A chat with Michael Dell: Alienware and XPS to stay separate

Posted by Scott M. Fulton, III

 

Grapevine (TX) - While custom PC builder Alienware may benefit from the much-increased purchasing power of its new corporate parent, Dell Computer, the development tracks of the two companies will remain separate. The reason, as Dell Computer Chairman Michael Dell revealed to TG Daily during a roundtable session with journalists on Sunday afternoon, is because his company's top-of-the-line XPS performance systems and Alienware's product line are targeted toward separate customer bases - still segments of the same gaming and enthusiast market, but still measurably different.

"I think what we've seen is that [the gaming and enthusiast segment] is a pretty big market," Mr. Dell told reporters, "and XPS has done quite well, [and] the Alienware brand has done quite well. We think their appeals are slightly different. The development teams are continuing on with the strategies that they've had, which are really very different. Each one has its own customer base."

According to Dell's own internal research, which Mr. Dell cited, the Dell and Alienware brands combined share 60% of the high-end gaming and enthusiast computer market in the US. Mr. Dell admitted there were few independent statistical measures of this market, but that he relies on internal figures.

It's a pretty simple equation, as Michael Dell sees it. Alienware and Dell reach separate segments of the same market, and should continue to do so.

It's a pretty simple equation, as Michael Dell sees it. Alienware and Dell reach separate segments of the same market, and should continue to do so.

Mr. Dell's comments came by way of introducing the XPS 700, the company's new top-of-the-line desktop PC, which unmistakably targets the high-end. The system not only will be Intel's first to ship with Nvidia's GeForce 7900, but will be available in an SLI configuration with two 7900s on-board. The 700 also features a model of Intel's Core 2 Extreme processor series so new that Intel hasn't announced it yet. In fact, Dell is actually waiting for Intel to make the formal announcement - which could come this week.

"XPS is really targeted at a first-to-market cadence with the key inflections, in terms of processor and video and other key ingredients," Michael Dell told reporters. As processors, graphics cards, and other components continue to be updated in four- and six-month intervals, he said, the buildouts of desktops and notebooks under the XPS brand will continue to be refreshed. "It'll be refreshed at a very, very fast rate - quite different from other product lines that we have. We're selling hundreds of thousands of computers to big, mega-corporations; they do not want them to change like that. They want a high level of consistency. This market [XPS] is totally different."

What information will XPS be able to glean from Alienware, TG Daily asked Mr. Dell, with regard to what direction to take successive waves of buildouts? He struggled at first to come up with a workable answer, pausing for several very telling seconds. Finally, he said, "We know there are benefits for the Alienware team, tapping into the Dell supply chain...We really want these teams to develop products independently. There's really a different product development ethos, and we don't want to disturb that. They're going to continue developing products in the way that they have; both have succeeded with different models, and we want those to continue."

So if Alienware were to come up with a really cool, feature-of-the-month model based on, say, an AMD Athlon 64 X2 processor, that wouldn't necessarily give the XPS division any ideas? Mr. Dell would only nod his head, yes.

Later, we took Dell Computer's Rocco Ancona aside - he heads the company's XPS engineering team. Essentially, the XPS 700 is Ancona's baby. We asked him, when he heard the news that Dell was buying Alienware, did he shout "Goody!" like an excited child, or did he instead ask why? "You know, you always look at your competitors," he responded. "I thought it was a good purchase for Dell. In fact, I'm excited by it. We compete with each other, still. We're still friendly competitors. I have every interest as a shareholder in wanting the brand to be successful. Likewise, as an employee, I want the XPS brand to be successful."

Still, Ancona acknowledged, he wants XPS to be the first out of the gate with a new feature.


XPS vs. Xbox

Inside the XPS 700, powered by Intel's Core 2 Extreme and two (2) GeForce 7900 GTX cards

Inside the XPS 700, powered by Intel's Core 2 Extreme and two (2) GeForce 7900 GTX cards.

It's the fact that the PC market can rapidly respond to market demand with new hardware features which makes the PC the more competitive gaming platform when compared to game consoles, Mr. Dell argued earlier in the discussion. "The challenge with the [game] console," he said, "is that it has a fixed function for five years. Consoles are fine, but really, the console is just a dedicated, single-purpose machine." When Nvidia released its GeForce 7800 GPU, he recalled, it was utilized by both PC and game console manufacturers. Already, though, the XPS 700 is preparing to top that introduction - by Mr. Dell's description, in orders of magnitude. "The brand new console comes out, and for five years, it's stuck with this 7800 chip; meanwhile, every three or four months, we're coming out with faster things."

"If you talk to [game] developers," Mr. Dell continued, "[they're] not super-excited about console environments, because from an economic standpoint, they have to live within this structure that's created by the console, and they give up a lot of the ongoing revenue. So you actually see a lot of games...that are not available on the console at all, World of Warcraft probably being the best example out there. Here's a great game played by six-and-a-half million people, not available on the console, no plans to be available on the console."

Also detracting from game console's long-term viability, Mr. Dell argued, is its revenue model: Consoles are sold at a loss, he related, in order to seed the market. Manufacturers' revenues are reaped in royalties, but it's those royalties - which should more than make up for the losses - which are the biggest contributor to the high price of console-based game software. In turn, Mr. Dell implied, it's the high price of software which is the biggest detractor to newcomers to console gaming.

"It's capitalism; everybody can have their own way of doing things," shrugged Mr. Dell. "It's just, if you want to have the latest hardware, the absolute best machine, you're not going to buy a console."

Of consolidation and substitution

Michael Dell says his company doesn't take too many cues from Alienware. Then his team shows off this XPS notebook system.

Michael Dell says his company doesn't take too many cues from Alienware. Then his team shows off this XPS notebook system.

Also in Sunday's roundtable discussion, Mr. Dell gave some clear, if non-descriptive, hints that a future announcement regarding Dell Computer's relationship with AMD is forthcoming. In May, Dell announced it would be using AMD Opteron CPUs in multi-processor Dell servers; and by virtue of having acquired Alienware, Dell already is in the business of producing AMD-based systems for the enthusiast segment.

Dell's decision to take on AMD as a CPU supplier comes in the midst of a PC market that is undergoing another wave of fundamental shifts. While the market is still growing by most estimates, the rate of growth of that growth is declining, and the weight of the market has tipped away from desktop units and toward notebooks. At the same time, the video game market is booming - now an $11.5 billion annual industry, using numbers Michael Dell cited, compared to $9 billion in revenue for the cinema.

The XPS 700 - or, more accurately, Dell's top-of-the-line XPS desktop system at any one point in time - could very well represent the overlap in these two markets: the one that's expanding, and the one that's declining. We asked Michael Dell, could we be seeing in the XPS desktop the prototype for the last desktop systems?

Mr. Dell's response was less than emphatic. "I don't think so," he began. "There's a substitution going on between desktops and notebooks. When you look at overall microprocessor volumes, [the PC market is] still increasing. So the PC market is actually still growing, and it's growing in lots of areas." But driving that growth, Mr. Dell then said, was the need for mobility, as emphasized by the addition of such features as HSDPA and EV-DO networking in his company's top-of-the-line notebook systems.

Which led Mr. Dell to conclude, since his company is perceived as a notebook systems leader, he's in good shape anyway. "Desktops go down, notebooks go up, that's not all bad. Dell's the leader worldwide in both notebooks and desktops." So in an evolving market over a five-year timeframe, if the desktop market pretty much dwindled away leaving the notebook market with the lion's share, he'd be okay with that, we asked him? Again, Mr. Dell gave one of his signature pauses, followed by a small shrug, and a little nod of the head.