Dell looking to abduct some alien attributes

Dell is a giant computer maker, the world's largest seller of desktop PCs, with a direct-sales, discount-price model and a supply chain that is second to none - and, despite its attempts to get a little hipper over the past year or two, a reputation for selling boring but dependable products.

It has annual revenue of about US$56 billion ($92 billion).

Alienware is pretty much the antithesis of that: a tiny company - revenue of about US$170 million - with a reputation for selling a relatively small number of high-priced, high-performance computers, mostly to video-game players and other uber-geeks.

One of its most popular models is shaped like the giant alien heads that are drawn by many alien-abduction believers.

What do these two have in common? Well, they're family now - the big, boring discounter just bought the tiny, high-priced PC maker (which is based in Miami) for an undisclosed sum, after several days of denying the rumours that such a deal was in the works.

Why? A good question. According to most analysts, the purchase, which is only the third in Dell's 22-year corporate history, is likely to barely make a ripple in the giant cashflow that is the company's PC business. Prudential Equity analyst Steven Fortuna told Marketwatch that, based on Alienware's 2005 revenue and shipments, the company is equivalent to about 2.2 per cent of Dell's US consumer sales, and less than 0.3 per cent of total revenue.

But he and other analysts said that the purchase could help juice what has been a relatively lacklustre part of Dell's business - that is, the retail or consumer PC market. Consumer sales only account for about 15 per cent of the company's revenue, with the vast majority of Dell's PCs being sold into the corporate market.

Last year, Dell's consumer sales rose by a 1 per cent, compared with growth of 18 per cent for Hewlett-Packard, one of the company's main competitors.

Analysts say Alienware's sales have risen by about 30 per cent this year, to US$225 million.

Shaw Wu of American Technology Research said the deal "demonstrates that Dell is taking steps to address its weaknesses, including strengthening its consumer business".

The company is also likely looking for ways of boosting its languishing share price, which has tumbled by about 30 per cent this year. Some investors seem to have switched their allegiance to Hewlett-Packard, which has seen its shares climb by about 70 per cent this year. JP Morgan analyst Bill Shope said Dell was beginning to take some decisive steps to repair its recently volatile consumer business.

He said the purchase moved Dell's focus to the higher end of the consumer market, where profit margins were greater.

Rebecca Runkle of Morgan Stanley said the Alienware deal was evidence that Dell was making "the right investments".

"Industrial design and hip branding are two important factors in the high-end consumer and gaming PC segments and, quite frankly, Dell lacks in both these areas," she said.

Some saw a further wrinkle to Dell's acquisition: the possibility that the PC maker could soon start offering products based on processors from Advanced Micro Devices, which competes with PC chip giant Intel. There have been repeated rumours over the past few years that Dell was about to abandon its exclusive relationship with Intel in favour of lower-priced AMD chips. Some said the purchase of Alienware - whose products use AMD chips - could mark the beginning of a change at Dell, and a possible move to AMD.

In fact, these rumours were so pronounced that AMD's stock rose more than 3 per cent after the deal with Alienware was announced. But several analysts poured cold water on the idea.

Raymond James analyst Ashok Kumar said that the Alienware acquisition was unlikely to change Dell's reliance on Intel chips. "For the foreseeable future, Dell will remain an 'Intel only' house," the analyst said.

Whether the Alienware purchase will lead to an AMD deal or help Dell boost its share at the high end is an open question. If nothing else, it might help the giant maker of boring, grey boxes become just a tiny bit hipper.