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I enjoyed reading Tom's analysis of Dell as a possible Rule Maker, but it raised some questions in my mind that I thought I'd bring up here. Before I get started, I should make a couple of things clear.

First, I've been a Dell shareholder since last May. Needless to say, I've been very pleased with the stock's performance. But I'm not here to bash Tom for his article nor rabidly defend Dell -- I'll leave that to certain posters on the Dell board. ;-)

Second, I decided to post this here, instead of the Dell board, because I'm very interested in Cash-King/Merchant King/Rule Maker style investing. Part of the problem I had with last night's article comes either from an inconsistent application of RM principles, an unclear definition of those principles, or my complete misunderstanding of what's going on. (Always likely :-) )

Dell as Rule Maker
Okay, I understand the reason for using Dell as last night's example: it's a popular stock that's done well and it was proposed as a candidate in last summer's Rule Maker elections. It was even an example in the recent book, "Rule Breakers, Rule Makers." So I can certainly see why you would want to look it over again as part of the Fool's continuing mission to teach.

But...

I can't help but feel some a priori assumptions were made and a straw man inadvertantly setup.

The straw man is created when Dell is analyzed as a Rule Maker, giving the mistaken impression that it should be seriously considered as a "candidate." It's just not that type of business -- not that it may not be eventually, but it's business model and the dynamics of its industry make it much more akin to Wal-Mart or Costco. It's dependent on superb asset management, high turnover, and attractive prices. In other words, it's a Merchant King stock.

Low margins are actually a benefit in this case. Where Dell may have made a mistake is in actually going for higher gross margins than being aggressive with prices -- going against the MK model. (There's also the change in Dell's fiscal year and not booking some large sales till the next quarter that make the revenue-growth shortfall look more illusionary) As a shareholder, I'll be interested to see how Dell adjusts it's pricing in the current quarter.

A priori assumptions seem to lie behind the argument that Compaq is eating into Dell's internet sales. Maybe so, but I don't think it's a given, other than any internet sales by Compaq will have an effect, since they had almost zilch before. But, is it significant?

I don't know, since I don't follow CPQ, but Tom's article didn't convince me since he didn't provide any hard data to make a comparison with. I do think CPQ's foray into internet sales will be less immediately satisfying than many hope -- not only do they have angry retailers to deal with, but they seem to have trouble even getting internet sales going. Here's a news link to CPQ suspending internet sales through internet vendors, even it's own.

http://quote.fool.com/news/news.asp?symbols=CPQ&currticker=CPQ&search=cpq&range=w&action=gs&pos=23&sid=053b1681

So, I think it was a bit facile to say that Dell's slight slow-down in sales growth was attributable to increased competition from CPQ.

Mass Market Appeal/Consumer Audience I think this term has been either applied in an inconsistent manner, or it's definition is fuzzy. Cisco certainly doesn't have the "store on every corner" appeal that was mentioned in "RBs, RMs," but it's certainly a Rule Maker.

I think the problem does come from defining the audience for each candidate. Coke's audience is every thirsty person in the world. Period. The audiences for CSCO and Dell are much narrower: people intimately involved in the selection of internet equipment and computing equipment for business. Dell is not a "consumer-market" PC company in the broadly understood meaning of the term. But it does have brand-recognition and draw within its target audience -- witness Ford standardizing its entire operations on Dell desktops, servers, and portables, recently.

To compare Dell to a broad consumer market company like Coke is to ask it to be something it isn't and doesn't try to be. The "brand" question should be asked only after the audience is defined.

Hmmm...I think I've gone on long enough -- I can see some mouse pointers heading for the "next" button. Anyone want to thwack me with a rubber chicken for being an obvious dunderhead? ;-)

have fun,
--Anthony
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