WEBVTT - Over Hill and Over Dell (Dell Story Part Two) 0:00:04.120 --> 0:00:07.160 Get in touch with technology with tech Stuff from how 0:00:07.200 --> 0:00:13.680 stuff Works dot com. Hey there, and welcome to tech Stuff. 0:00:13.720 --> 0:00:16.600 I'm your host, Jonathan Strickland. I'm an executive producer at 0:00:16.600 --> 0:00:19.119 how Stuff Works and I love all things tech, and 0:00:19.200 --> 0:00:23.640 today we are continuing our story about Dell Computers. If 0:00:23.640 --> 0:00:26.360 you haven't heard the most recent episode, go and listen 0:00:26.400 --> 0:00:28.720 to that because that's part one. This is part two 0:00:28.840 --> 0:00:32.600 and will be the conclusion for now for Dell because 0:00:32.640 --> 0:00:37.360 the company spoiler alert is still around, so um yeah, 0:00:37.520 --> 0:00:39.199 I'll probably have to do an update at some point 0:00:39.240 --> 0:00:41.720 in the future. But in our last episode, I left 0:00:41.760 --> 0:00:46.280 off in when Fortune magazine first ranked Dell computers on 0:00:46.360 --> 0:00:49.600 the Fortune List. But a lot of stuff was going 0:00:49.640 --> 0:00:53.199 on that year. In addition to that, Dell released a 0:00:53.320 --> 0:00:57.680 laptop full color notebook computer, but the mobile computers Dell 0:00:57.720 --> 0:01:01.720 produced were plagued with technical issues that vexed customers and 0:01:01.920 --> 0:01:07.480 Dell representatives alike. By the company was essentially forced to 0:01:07.680 --> 0:01:11.800 scrap the notebook line of products, entirely writing off the 0:01:11.840 --> 0:01:16.319 division and taking a forty million dollar hit against earnings 0:01:16.360 --> 0:01:20.040 to do so. Yikes. Engineers went back to the drawing 0:01:20.040 --> 0:01:22.560 board to design mobile computers that did not have such 0:01:22.640 --> 0:01:29.160 problematic technological issues. Also in ninete, Dell lost thirty eight 0:01:29.200 --> 0:01:32.840 million dollars due to an issue with foreign currencies. Now 0:01:32.880 --> 0:01:35.520 this gets a bit business ee, but it's important for 0:01:35.560 --> 0:01:39.880 any corporation with global operations, and it's really not that 0:01:39.959 --> 0:01:42.480 difficult to understand from a high level. So let's talk 0:01:42.520 --> 0:01:46.240 about it first. Imagine you've got your home base of operations, 0:01:46.240 --> 0:01:49.080 So for Dell, that's the United States, and the basic 0:01:49.160 --> 0:01:51.880 unit of currency in the United States is the American dollar. 0:01:52.240 --> 0:01:55.080 But Dell also does business in other places, such as 0:01:55.080 --> 0:01:58.160 the United Kingdom, where the basic unit of currency is 0:01:58.200 --> 0:02:01.919 the haypenny or the far thing or something. Just kidding, 0:02:01.920 --> 0:02:05.160 of course, it's the pounds sterling. So an American company 0:02:05.320 --> 0:02:09.000 receiving money from a British customer has to exchange the 0:02:09.040 --> 0:02:12.800 customers pounds sterling to American dollars because it has to 0:02:12.880 --> 0:02:16.200 cross borders. So the American company says, all right, well, 0:02:16.200 --> 0:02:18.760 we'll take your pounds sterling, we'll go to an exchange 0:02:18.840 --> 0:02:22.440 exchange it for American dollars, and that's the payment. Or 0:02:22.560 --> 0:02:25.160 if an American company is paying a bill to a 0:02:25.200 --> 0:02:28.480 British person or a company, it has to exchange American 0:02:28.520 --> 0:02:31.919 dollars for pounds sterling. This is true for any two 0:02:32.000 --> 0:02:34.920 foreign currencies. Of course, I'm just using dollars and pounds 0:02:34.919 --> 0:02:37.080 for the sake of an example, but you know, it 0:02:37.080 --> 0:02:40.639 could be euro and end, it can be whatever. Ultimately, 0:02:41.120 --> 0:02:44.880 business dealings between the US headquarters and British holdings have 0:02:45.000 --> 0:02:48.520 to depend upon a currency exchange, and the American dollar 0:02:48.639 --> 0:02:51.520 and the pound sterling do not hold the same value. 0:02:52.320 --> 0:02:56.040 What's more, the value of each can change with respect 0:02:56.120 --> 0:02:59.000 to the other. So let's just start off with the 0:02:59.040 --> 0:03:01.560 current exchange rate as of the recording of this podcast. 