Dell and HP in a reversal of fortune

The structure of the personal computer business used to be a no-brainer: Dell, the low-cost discounter, was the growth story with the die-hard following on Wall St, and Hewlett-Packard was the troubled giant with the dwindling profit margins and the single-digit share price.

A lot has happened over the past year or so, however, and now those traditional roles have been reversed: HP has become a much stronger competitor under new chief executive officer Mark Hurd, and its share price has climbed by more than 50 per cent, while Dell is the one that has come under fire from analysts for slowing growth and falling profit margins.

Two tangible signs of how bad things have become for Dell came last week as the former stock-market superstar announced its first-quarter financial results. The first was fairly obvious: Dell founder and chairman Michael Dell said the company's profit fell by 18 per cent over the same period a year earlier.

Although the reduced profit matched expectations, that was only because the computer maker had chopped its forecast in the weeks leading up to its latest report. Dell admitted that the poor performance was a result of intensified competition.

"We didn't recognise how competitive the market was going to be [last year]," the billionaire said several days before Dell announced its results. Not only did the company's profit drop by double digits, but its revenue was also rather anaemic-looking, compared with what the market has come to expect.

Sales rose by just 6 per cent over the same period a year earlier, when in the past Dell used to turn in revenue growth of 15 to 20 per cent per quarter. And the market has taken notice: Dell's stock is down by more than 35 per cent over the past year, while the share price of HP has climbed more than 50 per cent.

The other tangible sign that Dell is not the company it used to be was an announcement that the computer maker will start using chips from Advanced Micro Devices in some of its corporate server products. This might not sound that important, but Dell has always had an exclusive arrangement with microprocessor giant Intel.

While there have been rumours over the past year that Dell was about to break that exclusivity and start buying chips from AMD as well, the company has steadfastly denied them. Now, some analysts believe it's only a matter of time before Dell starts using AMD processors in some of its core PC products.

Dell's commitment to using Intel chips was obviously part of a deal with Intel, and one for which it no doubt got a substantial discount. Industry watchers said that by opening the door to AMD, Dell was clearly looking for either a cheaper offer, or a combination of lower cost and better performance that might give its PCs an edge.

In another move that got analysts wondering about its long-term strategy, Dell recently bought Alienware, the high-end maker of performance PCs - a company at the opposite end of the spectrum from Dell.

"Dell needs to wake up," said David Schamens of Invictus Funds. "They really need to re-evaluate what has gone wrong and correct it. It used to be sort of a secret that something wasn't right [at Dell] about a year ago. Now it is a very open secret."

American Technology Research analyst Shaw Wu says the company could return to double-digit growth, but that to do so it would have to find a way to become the low-cost leader again. "They've lost that edge obviously," Wu said recently, "but it doesn't mean they can't get it back."

Using AMD chips is clearly an attempt to try and do that, and so are some of the restructuring moves the company has announced recently, including increased use of components from Taiwan, which chief executive Kevin Rollins said would allow Dell to push prices even lower and pick up some of the market share it has lost to HP.

In the most recent quarter Dell's share of the PC market dropped to 16.5 per cent from 16.9 per cent, while HP's rose to 14.9 per cent from 13.8 per cent.

Dell is still the global leader, but its lead has shrunk - and the risk is that as HP becomes more efficient, it is increasingly able to match Dell's prices. The reversal of fortune between the two competitors may not be permanent, but Dell is having to work harder to maintain a market lead that used to be taken for granted.