The Hottest Little Computer Maker in Texas

Information Processing

Entrepreneurs

PC's Ltd. started in a dorm. Now its clones have hit it big

By Geoff Lewis in New York
Business Week

February 2, 1987

Michael Dell is a young man in a big hurry. At age 7, impatient to finish his education, he tried to enroll in a correspondence school to get a college diploma. At 12, using a rented mailbox, he earned $ 2,000 selling stamps on consignment. In high school he made $ 17,000 by dreaming up a new way to sell newspaper subscriptions. When he got to the University of Texas three years ago, he really hit his stride -- but not in the classroom. Dell, who was supposed to be majoring in pre-med, started a company called PC's Ltd. in his dorm room. It's now the biggest maker of mail-order IBM PC clones in the U.S. Dell's next goal: to boost his current $ 70 million in annual sales to $ 500 million by 1990 -- his 25th birthday.

Unlike most other computer industry prodigies, Dell isn't just a technical whiz. Yes, he became fascinated with computers in the 7th grade and tore apart his Apple II when he was 15. But what has set him apart is his keen commercial instinct. Other mail-order houses simply import finished Asian clones. But PC's Ltd. designs and assembles its own computers, selling directly to customers who respond to advertisements in computer magazines. They select a basic model, then add options to customize their computers. All the while, Dell uses computers extensively to track his markets.

Dell learned early how to use a computer to reach his market. As a teenager, he set records for selling new subscriptions to The Houston Post by getting a list of marriage-license applicants from the courthouse once a week. Then he'd use his Apple II to create a personalized letter for each couple. Nobody had ever tried that.

Such business sense paid off again when, as a round-faced college freshman, he decided that he could easily make some extra folding money by assembling custom versions of the International Business Machines Corp. PC. He would buy a stripped-down PC, then add the circuit cards, disk drives, and display to tailor the system for his particular customer.

COLD TURKEY

Business was soon booming, but Dell's studies weren't. His parents -- Dell's father is an orthodontist, his mother a stockbroker -- ordered him to drop the sideline. But he kept at it. Then one day his dad came to town unexpectedly. With 15 minutes' notice, Dell and his roommate frantically tried to hide the evidence. The older Dell caught on, however, and the son promised to go "cold turkey" for a month. But it was too late to quell his entrepreneur's dreams. "I couldn't go to school," Dell says. "This opportunity was irresistible."

He soon left and with $ 20,000 set up shop in an Austin (Tex.) storefront. In 1984 he had sales of $ 6 million. In 1985, when PC's Ltd. started building its own PC clones, sales jumped to $ 34 million. Since then, the company has sold 50,000 computers bearing its name.

Its formula for success is not much different from the made-to-order approach Dell used in college. After a day's orders are in, the company determines what parts will be needed for the next two weeks. This keeps inventory down and cuts the risk of building unsalable machines. "We don't have to build a bunch of computers, then ship them to dealers and wait to find out if they're selling," Dell says. "The issue isn't low labor cost -- that's only about 2% of the cost. It's how you handle materials."

His approach lets Dell grow quickly with little capital. Funding comes from retained earnings -- in the past two quarters, pretax profit margins have doubled to about 10% -- and credit from suppliers. Beyond that, there's a $ 5.5 million credit line. Dell retains 100% of the stock but his 300 employees have options in anticipation of a public offering.

GOOD REVIEWS

Selling directly to customers lets PC's Ltd. eliminate dealer margins, typically 30% to 40%. The company can thus match Asian-built clones, which also sell for about 40% below what IBM models bring. PC's Ltd. computers have received good reviews in computer magazines, and now, Dell says, businesses buy 85% of his output. These include many of the big companies that are supposed to be most loyal to IBM, such as Martin Marietta, Burlington Northern, and Price Waterhouse.

"These people have proved they are willing to order a computer by phone," says Dell. "Somebody is going to dominate this trend, and today we are the only company in position." He wants to press his advantage by adding a national maintenance organization to install and repair PC's Ltd. hardware once it arrives at a customer's office. "If we can do that," says Dell, "it will eliminate the need for retail computer stores."

The market is highly volatile -- and IBM could come out with a proprietary PC that renders clones obsolete. But Dell thinks his knowledge of customer tastes will let him pursue other ventures. One idea is an electronic information service for selling merchandise directly to customers. "I'm fascinated with the idea of eliminating unnecessary steps," he says. Other companies have had bad luck with such videotex services so far, but Dell figures he has time. "In the year 2000," he points out, "I'll be 35 years old."

GRAPHIC: Picture, DELL ON THE AUSTIN CAMPUS: HE COULDN'T CONCENTRATE ON HIS PRE-MED STUDIES, ZIGY KLALUZNY