0:03:01.600 --> 0:03:05.079 For this example, one pound sterling is equal to one 0:03:05.200 --> 0:03:10.840 point three three American dollars. But that value can change, 0:03:10.919 --> 0:03:12.800 and it's possible that it can change in such a 0:03:12.800 --> 0:03:14.960 way that a company could get the worst end of 0:03:14.960 --> 0:03:18.040 a deal because of an exchange. So let's say an 0:03:18.080 --> 0:03:21.959 American company accepts a payment, which would be a receivable 0:03:22.160 --> 0:03:25.799 in business terms, and there's a British customer. The British 0:03:25.840 --> 0:03:28.720 customer pays for a brand new computer, and the exchange 0:03:28.800 --> 0:03:31.080 rate at the point where the British customer buys the 0:03:31.080 --> 0:03:34.400 computer is at one point three three dollars to the 0:03:34.400 --> 0:03:37.880 pounds sterling, and the British customer is paying in pounds 0:03:37.920 --> 0:03:42.320 because that's what they have. It gets converted to American dollars. 0:03:42.360 --> 0:03:45.640 But then, let's say the britsh customer gets his or 0:03:45.680 --> 0:03:48.080 her computer, they run it for a little bit and 0:03:48.120 --> 0:03:50.720 they say, this isn't what I wanted. I'm gonna want 0:03:50.720 --> 0:03:54.320 a refund, So they return the product in order to 0:03:54.320 --> 0:03:57.560 get a refund. Only now the exchange rate has changed. 0:03:57.920 --> 0:04:00.760 Now the exchange rate is one point four or American 0:04:00.800 --> 0:04:04.240 dollars per pounds sterling. Now the British customer bought his 0:04:04.400 --> 0:04:08.120 or her computer in pounds, they expect the same number 0:04:08.160 --> 0:04:10.960 of pounds in return. Let's say that they spent seven 0:04:11.040 --> 0:04:15.280 hundred pounds on this computer. They expect a refund of 0:04:15.280 --> 0:04:19.120 seven hundred pounds. But now seven hundred pounds costs more 0:04:19.240 --> 0:04:22.400 American dollars than it used to because the pound is 0:04:22.440 --> 0:04:25.760 stronger against the dollar than it had been during the 0:04:25.800 --> 0:04:29.760 initial exchange. That means, ultimately the American company has to 0:04:29.760 --> 0:04:32.640 pay more in the refund than it got in the 0:04:32.680 --> 0:04:37.440 initial purchase. The company loses money on the refund. To 0:04:37.560 --> 0:04:40.920 protect against that sort of thing, companies sometimes use a 0:04:40.960 --> 0:04:44.839 strategy called hedging. So, for example, a company might make 0:04:44.880 --> 0:04:48.720 an agreement that locks in an exchange rate for a transaction, 0:04:49.240 --> 0:04:53.000 and that exchange rate determines how much value must be exchanged. 0:04:53.279 --> 0:04:55.919 So let's say that they lock in this one point 0:04:56.000 --> 0:05:00.800 three three American dollars to pounds sterling. Then, whenever the 0:05:00.839 --> 0:05:03.800 deal happens, because there was this agreement to lock in 0:05:03.800 --> 0:05:06.719 the exchange rate, that's the rate that is used to 0:05:06.720 --> 0:05:09.600 convert American dollars to pound sterling, no matter what the 0:05:09.680 --> 0:05:13.440 current exchange rate actually is. So the amount of money 0:05:13.480 --> 0:05:16.599 that changes hands could be slightly different than what it 0:05:16.680 --> 0:05:20.159 should be based on the exchange rate. Or the company 0:05:20.240 --> 0:05:23.120 might use options in which the company gets to set 0:05:23.160 --> 0:05:26.200 an exchange rate that it can opt to use, but 0:05:26.240 --> 0:05:29.760 if the actual exchange rate is more favorable, then the 0:05:29.800 --> 0:05:33.000 company can switch over to that one instead. So again, 0:05:33.080 --> 0:05:37.000 let's say that the American company says, all right, we 0:05:37.040 --> 0:05:40.200 agree with an option to go with one point three 0:05:40.279 --> 0:05:43.240 three American dollars to pound sterling. When the deal is 0:05:43.279 --> 0:05:46.080 ready to happen, some for some reason, the British pound 0:05:46.320 --> 0:05:48.760 has gone weak against the dollar, and now it's more 0:05:48.800 --> 0:05:52.279 like one point to five American dollars to British pounds 0:05:52.279 --> 0:05:56.040 sterling