Direct From Dell

Strategies that Revolutionized an Industry

Michael Dell, Catherine Fredman

• Publisher: Harper Business
• Year: 2010
• Print ISBN: 9780060845728
• eBook ISBN: 9780062004246
• Topic: Social Sciences
• Subtopic: Social Science Biographies
• Index: Social Sciences

Part I

1

THE BIRTH OF BEING DIRECT

I FIRST EXPERIENCED THE POWER—AND the rewards—of being direct when I was twelve years old. The father of my best friend in Houston was a pretty avid stamp collector, so naturally my friend and I wanted to get into stamp collecting, too. To fund my interest in stamps, I got a job as a water boy in a Chinese restaurant two blocks from my house. I started reading stamp journals just for fun, and soon began noticing that prices were rising. Before long, my interest in stamps began to shift from the joy of collecting to the idea that there was something here that my mother, a stockbroker, would have termed “a commercial opportunity.”

In our household, you couldn’t help being aware of commercial opportunities. The discussions at our dinner table in the 1970s were about what the chairman of the Federal Reserve was doing and how it affected the economy and the inflation rate; the oil crisis; which companies to invest in, and which stocks to sell and buy. The economy in Houston was booming at the time, and the market for collectibles was quite active. It was obvious to me from what I’d read and heard that the value of stamps was increasing, and being a fairly resourceful kid, I saw this as an opportunity.

My friend and I had already bought stamps at an auction, and since I knew even then that people rarely did something for nothing, I assumed that the auctioneers were making a decent fee. Rather than pay them to buy the stamps, I thought it would be fun to create my own auction. Then I could learn even more about stamps and collect a commission in the process.

I was about to embark upon one of my very first business ventures.

First, I got a bunch of people in the neighborhood to consign their stamps to me. Then I advertised “Dell’s Stamps” in Linn’s Stamp Journal, the trade journal of the day. And then I typed, with one finger, a twelve-page catalog (I didn’t yet know how to type, nor did I have a computer) and mailed it out.

Much to my surprise, I made $2,000. And I learned an early, powerful lesson about the rewards of eliminating the middleman. I also learned that if you’ve got a good idea, it pays to do something about it.

SEEING THE PATTERN

A few years later, I saw the chance to seize an even greater opportunity. When I was sixteen, I got a summer job selling newspaper subscriptions to The Houston Post. At the time, the newspaper gave its salespeople a list of new phone numbers issued by the telephone company and told us to cold call them. It struck me as a pretty random way of approaching new business.

I soon noticed a pattern, however, based on the feedback I was getting from potential customers during these conversations. There were two kinds of people who almost always bought subscriptions to the Post: people who had just married and people who had just moved into new houses or apartments. With this in mind, I wondered, “How could you find all the people who are getting mortgages or getting married?”

After asking around, I discovered that when a couple wanted to get married, they had to go to the county courthouse and get a marriage license. They also had to provide the address to which the license would be sent. In the state of Texas, that information is public. So I hired a couple of my high school buddies and we canvassed the courthouses in the sixteen counties surrounding the Houston area, collecting the names and addresses of the newly (or soon-to-be-newly) married.

Then I found out that certain companies compiled lists of people who had applied for mortgages. These lists were ranked by the size of the mortgage. You could easily identify the people with the largest mortgages and go after those high-potential customers first.* I targeted these people, creating a personalized letter and offering them a subscription to the newspaper.

By this time, summer was over and it was time to go back to high school. As important as school was, I found that it could be very disruptive to a steady income. I had worked hard to create a lucrative system and didn’t want to just throw it away, so I handled the bulk of the work during the week after school, and I did the follow-up work on Saturday mornings. The subscriptions came in by the thousands.

One day, my history and economics teacher assigned us a project for which we had to file our tax returns. Based on what I had made selling newspaper subscriptions, my income was about $18,000 that year. At first, my teacher corrected me, assuming I had missed the decimal place. When she realized I hadn’t, she became even more dismayed.

To her surprise, I had made more money that year than she had.

ENTER THE COMPUTER

By then, I had a new hobby: computers. In fact, my interest in computers goes back even further. From the time I was seven, when I purchased my first calculator, I was fascinated by the idea of a machine that could compute things. In junior high school, I was in an advanced math class and had joined a Number Sense Club, whose members did complicated math problems in their heads and competed in math contests. Our coach, a math teacher named Mrs. Darby, installed the first teletype terminal in our junior high school. If you stayed after school, you could play around with it and write programs or input equations and get back answers. It was the most amazing thing I’d ever seen.

