Feb 4, 2022
Dell is one of the largest technology companies in the world, and it all started with a small startup that sold personal computers out of Michael Dell's dorm room at the University of Texas. From there, Dell grew into a multi-billion dollar company, bought and sold other companies, went public, and now manufactures a wide range of electronics including laptops, desktops, servers, and more.
After graduating high school, Michael Dell enrolled at the University of Texas at Austin with the idea that he would some day start his own company. Maybe even in computers. He had an Apple II in school and Apple and other companies had done pretty well by then in the new microcomputer space. He took it apart and these computers were just a few parts that were quickly becoming standardized. Parts that could be bought off the shelf at computer stores. So he opened a little business that he ran out of his dorm room fixing computers and selling little upgrades. Many a student around the world still does the exact same thing.
He also started buying up parts and building new computers. Texas Instruments was right up the road in Dallas. And there was a price war in the early 80s between Commodore and Texas Instruments. Computers could be big business. And it seemed clear that this IBM PC that was introduced in 1981 was going to be more of a thing, especially in offices. Especially since there were several companies making clones of the PC, including Compaq who was all over the news as Silicon Cowboys, having gotten to $100 million in sales within just two years.
So from his dorm room in 1984, Dell started a little computer company he called PCs Limited. He built PCs using parts and experimented with different combinations. One customer led to another and he realized that a company like IBM bought a few hundred dollars worth of parts, put them in a big case and sold it for thousands of dollars. Any time a company makes too much margin, smaller and more disruptive companies will take the market away. Small orders turned into bigger and ones and he was able to parlay each into being able to build bigger orders.
They released the Turbo PC in 1985. A case, a mother board, a CPU, a keyboard, a mouse, some memory, and a CPU chip. Those first computers he built came with an 8088 chip. Low overhead meant he could be competitive on price: $795. No retail store front and no dealers, who often took 25 to 50 percent of the money spent on computers, let the company run out of a condo. He’d sold newspapers as a kid so he was comfortable picking up the phone and dialing for dollars. He managed to make $200,000 in sales in that first year. So he dropped out of school to build the company.
To keep costs low, he sold through direct mail and over the phone. No high-paid sellers in blue suits like IBM, even if the computers could run the same versions of DOS. He incorporated as Dell Computer Company in 1987, started to expand internationally, and on the back of rapid revenue growth and good margins. They hit $159 million in sales that year. So they took the company public in 1988. The market capitalization when they went public was $30 million and quickly rose to $80 million. By then we’d moved past the 8088 chips and the industry was standardizing on the 80386 chip, following the IBM PS/2. By the end of 1989 sales hit $250 million.
They needed more Research and Development firepower, so they brought in Glenn Henry. He’d been at IBM for over 20 years and managed multiple generations of mid-range mainframes then servers and then RISC-based personal computers. He helped grow the R&D team into the hundreds and quality of computer went up, which paired well with costs of computers remaining affordable compared to the rest of the market.
Dell was, and to a large degree still is, a direct to consumer company. They experimented with the channel in the early 1990s, which is to say 3rd parties that were authorized to sell their computers. They signed deals to sell through distributors, computer stores, warehouse clubs, and retail chains. But the margins didn’t work, so within just a few years they cancelled many of those relationships. Instead they went from selling to companies to the adjacent home market.
It seems like that’s the last time in recent memory that direct mailing as a massive campaign worked. Dell was able to undercut most other companies who sold laptops at the time by going direct to consumers. They brought in marketing execs from other companies, like Tandy. The London office was a huge success, bringing in tens of millions in revenue, so they brought on a Munich office and then slowly expanded into tother countries. They were one of the best sales and marketing machines in that direct to consumer and business market. Customers could customize orders, so maybe add a faster CPU, some extra memory, or even a scanner, modem, or other peripheral. They got the manufacturing to the point where they could turn computers around in five days. Just a decade earlier people waited months for computers.
They released their first laptop in 1989, which they called the 316LT. Just a few years earlier, Michael Dell was in a dorm room. If he’d completed a pre-med degree and gotten into medical school, he’d likely be in his first or second year. He was now a millionaire; and just getting started.