because of the option approach. The American company says, Nope, 0:05:56.080 --> 0:05:58.120 we're going to exercise our option and we're going to 0:05:58.160 --> 0:06:01.000 exchange at the current rate because will save more money 0:06:01.040 --> 0:06:04.960 that way. I'm not entirely certain what specific hedging strategy 0:06:04.960 --> 0:06:07.360 Dell Computers was using in the early nineties. Most of 0:06:07.400 --> 0:06:09.560 the articles I could find merely said that the foreign 0:06:09.600 --> 0:06:13.320 currency exchange hedging strategy was a total fiasco and it 0:06:13.400 --> 0:06:17.160 cost the company nearly forty million dollars as a result. 0:06:17.800 --> 0:06:20.960 To top it all off, Dell began to face competition 0:06:21.000 --> 0:06:24.320 in the form of Compact. Now, previously, Compact had been 0:06:24.360 --> 0:06:28.359 known for selling much more expensive computers, but Compact released 0:06:28.360 --> 0:06:31.960 a PC price at eight dollars. They were really taking 0:06:32.000 --> 0:06:35.880 aim at Dell's position in the marketplace. Dell responded by 0:06:35.920 --> 0:06:39.320 making some big price cuts in their own products, which 0:06:39.440 --> 0:06:42.520 the company could afford to do because their operating costs 0:06:42.520 --> 0:06:46.480 were much lower than compacts operating costs, so they had 0:06:46.520 --> 0:06:49.440 a little more wiggle room to work with prices, and 0:06:49.480 --> 0:06:52.960 the profit margins on Dell machines decreased, but the company 0:06:53.000 --> 0:06:55.080 was able to maintain its position in the market. It 0:06:55.120 --> 0:06:59.560 wasn't forced out by Compact. This combination of factors led 0:06:59.600 --> 0:07:02.800 the company to post its first quarterly loss in its 0:07:02.880 --> 0:07:08.320 history in nineteen. That quarterly loss was for seventy five 0:07:08.520 --> 0:07:12.560 million dollars, but the company was able to recover slightly 0:07:12.600 --> 0:07:14.760 within that fiscal year. At the end of the fiscal 0:07:14.840 --> 0:07:17.480 year they did. They still posted a loss, but their 0:07:17.560 --> 0:07:20.960 loss was thirty six million, which is terrible, but better 0:07:21.000 --> 0:07:23.960 than seventy five million that was for the fiscal year 0:07:24.080 --> 0:07:29.080 ending on January nineteen. Now, several things changed at that time. 0:07:29.480 --> 0:07:32.120 One was that Dell Computers, upon the advice of a 0:07:32.160 --> 0:07:36.240 consultant named Kevin Rawlins, would pull its products out of 0:07:36.440 --> 0:07:40.480 retail establishments. So they said goodbye to comp us A 0:07:40.640 --> 0:07:43.920 and Walmart and Sam's Club, and they decided to no 0:07:44.000 --> 0:07:48.080 longer use resellers at all. The company had been undercutting 0:07:48.080 --> 0:07:50.760 its own revenue and also had to maintain much larger 0:07:50.800 --> 0:07:54.240 inventories for those retailers than when it was just doing 0:07:54.240 --> 0:07:57.360 the direct sales to customers. So Rollins would end up 0:07:57.360 --> 0:08:00.720 coming over to join Dell Computers as a full time employee. 0:08:00.760 --> 0:08:03.320 He'll come back into the story in just a moment. 0:08:03.680 --> 0:08:07.360 Another change was that Dell Computers stopped focusing on the 0:08:07.360 --> 0:08:12.120 consumer market as its primary customers. The laptop problems, the 0:08:12.200 --> 0:08:15.440 increased competition from Compact, and the recession had all been 0:08:15.520 --> 0:08:20.240 factors in that consideration. Also, Dell's corporate clients were becoming 0:08:20.280 --> 0:08:25.240 increasingly important and representing a much larger source of regular revenue, 0:08:25.600 --> 0:08:28.480 so for the next couple of years, Dell would switch 0:08:28.520 --> 0:08:32.440 its focus almost entirely towards selling computers to companies and 0:08:32.480 --> 0:08:37.840 to large organizations, not to your average consumer. In nineteen 0:08:39.000 --> 0:08:43.160 mort Topford joined the company as vice chairman. Mort Topf 0:08:43.320 --> 0:08:46.120 had formerly worked as an executive at Motorola, and his 0:08:46.160 --> 0:08:48.880 original plan was just to act as an advisor for 0:08:49.000 --> 0:08:51.880 Michael Dell for just a few months, and he had 0:08:51.920 --> 0:08:54.920 even built a retirement home for his wife and himself 0:08:55.000 --> 0:08:58.560 to share in Nevada, but he ended up staying around 0:08:58.559 --> 0:09:01.720 with the company for five years. He acted as another 0:09:01.800 --> 0:09:04.920 mentor to Michael Dell. He helped guide the company through 0:09:04.920 --> 0:09:07.800 restructuring and through growth, and he also took on more 0:09:07.800 --> 0:09:10.240 of the operations of the company so that Michael Dell 0:09:10.280 --> 0:09:13.560 could focus primarily on long term strategies and the big picture. 