This newsletter is primarily financially-oriented,  but I thought that this
particular issue might be of interest to folks in here anyway...

* Forwarded (from: netmail) by Roy J. Tellason using timEd 1.10.y2k.
 Gary North's REALITY CHECK

Issue 209                                  January 24, 2003

[If you're planning to buy a computer, you will find this report useful. 
If you own a business, this report will warn you about what policies to
avoid.]

MICHAEL DELL VS. THE RED SCREEN OF DEATH: GATEWAY TO THE FUTURE

Michael Dell's story has become a case study of entrepreneurship.  It is a
business school textbook example of how to get rich.  I am convinced that
his company's story will eventually be in the textbooks as an example of
how the free market brings low what it previously had raised up.  Dell
Computer will become a case study of death by sclerosis and lost vision. 
In short: "Nothing fails like success."

Successful businessmen tend to forget that the consumer is relentless in
his pursuit of his own self-interest.  The buyer keeps asking the seller:
"What have you done for me lately?"  The answer had better be:
"I have always delivered above-average quality for your money." 
If he is in mail-order, he had better add: "With a no-questions-asked
money-back guarantee."

MICHAEL DELL'S ORIGINAL VISION

As a freshman in college in 1984, Michael Dell began assembling customized
desktop computers.  His half of his dorm room was stacked high with
motherboards and hardware.

He had spotted an opportunity.  IBM was selling its desktops for $3,000. 
The parts cost $700.  He made it on the spread.  He quit school after his
freshman year -- just as Bill Gates had four years earlier.  He went into
producing computers full-time.

http://www.businessfans.com/profiles/leaders/dell_michael/biography

It was the right decision.  He is now a multi-billionaire.  

He made his money with a vision of what the small-business world needed in
1984: cheap computer prices, fast delivery, custom features, and good
service.  He could not match a local computer store's instant delivery, but
he
could come close, and he could beat it with a much lower price.

As for service, that was a toss-up.  The buyer didn't know for sure.  He
was not dealing face-to-face with a seller.  This is why a direct-response,
mail-order company must offer a money-back guarantee.  This alone will
overcome the buyer's distrust -- not completely, but enough to get the
first sale, which is crucial.

Service remains a toss-up for Dell.  But today, Dell Computer faces a much
bigger problem: profit margins per sale are paper-thin.  Dell will sell you
a computer for as little as $600, but Microsoft gets the lion's share for
licensing Windows XP.  Economically speaking, Michael Dell is today working
as Bill Gates' operating system salesman. Dell gets rich.  Gates gets
richer.

No small business needs a computer that costs more than $1,200, with bells
and whistles installed.  The price spread has disappeared.  The free market
has done its work. It has turned a unique tool into a common commodity,
priced accordingly: cheap.  There is nothing special about a desktop
computer any more, unless it doesn't work properly.

A COMPANY'S USP

If you ever start a business, you had better decide early what your
business's USP is -- its unique selling proposition.  What is it that your
company brings to the competitive marketplace that sets it apart from your
main rivals?  What is the supreme benefit that it delivers to a customer? 
You should design every aspect of your business to deliver your USP to the
buyer.

You must not attempt to be all things to all people. For example, you
cannot successfully position your company simultaneously as a discount
seller and a premium, top-of-the line retailer.  The confused signals will
paralyze buyers.  You won't get their money.

First, you must target your market: the initial market and your follow-up
market after your company grows. Michael Dell targeted his market: small
businessmen who wanted to buy their first desktop computer, which they knew
they really had to own.  The desire to buy was already there.  IBM and
Compaq had already persuaded buyers of their need to own a desktop
computer.  That hard selling was over.  Now a buyer had only to decide on a
seller.

Second, you must decide what is the hottest hot button of the typical
member of your initial targeted audience. Michael Dell identified this
early: low price.

He had a great USP for his company in 1984: a very low price for a
small-business product.  He also added the following as back-up benefits:
customized assembly, reasonably fast delivery, and good service.  But it
was the low price that drove his sales.  Dell could beat IBM on price. 
Dell could also beat Compaq on price.

The #1 risk with any USP is that market conditions can change.  When you
position your entire product line one way in order to meet the demand of
one segment of the market, and your targeted audience decides that it wants
something else, you will hit a brick wall if you stick with your original
USP.

Dell Computer has finally hit this wall.  With price competition driving PC
profit margins to the level of minuscule, Dell's original USP is dead.  We
can see this in the company's stock price: down.