With the help of their new R&D chief, they were able to get into the server market where the margins were higher, and that helped get more corporate customers. By the end of 1990, they were the sixth largest personal computer company in the US. To help sales in the rapidly growing European and Middle Eastern offices, they opened another manufacturing location in Ireland. And by 1992, they became a one of the top 500 companies in the world. Michael Dell, instead of being on an internship in medical school and staring down the barrel of school loans, was the youngest CEO in the Fortune 500.
The story is almost boring. They just grow and grow. Especially when rivals like IBM, HP, Digital Equipment, and Compaq make questionable finance and management choices that don’t allow those companies to remain competitive. They all had better technology at many times, but none managed to capitalize on the markets. Instead of becoming the best computer maker they could be, they played corporate development games and wandered away from their core businesses. Or like IBM they decided that they didn’t want to compete with the likes of Dell and just sold off their PC line to Lenovo. But Dell didn’t make crappy computers.
They weren’t physically inspiring like some computers at the time, but they got the job done and offices that needed dozens or hundreds of machines often liked working with Dell. They continued the global expansion through the 90s and added servers in 1996. By now there were customers buying their second or third generation of computer, going from DOS to Windows 3.1 to Windows 95. And they did something else really important in 1996: they began to sell through the web at dell.com. Within a few months they were doing a million a day in sales and the next year hit 10 million PCs sold.
Little Dell magazines showed up in offices around the world. Web banners appeared on web pages. Revenues responded and went from $2.9 billion in 1994 to $3.5 billion in 1995. And they were running at margins over 20 percent. Revenue hit $5.3 billion in 1996, 7.8 in 1997, 12.3 in 1998, 18.2 in 1999, and $25.3 in 2000. The 1990s had been good to Dell. Their stock split 7 times. It wouldn’t double every other year again, but would double again by 2009.
In the meantime, the market was changing. The Dell OptiPlex is one of the best selling lines of computers of all time and offers a glimpse into what was changing. Keep in mind, this was the corporate enterprise machine. Home machines can be better or less, according to the vendor. The processors ranged from a Celeron up to a Pentium i9 at this point.
Again, we needed a mother board, usually an ATX or a derivative. They started with that standard ATX mother board form factor but later grew to be a line that came in the tower, the micro, and everything in between. Including an All-in-one. That Series 1 was beige and just the right size to put a big CRT monitor on top of it. It sported a 100 MHz 486 chip and could take up to 64 megabytes of memory across a pair of SIMM slots. The Series 2 was about half the size and by now we saw those small early LCD flat panel screens. They were still beige though.
As computers went from beige to black with the Series 3 we started to see the iconic metallic accents we’re accustomed to now. They followed along the Intel replacement for the ATX motherboard, the BTX, and we saw those early PCI form factors be traded for PCIe. By the end of the Series 3 in 2010, the Optiplex 780 could have up to 16 gigs of memory as a max, although that would set someone back a pretty penning in 2009. And the processors came ranging from the 800 MHz to 1.2 GHz. We’d also gone from PS/2 ports with serial and parallel to USB 2 ports and from SIMM to DIMM slots, up to DDR4 with the memory about as fast as a CPU.
But they went back to the ATX and newer Micro ATX with the Series 4. They embraced the Intel i series chips and we got all the fun little metal designs on the cases. Cases that slowly shifted to being made of recycled parts. The Latitude laptops followed a similar pattern. Bigger faster, and heavier. They released the Dell Dimension and acquired Alienware in 2006, at the time the darling of the gamer market. Higher margin hardware, like screaming fast GPU graphic cards. But also lower R&D costs for the Dell lines as there was the higher end line that flowed down to the OptiPlex then Dimension.