0:09:13.960 --> 0:09:18.800 The company righted itself that year by n Dell reported 0:09:18.800 --> 0:09:22.839 profits of one hundred forty nine million dollars. It also 0:09:22.960 --> 0:09:26.720 grew by fifty percent, and Dell had entered the online 0:09:26.720 --> 0:09:30.480 world and joined the information super highway. The company launched 0:09:30.520 --> 0:09:34.640 a website now in nine. It was largely an informative website. 0:09:34.640 --> 0:09:37.920 It was not an e commerce site, so essentially, we'll 0:09:37.960 --> 0:09:39.760 tell you, hey, call this phone number if you want 0:09:39.760 --> 0:09:43.000 to buy a computer. Dell would actually launch an online 0:09:43.040 --> 0:09:47.880 store the following year in nine. Six months after launch, 0:09:48.840 --> 0:09:52.880 that website was generating one million dollars in sales per 0:09:53.080 --> 0:09:56.920 day through the website. Three years later, the company was 0:09:56.960 --> 0:10:01.040 making more than thirty million dollars in sales per day 0:10:01.080 --> 0:10:04.880 online selling directly to consumers over the internet. It was 0:10:04.920 --> 0:10:07.160 the Internet that allowed Dell to get back on that 0:10:07.200 --> 0:10:10.840 model of marketing directly to home consumers as well as 0:10:10.880 --> 0:10:14.360 to corporations. While Dell continued to serve big corporate clients, 0:10:14.640 --> 0:10:18.319 it once again could court those average consumers, all thanks 0:10:18.320 --> 0:10:20.920 to the Internet. Now, I have a lot more to 0:10:20.960 --> 0:10:24.240 say about what Dell Computers was doing, but before I 0:10:24.280 --> 0:10:26.880 go into that, let's take a quick break to thank 0:10:26.920 --> 0:10:37.839 our sponsor. In nine, the company continued to do huge 0:10:37.880 --> 0:10:41.320 business both in its corporate accounts and with direct sales 0:10:41.320 --> 0:10:44.840 through the Internet. Dell was able to coordinate customer orders 0:10:44.840 --> 0:10:48.280 with its own supply chain, and that kept delivery really efficient, 0:10:48.320 --> 0:10:51.120 and it decreased the need for maintaining those large inventories 0:10:51.120 --> 0:10:57.120 of computers. In Dell sold it's ten million computer. It 0:10:57.200 --> 0:11:00.440 was by then the fourth largest computer company. It was 0:11:00.480 --> 0:11:06.079 only behind IBM, Hewett Packard and Compact. By the company 0:11:06.120 --> 0:11:08.920 was pulling in a profit just shy of one billion 0:11:09.000 --> 0:11:12.600 dollars and had moved up to number two and in 0:11:14.600 --> 0:11:18.120 Dell would take first place, overtaking Compact as the largest 0:11:18.120 --> 0:11:21.960 seller of desktop PCs. It didn't lead across all kinds 0:11:21.960 --> 0:11:25.000 of PCs like mobile it was not as high, but 0:11:25.080 --> 0:11:28.360 on desktops it was number one. Around this time, the 0:11:28.400 --> 0:11:32.720 annual sales were reaching about twenty five billion dollars. The 0:11:32.760 --> 0:11:36.440 company began to make more specialized computers like servers, including 0:11:36.520 --> 0:11:40.040 data storage servers, which put Dell in more direct competition 0:11:40.080 --> 0:11:43.760 with Hewett, Packard and Sun Microsystems. Compact was also in 0:11:43.760 --> 0:11:48.160 that space. Corporate sales, however, we're starting to plateau, and 0:11:48.240 --> 0:11:51.360 so Dell looked to make a more aggressive move in 0:11:51.440 --> 0:11:54.959 the home consumer space. The company began to slash prices 0:11:55.000 --> 0:11:58.040 on home computers, which prompted something of a price war 0:11:58.160 --> 0:12:00.920 in the home