[Note: the following URL is quite long, and your e-mail program might break
it into two lines. If that happens, you'll have to paste it together for it
to work.]

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=dell&sid=0&o_s
ym b=dell&freq=2&time=10

In February, 2001, FORTUNE ran a long story on Dell's problems.  Here is an
example of business journalism at its best.  If I owned stock in Dell
Computer, I would read all of it twice, even though it's old news, because
Michael Dell has yet to solve the problems that the authors discussed. 
Here was Dell's problem in early 2001.

     Though Dell has moved aggressively into new
     markets, desktops and portables still accounted
     for 83% of its revenues in the fiscal year that
     ended Jan. 28. Its stock, which grew at an
     average annual rate of 97% during the '90s, now
     looks more like Maytag's -- no, worse.  Dell
     shares have been trading in the low-$30 range,
     almost 45% below their high of nearly $60 in
     March.  Maytag, in the low-$30 range, has fallen
     38% from its 52-week high. 

Today, Dell stock now sells in the mid-20's.  Dell's investors would have
been wise in October, 2000, to take the article's warning seriously.  They
should have sold their shares and bought T-bills.  They have lost money by
remaining owners of the company.

Here was their conclusion:

     Nothing lasts forever.  Michael Dell's biggest
     challenge will be to have the discipline to know
     when and how to change what has worked so well up
     to now.  If he does not, it will be just a matter
     of time before another company does a Dell on Dell. 

http://www.fortune.com/fortune/articles/0,15114,373784,00.html

Dell's biggest problem is not that another company will do a "Dell on
Dell."  Its biggest problem is far worse: the entire product line is
no longer more than marginally profitable.  PC's have become a mass-market
commodity.  They are all work pretty much the same.  The features are the
same.  They are all dirt cheap.  There is no significant profit in selling
one at a time.

When one PC is as good as another, and when they will all be made obsolete
within a year, one PC company is as good as another, if all it sells is
PC's.

So, Dell's original USP -- low, low prices for a crucial small-business
tool -- is doomed.  The steady progress of the free market has killed
Dell's USP.  Now what?

RELIABILITY IS NOW THE PREFERRED USP

"The day you get delivery of a new computer, it's obsolete." 
They said this in 1985.  It was true.  It's even more true today.  No one
believes the "act now!" marketing slogan, which is an important
tool in direct-response marketing.  Computer buyers know that if they wait
a month, they'll get a better deal.  But the money they save won't be worth
it, if the computer is necessary for their productivity.  In any case, a PC
is so fast that they won't be able to perceive any difference in the new
one's performance a month from now.  Therefore, buying pressure stems from
the primary use that the computer will be put to, not from its price. 
"Act now!" has little to do with
the computer; it is governed by the buyer's expected use for the computer
-- a factor not under the control of the seller.

A computer's price today is essentially irrelevant as a way to distinguish
one brand from another.  The price difference is almost irrelevant to the
buyer.

What worries a business user most is down-time.  He can lose far more money
during down time than the retail cost of the computer.  This is why
computers had better be reliable.  It is usually cheaper to buy a new
computer than it is to fix it.  The down time -- transit time -- is what
scares the businessman.

Dell and other computer companies sell extended warranties.  This is where
they make a big chunk of their profit per sale.  But if it ever looks as
though a computer firm is stiffing the user, despite the warranty, that
firm will lose market share.  "Stiffing the business computer
user" means "eating up his time."  He doesn't care most
about money.  He cares most about down time and time spent on call-waiting.

High reliability is different from good service.  Good service means this:
"We fix it fast for free."  Reliability means this: "You
won't need our terrific service."

Maytag made a USP out of this user benefit.  This USP had a symbol: the
lonely Maytag repairman.  (He was played by Jesse White, who never seemed
to grow old on-screen, from "Harvey" until the year he died.  He
was perfect for Maytag: "No repairs needed" on him, either.) 
Maytag's USP was accurate.  We still own a Maytag washer that my wife
bought, used, in 1976.  We did have to replace a belt about 15 years ago.

Computer service policies are changing fast.  Today, large American
companies are hiring Indians to do service by phone.  The cost of
long-distance phone lines is low. These foreign workers are happy to earn
$250 a month.  Some of them speak American-sounding English.  Others -- the
technicians -- don't have to.  Everyone expects a computer technician to be
either Indian or Chinese.  If he sounds like an American, the caller might
think he is less competent.

