Dell Freezes Over

The unthinkable has happened: the once impregnable computer behemoth has shown itself to be just another company—susceptible to the kinds of competitive pressures, stock-price plunges, and morale problems from which it was once immune. (To say nothing of laptops flambé.) Now what? Not surprisingly, a reboot is under way.

LAST YEAR MY WIFE AND I BOUGHT A BRAND-NEW Dell computer. It was a handsome machine, sleek and gunmetal gray, with a swiveling screen and a set of speakers. Unlike our previous computer, it worked without wires, miraculously conversing with a small box of blinking lights in our bedroom. We were very happy with it—for about two hours. That was when the wireless feature started to go wiggy. Sometimes we would get an Internet connection, and sometimes we wouldn’t. We called the Dell folks for help.

What followed made me long for the days of carrier pigeons and slide rules. Dell’s response was to send a string of ever less intelligent and ever less reliable service people to try to solve the problem. We spent hours with technicians, both at home and on the phone. It took more than a month for them to determine that our cordless telephone was knocking the computer off-line, a solution so crushingly obvious that it only made us madder.

We later learned that what happened to us was not just some isolated, random piece of bad luck. At that very moment, tens of thousands of other people were having similar horrific experiences with Dell, a company long famous for its excellent customer service. And the incompetence of Dell’s help desk mirrored the bigger, deeper, and less tractable problems that would soon be flogged in headlines around the world: declining growth, a drop in global market share, an unprecedented descent in the company’s consumer satisfaction ratings, its consistent failure to earn as much money as it was expected to.

The precise details were ugly. In the first quarter of 2006, Dell was waxed by Hewlett-Packard, its resurgent main rival, in the fastest-growing component of the market: notebook computers. During the same period, Dell’s overall sales failed, for the first time ever, to keep pace with the computer industry as a whole. By the time the company reported in August that its quarterly earnings would decline for the eighth consecutive time—plummeting from $1.02 billion a year earlier to $502 million—business writers and stock analysts had all found their angle: Dell was rapidly losing its once huge price advantage and therefore its legendary ability to lowball its competitors. Amid such speculation, Dell’s shell-shocked shareholders watched the value of their holdings plunge earthward. On July 21 Dell stock closed at a five-year low of $19.04, down 54 percent from the previous July, and remained mired for the rest of the summer in the low $20’s. It was kept there, in part, by Dell’s announcement, in August, that it would recall 4.1 million batteries that could cause laptops to erupt into flames—the largest safety recall in the history of the consumer electronics industry.

To listen to this steady drumbeat of bad news, you might think that Dell is losing money or about to lay off workers. No and no. Dell is not in trouble in any conventional sense of the word. It is still growing, albeit modestly, and still making money. Dell’s problem is that it is not what it used to be, which is to say the world’s fastest-growing company with the world’s best-performing stock. The easiest way to illustrate this is to compare Dell with the most successful companies of our era. At the end of its first twenty years in business (2004), Dell’s revenues, adjusted for inflation, stood at $41 billion. Microsoft and Wal-Mart, by comparison, had revenues of only $10.7 billion and $4.7 billion, respectively.

No company in history has ever matched the speed or duration of Dell’s revenue growth, and few have left as many failed and bankrupt competitors in their wake. Dell inflicted such large losses on IBM that the computer giant got out of the PC business altogether, selling out to a Chinese company. Dell outmaneuvered Hewlett-Packard and Compaq so completely that they were forced into an initially disastrous merger that cost the combined companies 40,000 jobs. These triumphs in turn fueled the greatest sustained stock price rise in history—nearly 87,000 percent from bottom to top—and established Michael Dell as one of the richest people on earth, with a net worth, at its height in 2000, of $21.5 billion.

And so the mere whiff of mortality, of weakness, of the beginning of the end of Dell’s dominance, has sent the high-tech world into a little celebratory fit of schadenfreude. Making everything worse—or better, depending on your point of view—Dell has another, more serious problem that you have not read about in the headlines: a severe decline in company morale linked to both the fading stock price and to a crisis of leadership, which has spawned a radical, company-wide attempt to remake the Dell culture. While it wrestles with those demons, Dell must deal with the inconvenient fact that it is now widely perceived as decelerating irreversibly into a comfortable and somewhat stagnant middle age, taking its once high-flying stock down with it. Even two years ago, such a thought would have been unimaginable. Now it is common currency. Is the joyride finally over?

THERE HAS ALWAYS BEEN SOMETHING disquietingly calm about Michael Dell. In an industry where change comes at you like telephone poles on a country road, he ought to look a great deal more worried, harried, driven, nervous. Unhappy, perhaps. But he shows no scars; his trademark is still that engaging, guileless, dopey grin spreading across that creaseless, unmarked, choirboy face. If you did not know that he was the greatest industrial genius of our age, you would never guess it. When I first interviewed him, in 1997, he was only 32 and already worth more than $10 billion. Back then he still looked a bit like a pudgy kid and had this slightly confused, deer-in-the-headlights expression on his face when meeting someone new, which made for a profound disconnect between the innocent he seemed and the hypercompetitive monster he actually was.

The main purpose of that interview was to get him to explain how Dell, which had been growing like bacteria—doubling in size every few

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