computer industry. To great time to be 0:12:01.040 --> 0:12:03.400 a shopper for a computer at that point, but not 0:12:03.520 --> 0:12:05.160 so great if you were a company trying to make 0:12:05.240 --> 0:12:08.880 money from it. Among Dell's competitors, there was some troubling 0:12:08.960 --> 0:12:13.360 news Hewlett Packard and Compact. We're looking at a merger now. 0:12:13.400 --> 0:12:16.800 That merger was a truly enormous idea. Hewett Packard CEO 0:12:17.040 --> 0:12:21.040 Carly Fiorina had letter company in a twenty five billion 0:12:21.080 --> 0:12:25.280 dollar merger deal with Compact, which was a pretty contentious 0:12:25.400 --> 0:12:29.800 event Within HP. Walter Hewlett, the son of the company's 0:12:29.840 --> 0:12:33.520 co founder, led a campaign and even a stock proxy 0:12:33.600 --> 0:12:38.920 battle against Fiorina opposing this merger. Several shareholders were arguing 0:12:38.960 --> 0:12:41.840 that Compacts business already had a lot of overlap with 0:12:41.920 --> 0:12:44.280 stuff that HP was doing, and that it made no 0:12:44.360 --> 0:12:47.280 sense for HP to get into the low margin computer 0:12:47.360 --> 0:12:51.760 business where you're not making that much profit on a 0:12:51.760 --> 0:12:56.479 pur sale basis. They even pointed out that the main competitor, IBM, 0:12:56.679 --> 0:12:59.920 was actually extricating itself from that very industry. This is 0:13:00.080 --> 0:13:02.040 right around the same time that IBM said, you know what, 0:13:02.200 --> 0:13:07.800 we tried selling to consumers directly to home consumers. Turns 0:13:07.800 --> 0:13:11.680 out that's an unsustainable business market for US, and they 0:13:11.880 --> 0:13:17.319 turned their focus more to giant businesses. The merger ultimately 0:13:17.520 --> 0:13:21.960 caused or exacerbated existing problems for HP, depending upon your 0:13:22.000 --> 0:13:24.640 point of view, and the company would end up losing 0:13:24.640 --> 0:13:28.600 about half of its market value. Fiorina would leave HP 0:13:28.760 --> 0:13:31.800 in two thousand five. The company would later split into 0:13:31.840 --> 0:13:35.000 two different companies, and zd net would refer to the 0:13:35.120 --> 0:13:40.080 HP Compact merger as the biggest merger disaster in tech history. However, 0:13:41.120 --> 0:13:44.120 they are not the one opinion here. There are a 0:13:44.120 --> 0:13:47.040 lot of people who argue opposite. They say it was 0:13:47.040 --> 0:13:50.920 a successful merger, it took time, but that ultimately it 0:13:51.040 --> 0:13:54.000 succeeded in what it was supposed to do, and said 0:13:54.000 --> 0:13:56.760 that the integration of the two companies ultimately worked better 0:13:56.800 --> 0:14:00.120 than what a lot of people were predicting either a 0:14:00.440 --> 0:14:03.000 whether you consider it a success or a failure. And 0:14:03.040 --> 0:14:06.680 it's weird to think that people have such radically different 0:14:06.760 --> 0:14:10.040 views of this merger. Uh. Seeing two of Dell's big 0:14:10.040 --> 0:14:13.800 competitors joined forces probably was a little intimidating at the time. 0:14:14.720 --> 0:14:17.880 The lowest price Dell computer in two thousand one would 0:14:17.880 --> 0:14:23.040 be the five hundred nine dollar smart Step desktop. This 0:14:23.160 --> 0:14:27.320 had an Intel Celeron processor. The Celeron was Intel's low 0:14:27.480 --> 0:14:30.840 end processor. It was meant for less expensive computers, so 0:14:31.040 --> 0:14:33.000 slightly less powerful than the stuff you would find in 0:14:33.040 --> 0:14:35.680 the higher end machines. It came with a hundred twenty 0:14:35.720 --> 0:14:39.040 eight megabytes of RAM, had twenty gigabytes of storage, had 0:14:39.080 --> 0:14:42.480 a CD ROM drive, a fifteen inch cathode ray tube 0:14:42.520 --> 0:14:48.600 monitor the old CRT monitor days those gigantic monitors, and 0:14:48.640 --> 0:14:51.840 it also had Windows XP as the operating system. There 0:14:51.840 --> 0:14:55.240 were no configuration options, so that helped keep the price low, 0:14:55.360 --> 0:14:57.360 but it meant that you know what you bought was 0:14:57.400 --> 0:14:59.520 what you got. You didn't you couldn't configure it and 0:14:59.560 --> 0:15:03.560 make it better. In addition to slashing prices and building 0:15:03.600 --> 0:15:08.240 inexpensive machines, Dell launched a new marketing campaign one I 0:15:08.280 --> 0:15:11.640 remember really well. So there was an actor named Ben 0:15:11.720 --> 0:15:15.760 Curtis who took on a role of a guy named Steve. 