A businessman wants fast service.  But far more important to him is product
reliability.  If word gets out that users are suffering from reliability
problems, it's the kiss of death.

(Snip...)

THE BLUE SCREEN OF DEATH

I bought a Dell laptop three months ago.  It has never worked properly.  It
produces a blue screen every few minutes.  Then it shuts down.

I did not initially try to send it back.  I was not using it yet.  I had
bought it to take on a trip to China, but the trip fell through.  So, I
waited for my son to come home for Christmas.  He is a full-time
microcomputer repairman.  He knows his stuff.  He goes on-site to fix
really messed-up systems.

He tried to get the unit to work.  He spent hours.  He told me that the
blue-screen problem is a familiar affliction of Windows.  It's called the
blue screen of death.  It is so common that it has an acronym: BSOD.  I
searched Google for "blue screen of death."  Here are a couple of
reports.  This one is old.

     The blue screen of death is a rather terrifying
     display image containing white text on a blue
     background that is generated by Windows operating
     systems when the system has suddenly terminated
     with an error. The system is locked up and must
     be restarted. The blue screen may include some
     hexadecimal values from a core dump that may help
     determine what caused the crash. 

     The blue screen of death can strike anywhere. At
     the Comdex trade show, Microsoft Chairman Bill
     Gates encountered the blue screen during a
     demonstration of Windows 98. (He had a spare
     computer standing by.) 

http://whatis.techtarget.com/definition/0,289893,sid9_gci214376,00.html

Now, in a lighter vein, or as MAD MAGAZINE originally put it, "humor
in a juggler vein," we read. . . .

     Are you tired of the same old blue screen of
     death? Well say good-bye blue screen and hello to
     green screen, or purple screen, or black screen
     of death! Just download this simple little
     utility called BSOD Properties and select your
     favorite color. 

     This program makes use of some old Windows 3.1
     options in the system.ini file that have been
     long forgotten, but are still present in Windows
     95, 98, and ME. Unfortunately this program has no
     effect on Windows NT 3.x, 4, 2000, or XP. 

http://toastytech.com/files/bsod.html

I had paid good money ($1,500) for the laptop.  I now want an exchange, or
at least a factory repair.  I do not trust software-hardware problems, for
each seller blames the other.  (Gateway last year used a TV dramatization
of this problem to promote its computer-sales stores in preference to phone
ordering -- a very persuasive ad.)

I called Dell service.  It took a long time to get through.  The phone line
sounded like it was going through several switching systems.  I finally got
a very polite Indian on the line.  He spoke that wonderful, lilting
Sanskrit-derived version of English.  Problem: he had a script, and he
stuck to that script.

"This is an operating system problem."  I suspected this.  I
explained that I wanted to send the unit back and get a machine that didn't
have the problem.  "Do you have your machine in front of you?" 
No; it's at my home. "Please get your machine in front of you." 
But it is at my home.  "Please get your machine in front of you."
 But I just want to send it back for an exchange or to get the factory to
repair it.  My son couldn't, and he makes his living repairing computers. 
"This is an operating system problem.  Do you have your machine in
front of you?"

I suspect that hell is administered by Indian bureaucrats.  Pakistanis back
them up with force.  This is their one area of cultural solidarity.

I decided that this was a dead end.  So, I sent Dell's Customer Division a
letter explaining my situation.  I described my son's time spent in trying
to repair the unit. I also took care to mention that I have a subscriber
base
of 50,000 readers, and that I have previously recommended Dell products.  

A week later, I got a call from N.  N. is female.  She sounded about 24
years old.  She asked if I had contacted technical support.  I told her
about my experience with the Indian with the script.  I told her that I
assumed that Dell was now using service people in India.  She did not
correct me or indicate otherwise.  I reminded her about my son's failure. 
"What procedures did he go through?"  Not surprisingly, I didn't
know.  "You must contact technical support."  I explained that I
would do this if she would give me a phone number that does not take 15
minutes to get through to someone.  She offered none.  She reiterated that
I had to go to technical support.

Here is N., earning maybe $9 an hour, talking with an unhappy customer with
50,000 subscribers.  Did this statistic register on her thinking?  Of
course not.  Her job is to direct calls back to India.  She does her job
efficiently.  Future sales?  Not her department.  Good will?  Not her
department.  Helping to move Dell's USP from low price to high reliability?
 Not her department.