Meanwhile, there was this resurgent Apple. They’d released the iMac in 1998 and helped change the design language for computers everywhere. Not that everyone needed clear cases. Then came the iPod in 2001. Beautiful design could sell products at higher prices. But they needed to pay a little more attention to detail. But more importantly, those Dells were getting bigger and faster and heavier while the Apple computers were getting lighter, and even the desktops more portable. The iPhone came in 2007. The Intel MacBook Air came 10 years after that iMac, in 2008. The entire PC industry was in a race for bigger power supplies to push more and more gigahertz through a CPU without setting the house on fire and Apple changed the game. The iPad was released in 2010. Apple finally delivered on the promise of the Dynabook that began life at Xerox PARC.
Dell had been in the drivers seat. They became the top personal computer company in 2003 and held that spot until HP and Compaq merged. But their spot would never be regained as revenue slowed from the time the iPad was released for almost a decade, even contracting at times. See, Dell had a close partnership with Intel and Microsoft. Microsoft made operating systems for mobile devices but the Dell Venue was not competitive with the iPhone. They also tried making a mobile device using Android but the Streak never sold well either and was discontinued as well.
While Microsoft retooled their mobile platforms to compete in the tablet space, Dell tried selling Android tablets but discontinued those in 2016. To make matters worse for Dell, they’d ridden a Microsoft Windows alliance where they never really had to compete with Microsoft for nearly 30 years and then Microsoft released the Surface in 2012. The operating systems hadn’t been pushing people to upgrade their computers and Microsoft even started selling Office directly and online, so Dell lost revenue bundling Office with computers.
They too had taken their eye off the market. HP bought EDS in 2008, diversifying into a services organization, something IBM had done well over a decade before. Except rather than sell their PC business they made a go at both. So Dell did the same, acquiring Perot Systems, the company Perot started after he sold EDS and ran for president, for $3.9 billion, which came in at a solid $10 billion less than what HP paid for EDS.
The US was in the midst of a recession, so that didn’t help matters either. But it did make for an interesting investment climate. Interest rates were down, so large investors needed to put money to work to show good returns for customers. Dell had acquired just 8 companies before the Great Recession but acquired an average of 5 over each of the next four years. This allowed them to diversify, And Michael Dell made another savvy finance move, he took the company private in 2013 with the help of Silver Lake partners. 5 years off the public market was just what they needed. 2018 they went public again on the backs of revenues that had shot up to to $79 billion from a low of around $50 billion in 2016. And they exceeded $94 billion in 2021.
The acquisition of EMC-VMware was probably the most substantial to $67 billion. That put them in the enterprise server market and gave them a compelling offer at pretty much every level of the enterprise stack. Although at this point maybe it remains to be seen if the enterprise server and storage stack is still truly a thing.
A Dell Optiplex costs about the same amount today as it did when Dell sold that first Turbo PC. They can be had cheaper but probably shouldn’t. Adjusted for an average 2.6 percent inflation rate, that brings those first Dell PCs to just north of $2,000 as of the time of this writing. Yet the computer remained the same, with fairly consistent margins. That means the components have gotten half as expensive because they’re made in places with cheaper labor than they were in the early 1980s. That means there are potentially less components, like a fan for certain chips or RAM when they’re memory integrated in a SoC, etc.
But the world is increasingly mobile. Apple, Google, and Microsoft sell computers for their own operating systems now. Dell doesn’t make phones and they aren’t in the top 10 for the tablet market. People don’t buy products from magazines that show up any longer. Now it’s a quick search on Amazon. And looking for a personal computer there, the results right this second (that is, while writing this paragraph) showed the exact same order as vendor market share for 2021: Lenovo, followed by HP, then Dell. All of the devices looked about the same. Kinda’ like those beige injection-molded devices looked about the same.
HP couldn’t have such a large company exist under one roof and eventually spun HP Enterprise out into its own entity. Dell sold Perot Systems to NTT Docomo to get the money to buy EMC on leverage. Not only do many of these companies have products that look similar, but their composition does as well. What doesn’t look similar is Michael Dell. He’s worth just shy of $60 billion dollars (according to the day and the markets). His book, Direct From Dell is one of the best looks at the insides of a direct order mail business making the transition to early commerce one can find. Oh, and it’s not just him and some friends in a dorm room. It’s 158,000 employees who help make up over a $42 billion market cap. And helped generations of people afford personal computers. That might be the best part of such a legacy.