0:15:16.480 --> 0:15:18.920 Steve was kind of a a laid back guy who 0:15:19.000 --> 0:15:22.880 had a frightening lye exhaustive knowledge of Dell computers that 0:15:22.960 --> 0:15:28.040 was matched only by his enthusiasm for Dell computers, and 0:15:28.080 --> 0:15:30.720 he would tell people in commercials all about the amazing 0:15:30.760 --> 0:15:34.479 specs of the various computers. Particularly, he would be addressing 0:15:34.520 --> 0:15:39.360 the parents of a student. Hey, Mr and Mrs so, 0:15:39.520 --> 0:15:43.000 and so your son here wants adele and would go 0:15:43.080 --> 0:15:45.240 on to talk about all the amazing features of this 0:15:45.320 --> 0:15:49.360 Dell computer and how it was priced so incredibly low. 0:15:49.920 --> 0:15:51.560 When they were won over by his pitch, he would 0:15:51.600 --> 0:15:55.680 joyfully exclaim, dude, you're getting a Dell. There were more 0:15:55.680 --> 0:15:58.160 than twenty of those commercials, but the ads worked. They 0:15:58.160 --> 0:16:02.080 were popular, They struck nerve, they had the right balance 0:16:02.160 --> 0:16:04.920 of humor and information in them. They got the Dell 0:16:05.080 --> 0:16:08.600 name into a lot more households, and Dell saw increased 0:16:08.680 --> 0:16:12.360 sales in the home consumer market as a result, but 0:16:12.480 --> 0:16:16.520 overall the company was still dealing with a plateau situation. 0:16:16.800 --> 0:16:21.480 In two thousand, Dell's sales reached nearly thirty two billion dollars. 0:16:21.520 --> 0:16:25.000 That's a lot of money. But in two thousand one 0:16:25.240 --> 0:16:29.320 they remained flat. They didn't decline, but they didn't increase either. 0:16:29.600 --> 0:16:33.880 And here's the thing about companies. Shareholders always want to 0:16:33.880 --> 0:16:36.880 see a company grow because it's not enough to do well, 0:16:36.960 --> 0:16:40.920 you have to get bigger because shareholders want their investment 0:16:41.000 --> 0:16:44.760 to increase in value. So in February two thou one, 0:16:45.760 --> 0:16:49.040 Dell held its first major layoff in its history, and 0:16:49.120 --> 0:16:52.920 it cut about seventeen hundred jobs. The company was still 0:16:52.920 --> 0:16:55.800 doing better than many of its competitors were. Some companies, 0:16:55.840 --> 0:16:59.440 like IBM, had already pulled out the consumer market. In 0:16:59.480 --> 0:17:02.520 two thousand one, Kevin Rawlins, the man who had acted 0:17:02.560 --> 0:17:05.760 as a consultant for Dell a few years earlier, became 0:17:05.800 --> 0:17:08.960 the new president of the company. Michael Dell would remain 0:17:09.040 --> 0:17:13.000 the CEO, and Rawlins tried to diversify the company's products. 0:17:13.040 --> 0:17:16.960 He wanted to acquire a data data storage company called 0:17:17.040 --> 0:17:20.359 e m C. The two companies had created a distribution 0:17:20.440 --> 0:17:24.040 deal partnership together, but Rollins felt it would be best 0:17:24.160 --> 0:17:27.119 if Dell acquired this other company, which had been around 0:17:27.160 --> 0:17:31.960 since nineteen Michael Dell, however, did not like this idea, 0:17:32.000 --> 0:17:34.080 and he struck it down multiple times, and they would 0:17:34.160 --> 0:17:38.840 argue about it several times throughout Kevin rawlins tenure as president. 0:17:39.240 --> 0:17:41.359 Rawlins would later say that Dell was worried that this 0:17:41.400 --> 0:17:45.040 acquisition would destabilize the company and It's funny because in 0:17:46.600 --> 0:17:50.360 many years after Rawlins had left the company, Dell did 0:17:50.359 --> 0:17:53.400 in fact acquire E M C for a whole lot 0:17:53.440 --> 0:17:55.800 of money. I'll talk more about that towards the end 0:17:55.800 --> 0:17:59.520 of this episode. Dell did start offering other products, however, 0:17:59.560 --> 0:18:03.480 including stuff like digital audio players, printers, and televisions. This 0:18:03.680 --> 0:18:06.119 was not in the same realm as what Rawlins was thinking. 