I started hanging around at Radio Shack and playing with their computers. And I started saving money to buy my own. At the time, the Apple was easily the most popular personal computer in the United States, and the one with the most software, which was important. The beautiful thing about the Apple II was that it wasn’t as complicated as today’s computers. Every circuit was on its own unique chip, and you could easily open up the box and figure out how the computer worked. Byte magazine regularly described the latest components, and the semiconductor companies published manuals that explained everything you ever wanted to know about their particular chips, so you could pick up a data book to learn what a 74LS07 did and what its inputs and outputs were. I remember reading an article in Byte about the first Shugart 5¼-inch floppy disk drive; I thought it was incredibly cool.

I bugged my parents repeatedly to let me buy my own computer and finally, for my fifteenth birthday, they agreed. I didn’t have a driver’s license yet and was so anxious for my computer to arrive that I made my dad drive me down to the local UPS office to pick it up. Once we pulled back into our driveway, I jumped out of the car, carried the precious cargo to my room, and with great relish, promptly took my new computer apart.

My parents were infuriated.

An Apple cost a lot of money in those days. They thought I had demolished it. I just wanted to see how it worked.

As had happened with stamps, my fascination with computers soon evolved from a hobby into a business opportunity. In 1981, IBM introduced the PC, and I soon switched from Apple to IBM. While the Apple had lots of games, at the time, the IBM PC was more powerful. It had software and programs for business usage, and although I didn’t have a lot of business experience, I had enough to know that this PC was going to be the choice for business in the future.

Meanwhile, I wanted to learn as much as I could about PCs, so I bought all these other things that would enhance a PC, like more memory, disk drives, bigger monitors, and faster modems. (This was before personal computers had hard drives, so there weren’t a great deal of options.) I would enhance a PC the way another guy would soup up a car, and then I would sell it for a profit and do it again. I was soon going to distributors and buying components in bulk to reduce the costs. My mother complained that my room looked like a mechanic’s shop.

By some stroke of luck, the 1982 National Computer Conference was held in June at the Astrodome in Houston—four months after I’d gotten my driver’s license. (The NCC has since been replaced by Comdex.) I skipped school for much of that week to attend the show; somehow my parents never found out. It was an incredibly eye-opening experience.

I had spent plenty of time in computer stores and had already dealt with component distributors, but I had never been exposed to the computer industry, per se. At the NCC, the whole computer industry was demonstrating the latest prototypes and previewing technology that would soon be coming to market. There, I saw the first 5 megabyte disk drive. (Today, Dell routinely sells personal computers with 37 gigabyte hard drives—more than 7,400 times larger!) I remember going up to the booth of a company called Seagate and asking how much one would cost. I think they cost a few thousand dollars. In response they asked, “Are you an OEM?” I didn’t even know what an OEM was.*

I was learning about the computer business.

Eventually I saved up enough money to buy a hard disk drive. I used it to set up a bulletin board system on which I exchanged messages with others interested in computers. And as I compared notes about PCs with other people, I found that there were real anomalies in the sales and markups of these machines.

An IBM PC typically sold in a store for about $3,000. But the components could be purchased for around $600 or $700, and the technology wasn’t IBM’s. (I knew how much the components cost and who was making them because I was taking the computers apart and upgrading them.) That didn’t make a lot of sense to me.

Another thing that didn’t make sense was that the people operating the computer stores didn’t even know much about PCs. For the most part, they had previously sold stereos or cars, and thought that computers represented the next “big ticket” fad, so they figured, “Why not? We’ll sell them, too.” Hundreds of computer stores were popping up in Houston. And these dealers would pay about $2,000 for an IBM PC and then sell it for $3,000, making $1,000 profit. They also offered little or no support to the customer. Yet they were making tons of money because people really wanted to buy computers.

At this point, I was already buying the exact same components that were used in these machines, and I was upgrading my machines and selling them to people I knew. I realized that if I could sell even more of them, I could actually compete with the computer stores—and not just on price but on quality. I could also earn a nice little profit and get all the things your typical high school kid would want.

But beyond that, I thought, “Wow, there’s a lot of opportunity here.”

I was both nervous and excited by the possibilities. My mind was filled with questions: What did I already know that I could use? What did I need to learn? How could I learn it?

But my parents intervened. They had expected me to be a premed major at the University of Texas at Austin, just like my older brother. And so it was. On the day I left for college, I drove off in the white BMW that I had bought with my earnings from selling newspaper subscriptions, with three computers in the backseat of the car.

My mother should have been very suspicious.

