The Texas 100: Revenge of the Nerd

Emphasizing substance over style, Michael Dell taught rival Compaq a thing or two about success in the computer business. Now he’s got his sights set on IBM.

September 1992By Comments

MICHAEL DELL WAS EIGHT YEARS old the first time he held a microchip in his hand. It was 1973, and the chip was part of a pocket calculator, which in those days was a bulky basic number-cruncher—nothing like the sleek, versatile machines of today. But young Dell was intrigued. “It was a National Semiconductor model that I paid, like, forty-two dollars for,” he recalls. “All it did was add, subtract, multiply, and divide, and it didn’t do that very well. You put in twenty-two divided by seven and it would say three—you know, come close. I used to do my math homework and then pull out my calculator when my parents weren’t looking to see if I got it right.”

Nearly two decades later, Dell has moved beyond calculators, but he’s still getting it right. His Austin-based Dell Computer Corporation, less than a decade old, has made him an industry supercelebrity on the order of Microsoft’s Bill Gates and Next’s Steve Jobs. His net worth—now about $220 million—put him on the Forbes 400 list at the unripe age of 27. (He is the youngest person, for the fourth year in a row, on the Texas 100 list.) His corporate sales—$890 million in 1991, a jump of $344 million over 1990—make his company one of the nation’s fastest growing, worthy of a Fortune cover story last October. This year Dell Computer is, for the first time, on the Fortune 500 list of America’s largest corporations—with Dell the youngest chief executive in the history of those formidable rankings. And all in the throes of a recession.

How has Michael Dell done it? Unlike Gates and Jobs, who made their mark with operating systems, Dell made his with marketing. In the early eighties, as the personal computer (PC) industry was first taking shape, Dell identified an undiscovered market of people like himself—basement tinkerers interested in technology for technology’s sake—and furiously courted their business. Because he was one of them, he knew what sort of products appealed to them, and he could speak their language; retail computer salespeople didn’t and couldn’t. In the mid-eighties, when other computer companies grew to mammoth proportions, alienating individual customers in favor of corporate clients, Dell stayed small, undersold the competition, and focused on intimate personal attention, installing a free sales-and-service telephone line that rivals would later copy. Today, as perennials IBM and Compaq are downsizing and restructuring, Dell is gobbling up market share, expanding into Europe, and rolling out a new low-cost line of computers.

By now the story of Michael Dell’s childhood start is well known. He grew up in west Houston, the son of an orthodontist father and a stockbroker mother. He fiddled with his first computer at age thirteen, in seventh-grade math class; from there his interest only grew. At age fifteen, while his friends were coveting ten-speed bikes and baseball mitts, he saved $2,000 from his job selling newspaper subscriptions and bought himself an Apple II PC. At age seventeen, while other seniors at Memorial High were planning college applications and prom dates, Dell was hanging out with other weird myopic kids in neighborhood computer stores—and criticizing the way they were run. “It was a joke,” he recalls. “It’s like you’re playing with these computers and you understand them. Then you go into this store, and there’s some guy sitting there who doesn’t know what a computer is. And you have to pay him a thirty percent markup. It made no sense.”

During his last year at Memorial, Dell was also writing computer programs for anyone who would buy them. (One such program, purchased by the Houston Post, culled potential newspaper subscribers from lists of new home buyers.) His efforts earned him $18,000 and allowed him to buy a BMW—success he had predicted to friends that year, when he bragged that he would be the first millionaire in their class. For his yearbook picture, Dell posed hunched over the Apple II, his black hair wildly frizzy, his eyes hidden behind thick glasses. The caption: “Senior computer wizard Dell is really good.”