0:18:06.160 --> 0:18:10.919 He was thinking about infrastructure types of products, things that 0:18:11.000 --> 0:18:13.840 companies would use to run the businesses that they do, 0:18:14.560 --> 0:18:17.320 and Michael Dell was thinking of more sort of consumer 0:18:17.359 --> 0:18:22.520 friendly technologies that were closer in at least in concept, 0:18:22.680 --> 0:18:25.399 to the computers he had been building for years. In 0:18:25.440 --> 0:18:27.919 two thousand three, the company would change its name again, 0:18:28.280 --> 0:18:31.480 now calling itself Dell Incorporated, to help reflect that the 0:18:31.520 --> 0:18:35.800 company was no longer focusing solely on computers. In March 0:18:35.840 --> 0:18:38.720 two thousand four, Michael Dell decided to step down as 0:18:38.760 --> 0:18:41.879 CEO of the company. Kevin Rawlins would take over both 0:18:41.920 --> 0:18:45.719 as president and CEO. Michael Dell, however, would stay on 0:18:45.800 --> 0:18:49.119 as chairman of the board, but ostensibly he had stepped 0:18:49.160 --> 0:18:52.359 back from the daily operation of the company. This is 0:18:52.400 --> 0:18:54.919 not the end of Michael Dell's involvement with the company 0:18:55.000 --> 0:18:59.119 that shares his name. However, Rawlins meanwhile had set some 0:18:59.200 --> 0:19:02.480 really high goals, and in two thousand four he had 0:19:02.520 --> 0:19:04.720 a whole lot of momentum going behind him. He had 0:19:04.760 --> 0:19:07.840 no reason to believe that Dell couldn't hit these goals, 0:19:08.080 --> 0:19:11.040 so he wanted Dell to hit sixty billion dollars in 0:19:11.119 --> 0:19:14.920 revenue by the end of two thousand six and eighty 0:19:14.960 --> 0:19:19.320 billion by two thousand nine at the latest. He also 0:19:19.600 --> 0:19:22.960 was guiding the company to enter into new businesses, including 0:19:23.000 --> 0:19:27.119 providing services and not just hardware. But things did not 0:19:27.560 --> 0:19:31.560 go smoothly. To put it lightly, not that the rough 0:19:31.600 --> 0:19:35.280 times all fall at Rollin's feet and he's not responsible 0:19:35.320 --> 0:19:38.480 for all of it. For one thing, corporations started to 0:19:38.520 --> 0:19:43.439 back off their previously aggressive upgrading and purchasing strategies. A 0:19:43.480 --> 0:19:47.359 lot of companies had been buying computers and upgrading computers 0:19:47.640 --> 0:19:50.879 at a really aggressive schedule. So you might have a 0:19:50.880 --> 0:19:53.760 company by all new computers for its employees and then 0:19:53.840 --> 0:19:57.440 upgrade them a year later. But more companies were starting 0:19:57.440 --> 0:20:00.720 to wait longer to upgrade their machines because the machines 0:20:00.720 --> 0:20:02.800 that were coming out could still do all the work 0:20:02.840 --> 0:20:05.720 that they needed them to do for longer they were 0:20:05.760 --> 0:20:09.320 that fast, so there was less demand for computers, which 0:20:09.359 --> 0:20:11.480 was a huge blow to Dell, which got about eight 0:20:11.680 --> 0:20:15.200 five of all its revenue from its corporate clients, mostly 0:20:15.320 --> 0:20:18.800 in North and South America. On the home consumer front, 0:20:19.240 --> 0:20:22.280 customers were beginning to feel the latest computers in the 0:20:22.280 --> 0:20:26.200 market offered up very few advantages compared to earlier machines. 0:20:26.520 --> 0:20:29.359 They weren't seeing as much innovation in the space, and 0:20:29.520 --> 0:20:33.080 customer service, which was once one of Dell's strongest features, 0:20:33.440 --> 0:20:37.399 was now seen as an eyesore, a chore. Dell was 0:20:37.440 --> 0:20:41.000 pushing more customers toward an online customer support model, and 0:20:41.040 --> 0:20:43.320 the company had started to rely more heavily on customer 0:20:43.359 --> 0:20:48.360 service representatives who were located overseas, so they weren't Customers 0:20:48.359 --> 0:20:52.240 weren't getting the the attention, the personal attention that they 0:20:52.240 --> 0:20:56.880 had in previous generations of Dell products anymore. Dell's competitors 0:20:57.080 --> 0:21:00.560 were doing better. Some of them were relying more