THE BIG IDEA TAKES HOLD

I was serious about college. I went to class and I did my work. And I would never advocate that young people today pass up an opportunity for higher education. But my freshman year was boring compared to the idea of starting a business—and not just any business, but one where the opportunities were so readily apparent. Fortunately, the University of Texas at Austin is a very large school. And, well, the benefit of going to a very large school is that nobody really knows what you’re doing, so you can drift off and do something else.

Like start a business.

I was probably quite a strange sight to see, walking around campus, books in one hand, a bunch of RAM chips in the other. I would go to class and then after class I would go back to my dorm room to upgrade a few computers. By this time, word of what I was doing had traveled, and businesspeople (as opposed to students)—like attorneys and doctors from the area—were coming by to drop off or pick up their computers.

Because the State of Texas had an open bidding process, any vendor could bid on state contracts. So I applied for a vendor’s license. Without the overhead of a computer store, I could sell higher-performance models at a much lower price.

I won a lot of bids.

By November of that year (1983—I was eighteen), my parents had gotten wind of the fact that I wasn’t attending classes and my grades were going down. So in a second intervention, they flew up to Austin for a surprise visit. I remember that they called me from the Austin airport to tell me they were there. I had barely enough time to stash all the computers behind the shower curtain in my roommate’s bathroom before they walked in. Still, it was obvious that not a lot of studying was going on.

My Dad started. “You’ve got to stop with this computer stuff and concentrate on school,” he said. “Get your priorities straight. What do you want to do with your life?”

“I want to compete with IBM!” I said.

He wasn’t amused.

I agreed to stop with the “computer stuff,” only to appease my parents. And I tried. I went cold turkey for three weeks. But as well intentioned as I was, I couldn’t do it. By December, I knew my fascination with computers wasn’t just a hobby or a passing phase. I knew in my heart that I was on to a fabulous business opportunity that I could not let pass me by. Here was a device that so profoundly changed the way people worked—and its cost was coming down. I knew that if you took this tool, previously in the hands of a select few, and made it available to every big business, small business, individual, and student, it could become the most important device of this century.

What I can’t say I knew, at age eighteen, was how big the opportunity was. I didn’t know exactly how the technology would evolve. And I definitely felt that I was diving into something pretty major without knowing most of the details. There was a lot more that was unknown than known to me then. Like what the barriers for entry into this exploding industry would be. Like how to secure capital, how much I’d need, and how fast the business market would grow.

But I did know one thing. I knew what I wanted to do: build better computers than IBM, offer great value and service to the customer by selling direct, and become number one in the industry.

Besides my parents, I didn’t admit that to anyone, because they probably would have thought I was crazy. But to me, the opportunity was clear.

And I felt that this was absolutely the right time to go for it.

THE BIG OPPORTUNITY BECOMES CLEAR

What I saw was a great opportunity to provide computing technology in a much more efficient way. That was the core idea of what became Dell Computer Corporation, and it’s one that we’ve stuck with ever since.

Traditionally, in the computer industry, a manufacturing company built computers, which were then distributed to resellers and dealers who sold them to businesses and individual consumers. In the early days, companies like Apple and IBM sold their products through computer dealers because they needed the leverage to gain nationwide sales. When IBM introduced the original IBM PC, even though IBM had the most sophisticated field sales organization in the world, they chose to sell their PCs the same way. With the biggest players at that time all oriented to the idea of selling through resellers, people believed that the indirect channel was simply the way to go.

But the indirect channel was based on a marriage of the unknowing buyer and the unknowledgeable seller. I knew that marriage could not last. I had grown up with computers. Every paper I wrote in high school had been written on a computer. Computers were already well integrated into my life, and it seemed obvious to me that it was just a matter of time before every business, every school, and every individual started to rely on them. Even in 1984 you could say, “Ten years from now there will be millions and millions of more knowledgeable PC users.” What wasn’t as clear then was that there could be as many as 1.4 billion PCs in use by 2008, as I believe today. But I knew the market would be huge. And I knew, based on my own experience as a user—and my limited experience with customers—that customers would become even more knowledgeable and demanding every year.

I started the business with a simple question: How can we make the process of buying a computer better? The answer was: Sell computers directly to the end customer. Eliminate the reselle...

Table of contents

• Cover
• Title Page
• Dedication
• Contents
• Timeline
• Foreword to the Collins Business Essentials Edition
• Foreword
• Preface
• Part I
• Part II
• In Conclusion
• Index
• Acknowledgments
• About the Author
• Praise
• Copyright
• About the Publisher