Here is what she was really saying:

     "You paid for a warranty.  Boy, were you dumb! 
     You expected our technical support staff to
     repair your computer on-site.  Are you nuts?  Why
     do you think we hired our support staff in India? 
     They are paid $1.50 an hour to show you how to
     solve this problem, despite the fact that this
     particular problem that is so entrenched that
     Microsoft hasn't solved it since at least Windows
     95, and despite the fact that your son was unable
     to solve it.  The BSOD hits some computers, but
     not others.  You bought one that is vulnerable. 
     Tough bananas, Bozo.  It's your problem, not
     ours.  Go through our "put these callers on hold"
     hoops, or else take the $1,500 hit.  And, by the
     way, tell all 50,000 of the losers on your
     mailing list that I said so.  If they want a new
     computer, they can either do it Dell's way or buy
     it from Gateway.  I, for one, couldn't care less. 
     I get my $9 an hour either way."

I understand that large companies need procedures. But someone in every
chain of command had better be given the authority to bypass standard
routines.  This means that someone beneath him/her has to recognize
situations that cry out, "Pass this request up to someone making $15
an hour."  It was clear to me that N. saw her job as passing
responsibility back to someone in India making about $1.50 an hour.

NEW GUYS ON THE BLOCK

Dell Computer is now facing the same problem that IBM's Boca Raton PC plant
was facing when Michael Dell was a freshman: an inability to respond
effectively to new market conditions.  IBM in 1984 had procedures in place.
It had scripts.  But IBM has not been a major player in the PC market since
about 1988.

A teenage kid from Houston cost IBM Boca Raton whatever fortune was left
over after Compaq, also from Houston, had creamed IBM by introducing the
first 386-chip desktop.  The mainframe division at Armonk had seen what was
coming: desktops from Boca Raton's plant would outperform IBM's entry-level
mini-computer, the System 36. So, they made sure that Boca Raton didn't
introduce new PC's as fast as was technically possible.  Anyway, that was
the rumor at the time.  Whatever the reason for the delay, the result was
clear by 1988: Compaq, Dell, Gateway, and Hewlett-Packard had taken over
the PC market.

The genius of the free market, from the consumer's point of view, is that
newcomers are usually nipping at the heels (or higher) of large,
profitable, well-established firms.  Microsoft appears to be immune from
this law, but in China, open-source operating systems like Linux are being
used widely.  The price is right in a poor nation: free.  The biggest
market on earth will be lost for Microsoft.  The only thing that may keep
this from happening is Chinese piracy: stolen Microsoft software. Once
there is an installed base of Microsoft products, Chinese users may become
dependent on them.  But, at least
officially, Microsoft is fighting Asian piracy.

When open-source, Linux-based programs finally get icon-based interfaces,
and when they can accurately import data from existing Microsoft files,
Microsoft will go the way of Apple.  Then Bill Gates, Steve Jobs, and
Michael Dell can meet for lunch at the Innovation Retirement Center and
talk about the good old days.

As I said before, Michael Dell is now working for Bill Gates.  He sells
Microsoft operating systems in his boxes. For all of his trouble, he now
gets hit with the blue screen of death.  Anyway, Dell computer owners get
hit.

CHANGING THE USP

It is rare for a company to successfully exchange its USP for a new one,
but Dell had better do it, and fast. When the price of any item falls so
far that buyers can no longer distinguish one seller from another, sellers
must find some other way to tell buyers, "Buy from me."  Sellers
must offer cogent reasons for buyers to buy.

Dell has to sell something else besides price.  If it's selling service,
it's selling service by way of India, which means phone time spent on hold.
 It means that businessmen must become unpaid computer repair co-workers. 
"Do you have your machine in front of you?"

Dell had better sell reliability.  Because, when it comes to consumer
support, Dell has become "Not my department."

Next time, I'll buy from Gateway.  I will then have a local store to return
a blue-screen machine to, where I can say, "It's under warranty.  Fix
it."  

WE CAN SEE DELL'S PROBLEM IN DELL'S TV ADS

When Gateway ran that ad last fall with some helpless schmoe on the phone,
caught between the hardware guy ("It's a software problem") and
the software lady ("It's a hardware problem"), it was clear to me
that Gateway's ad agency had put Dell into its cross-hairs.