heavily 0:21:00.640 --> 0:21:03.760 on retail stores, and Dell obviously had a showed that 0:21:03.920 --> 0:21:07.720 they didn't like the low profit margins they were undercutting 0:21:07.720 --> 0:21:10.440 their own sales. They found that direct cells worked better 0:21:10.480 --> 0:21:13.840 for Dell's model. But the truth of the matter is 0:21:13.960 --> 0:21:17.080 a lot of consumers wanted to be able to see 0:21:17.160 --> 0:21:21.439 and touch the computers they were considering buying before they 0:21:21.520 --> 0:21:24.439 actually put money toward it. And if your business is 0:21:24.440 --> 0:21:29.240 dependent upon orders by phone or online, then the consumer 0:21:29.359 --> 0:21:31.640 never gets a chance to actually try out the computer 0:21:31.800 --> 0:21:35.520 before making that leap, so it became something of a 0:21:35.520 --> 0:21:39.119 barrier for sales at that point. Also, desktops were starting 0:21:39.160 --> 0:21:41.920 to lose steam and notebook computers were starting to become 0:21:41.920 --> 0:21:45.879 more popular, and Dell was lagging behind on notebook computers. 0:21:46.480 --> 0:21:50.480 And finally, Dell had long relied on up selling customers 0:21:50.480 --> 0:21:53.040 with upgrades to basic computers, but by the mid two 0:21:53.080 --> 0:21:56.800 thousand's even a basic computer was more than capable enough 0:21:56.840 --> 0:21:59.840 to do most of the work people needed. You still 0:21:59.840 --> 0:22:02.840 have niche markets like gamers who wanted to have the 0:22:02.840 --> 0:22:05.320 best of the best, but for someone who wanted to 0:22:05.400 --> 0:22:08.800 run word processing, maybe do some web browsing, that kind 0:22:08.800 --> 0:22:11.919 of stuff, they didn't need anything more than a base model, 0:22:12.080 --> 0:22:15.240 so they would buy the cheapest model, and that was 0:22:15.280 --> 0:22:18.119 the one that had the lowest profit margin for the company. 0:22:18.200 --> 0:22:21.520 So Dell was stumbling. An HP was able to regain 0:22:21.560 --> 0:22:24.719 its spot as the largest PC company in the world. 0:22:25.320 --> 0:22:28.120 Dell's stock had hit a high in July two thousand five, 0:22:28.200 --> 0:22:29.879 but by the end of two thousand six the price 0:22:29.920 --> 0:22:33.240 was down thirty seven per cent. Rollins did guide Dell 0:22:33.320 --> 0:22:36.680 into one acquisition that I mentioned in a previous episode 0:22:36.680 --> 0:22:39.840 of tech Stuff. That acquisition happened on March twenty, two 0:22:39.920 --> 0:22:43.119 thousand six. That was when Dell bought the boutique gaming 0:22:43.160 --> 0:22:47.439 computer designer company alien Ware, and alien Ware continues to 0:22:47.480 --> 0:22:51.880 operate as a subsidiary to Dell, largely autonomous, but they 0:22:51.920 --> 0:22:55.280 get to rely heavily on Dell's assets, which is helpful. 0:22:55.920 --> 0:22:58.399 Then in that around that same time, there was a 0:22:58.520 --> 0:23:02.280 video that went viral. As much as videos can at 0:23:02.320 --> 0:23:05.560 that time, it's very widespread. It showed a Dell Notebook 0:23:05.560 --> 0:23:09.480 computer that had burst into flames. Now, the source of 0:23:09.520 --> 0:23:13.080 the problem was a battery, and the battery ultimately came 0:23:13.160 --> 0:23:15.840 from Sony, and Sony ended up having to do a 0:23:15.880 --> 0:23:19.240 big recall on these batteries. But it was a Dell 0:23:19.359 --> 0:23:21.960 Notebook in the video, and that did not help the 0:23:22.000 --> 0:23:25.560 company's image. To make matters worse. In August two thousand six, 0:23:25.920 --> 0:23:28.879 Dell had to disclose that it was under investigation by 0:23:28.920 --> 0:23:32.280 the U S Securities and Exchange Commission a k a. 0:23:32.480 --> 0:23:36.120 The SEC. Even by the end of two thousand six, 0:23:36.240 --> 0:23:39.240 no one really outside of the matter had any idea 0:23:39.280 --> 0:23:41.720 of what the investigation was actually about. They just knew 0:23:41.720 --> 0:23:45.480 what was happening. But even that was enough to cast 0:23:45.520 --> 0:23:48.159 a bit of a pall over Dell. The details of 0:23:48.160 --> 0:23:51.840 the investigation wouldn't become clear until years later. I'll explain 0:23:51.960 --> 0:23:55.200