After high school, Dell enrolled at the University of Texas at Austin, but his entrepreneurial mind wouldn’t let him concentrate on his freshman classes. He had already traded in his Apple for an IBM PC, which he’d modified with a hard-disk drive, a procedure for which dealers were charging $1,500. By searching out bargains in wholesale catalogs, Dell could do the same for other people—assemble their drive kits—and turn a healthy profit: $1,200 a pop, sold through ads in newsletters. By the time his parents came to visit over spring break, he’d quit buying schoolbooks and was grossing $50,000 a month.

Dell begged his parents to let him drop out of school, convinced that he could make his fortune in the computer business. They agreed to let him pursue his “hobby” full-time during the summer vacation and see how it went. He continued to buy up and refit early IBM models, hawking his wares in newsletters and magazine ads. By the end of the summer, he had grossed more than $700,000 and moved out of the dormitory. “When I started out,” he recalls, “I was selling to customers who were kind of like me. They were knowledgeable people who looked in the back of magazines for stuff. And those people are real vocal: They’re going to tell you exactly how they feel. I figured if we can take care of those people, we can take care of anybody.”

Taking care of people, however, meant offering more than second-hand systems—so in 1985, Dell hired a small team of Austin engineers and designed his own PC clone, a cheap knockoff of the best-selling model pioneered by IBM. But he made no effort to get it into computer stores; he continued to believe they were a joke. “I saw the lack of service they provided,” he says, “and I saw the increased number of users who were knowledgeable. In 1984 there weren’t many, but it was pretty obvious that there would be more in 1986, and a lot more in 1988, and by 1990, there would be tons of them. And it was obvious that the overhead of a store was very burdensome. I’d read about the corner TV stores of the fifties—how they all disappeared. So it seemed obvious to me that these computer stores were not going to be around in five or ten years.”

The future that looked so obvious to Dell called for a new way of doing business, and he had one: telephone and mail sales. Computers, after all, could be put in boxes and shipped overnight, direct to customers. If they had any questions or problems, they could simply call back. It was another of those eminently sensible ideas that would shape the modern computer industry. That first year, Dell sold $34 million worth of PCs, at prices one third lower than IBM’s or Compaq’s, mostly to fussy, cost-conscious nerds. Two years later, when his company went public, he was doing $160 million in mail-order sales, and a dozen other cheap clone-makers were copying his strategy.

But Michael Dell loved computers too much to be satisfied slapping together generic knockoffs with Korean circuit boards and Malaysian power supplies: He wanted to be an industry leader. So in 1988 he hired away one of IBM’s star scientists, an IBM Fellow named Glenn Henry, who was lured by Dell’s commitment to turning good research into useful products. Historically, IBM had been famous for world-class science, but the company’s bloated size made getting its products to market a staggering chore. At streamlined Dell, Henry could develop two dozen new state-of-the-art models in just under two years—and watch them get sold by phone and shipped through the mail.

Here, as elsewhere, Dell’s timing was important. At the precise moment Henry was solidifying his team, the PC marketplace was going through a major boom and bust. First it expanded exponentially, growing by 20 to 30 percent a year as computers found a place in American life that only dreamy enthusiasts could have foreseen. During that period, Dell, along with everyone else, was sitting pretty. Then, when the economy began to sag at the end of 1989, every major computer maker took a huge hit—except for Dell. When PC sales cooled off, it was like a depression, but only for high-end, high-overhead companies, because clients could no longer afford the price tag of a typical IBM or Compaq system. They could, however, afford to pay 10 to 20 percent less for a computer of comparable quality—and that’s what Dell could offer them. Sales soared.

They’ve continued to soar since. In the first quarter of 1992, Dell Computer’s sales jumped 109 percent, to $366.1 million, over the same period a year earlier. Can Dell keep it up? That’s the challenge for him and his company. Already there are rumblings from Wall Street that Dell may be focusing too much on market share and too little on profit margins. But for now, Dell seems unfazed by stock dips and other far-off concerns. Business is better than ever, he insists—and besides, he would rather worry about matters closer to home. He and his wife had their first child, a daughter, last December, and he’s already teaching her how to play on a computer.

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