Take a close look at Dell's latest TV ads.  They are multimillion-dollar
revelations of the extent of Michael Dell's confused vision.  They verify
what Dell's stock price indicates.  The Christmas ad featured a Dell
salesman in his very early 20's.  He was on the phone.  He was talking to
his father (or some adult), who is in a computer store.  Gateway?  Best
Buy?  Circuit City?  The guy in the store is being pressured to buy . . .
by a robot.  The robot was handing him a candy cane.  Message: "Buy
from some kid on the phone.  Don't go into a local computer store, where
you will be pressured by a salesman no smarter than a robot."

Here is another Dell ad.  A small high school group comes to visit a Dell
office.  (Oh, boy!  A field trip!  A significant learning experience!  We
knew better by age 12, but Dell's ad agency thinks this is powerful imagery
of an
educational experience.)  The students see a guy not much older than they
are.  He sells computers on the phone. Wow, are they impressed!  Even the
tattle-tale girl, who represents all of the tattle-tale girls who ever
ratted on us, is impressed by the end of the ad.  With her
"testimonial," I'm supposed to buy from Dell.

What on earth was the ad agency thinking of, and why did Dell approve the ad?

It never occurs to Michael Dell to locate a dozen business owners who have
bought from Dell for 15 years and who have built their businesses with Dell
computers.  He then tells the ad agency to send in a camera crew and get
testimonials.  Then Dell runs one testimonial ad each month.  Instead, Dell
paid an ad agency to pay an actress to play a tattle-tale girl who finally
accepts the fact that buying from Dell is OK.  We'll believe her!

Michael Dell has grown so rich that he has forgotten how he got rich.  He
didn't get rich because of what he learned on a high school field trip.

These ads are not the worst ads I have ever seen.  But they are the most
revealing ads I have ever seen.  They reveal a very rich man who has lost
all sense of what his once-innovative company is all about in today's
market. They reveal a founder in search of a new USP for his company.  Here
is what those ads tell me:

1. Dell is targeting first-time home-computer buyers, not businesses.

2. Dell is trying to persuade viewers that talking on the phone to
22-year-old boys -- all Anglos -- is a better way to shop than going into a
store.

3. Dell is trying to persuade viewers that at a store, they will get
pressured by uncaring, ignorant salesmen.

First, it's the wrong audience.  There is no money in first-time
home-computer buyers.  Even if there were, they still prefer to buy at a
local store where they can talk to 22-year-old Anglos who look them in the
eye.

[Customers prefer to buy products from people, not from organizations. 
They trust people, not organizations.]

Second, if you don't sell a product line that works every time, right out
of the box, you had better not have a support staff located in India.  You
had also better not train 24-year-old girls to re-direct legitimately irate
buyers back to India.

[Customers pay for warranties in order to have specialists fix broken
products.  Car companies do not expect customers to fix their cars with the
help of car repairmen guiding them verbally over the phone.  Neither do
appliance companies.]

Third, Dell is fighting an uphill marketing battle. Buying in a store means
that the buyer is buying from a human being who can be held responsible for
a warranted product that doesn't work as advertised.

[Nobody on a phone can be held responsible for anything.  If a low price is
a significant factor for a buyer, then he may risk buying over the phone. 
When price differences are minimal, he wants to buy from someone he can
hold responsible.]

Michael Dell is trying to sell the old way: over the phone.  He is trying
to do sell to a market that is radically different from 1984: non-business
people who are first-time buyers.  These are high-risk buyers for Dell:
unskilled, late-coming adults who are not buying with business-generated
money.  They have no in-house support staff.

These people are not time-sensitive in the way that businessmen are.  They
will patiently wait for their calls to India to get through.  So, Dell is
restructuring its technical support system for these people.  Dell is
treating its business buyers as if they were home computer users.  Dell is
telling the firm's core buyers: "If you want help from us, go to
India!"

I'd rather go to Gateway.

Dell is sending out conflicting signals: TV ads for racks of servers
(bought by very large businesses) and ads for befuddled adults who are
buying their first home computer.  This is evidence of a company in deep
trouble and an ad agency in high cotton.  Dell Computer no longer has any
identifiable USP.  It is now trying to be all things to all people.  This
will produce a lot of red ink.

Call it the red screen of death.

CONCLUSION

To Dell Computer's Third Vice President in Charge of Passing the Buck on
Consumer Complaints, who is now reading this report, I say: "This
really is your department.  Fix it."

To Gateway's ad agency, I say: "You're on target.  Do it again.  The
brush-off lady was especially choice."

(Snip...)
     
---