally we have a number of ways to deal with that as it comes into Dell to try to block as much of that as possible. As you know, it's a continual cat and mouse game with new forms of spam and new tools out there. We work with the security software companies and provide tools to our customers.
Audience Question: You've got a great distribution model, no doubt about it. I remember reading about a white box program. Are you still pursuing a white box channel strategy to leverage the distribution to gain share in that market? And then are you also looking to the channel to help improve the customer experience on the services side?
Michael Dell: We have a white box program in the United States that is going pretty well. It's really not necessarily for pure resellers. It's more for companies that add value in something other than the box, but they need a box to go with it. It's a good business. It's doing nicely. In our services business, we work with a lot of partners. We’re happy to engage with partners and there's plenty of room for cooperation there.
Audience Question: Outside of the United States, cell phones actually can do pretty much everything that a computer or a camera can do. What's your vision about the cell phone as a device that would be a mainstream device?
Michael Dell: A cell phone is obviously a massive volume device. I don't necessarily think of it as a full replacement for the computer, although there are certain markets where, as you say, people used that as their primary device. But as you want more power, a phone is lacking, and the screens are a little small. It's a little hard to type on the keyboards. So we don't have anything against phones; we just don't think they're very good computers.
Bill Gurley: Does Dell enter the phone business?
Michael Dell: I don't have any plans to do that anytime soon, no.
Audience Question: First, I want to thank Bill, because this has been a really great interview, so fantastic. What do you see as your critical success factors near and mid-term? And if it doesn't fall into that category, you mentioned China. Their manufacturing capability is just unbelievable and to what extent do you really see a threat out of China to your business from a manufacturing standpoint down the line?
Michael Dell: Probably the biggest success factors for us are talent development and leadership development inside the company and the continuing trend toward standards and commoditization in the enterprise of an increasing array of products and services across the $800 billion spectrum of IT. In terms of China as low-cost manufacturing, for us that's sort of an enabler of helping us make products more affordable, driving costs down, but we don't see that as much as a threat as we do an opportunity. We have our own plants in China, not for the United States. We don't build any products in China for the U.S.; we build them in China for China and for Japan. And obviously we have component suppliers there who supply us parts for our supply chain worldwide.
Audience Question: In the past the improved processor performance was one of the main drivers for consumers to buy a new PC. Do you think that's still the main driver or are there others and how is Dell handling that?
Michael Dell: I think there are many other drivers now. If you talk to users, they tend to talk about DVD drives and multimedia and video and broadband and wireless. It doesn't mean that there aren't uses for processor and memory improvements, but the focus has really broadened out to lots of other areas.
Audience Question: Given all your success, particularly at such an early age, I'm curious who are your personal heroes that in those moments when you're having to make key decisions you think of or measure yourself against? And then, given all the things that have happened, what has been most unpredictable when you think back? What most surprises you about where you are now?
Michael Dell: My personal heroes are my parents. Certainly there are plenty of other business leaders you can look to. Sam Walton created a great business that keeps going long after he's gone. I look for inspiration to my kids, my wife, my family. Those are very important to me. As far as what most surprises me is that competitors haven’t copied our business model. I would have thought a long time ago other companies would have figured out what we were doing. That's been pretty surprising.
Audience Question: I moved here from the U.K. and one of the things English people don't understand is what motivates successful people in the U.S. to carry on working. In our culture, people make money, retire and play golf. So why are you still working?
Michael Dell: I'm having a great time. I take time off and I think I have great balance in my life, but there's only so much fun you can have goofing off. It's a tremendous thrill to be part of an organization like this and to see it reach its full potential. That’s massively exciting for me.
Audience Question: Regarding the United States consumer market, I just have one question: Wal-Mart. How are you going to address Wal-Mart on the low end?
Michael Dell: Good question. They are selling more and more devices and computers. They've got a good cost structure. We have a good cost structure. So at the end of the day the consumer is going to win and that makes us all better as companies and we work every day to figure out new ways to be competitive. If you look inside our business model, our distribution, logistics, you'll find that it stands up very well to a competitor like that, but every day there's a new challenge.
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Wrap-up
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