Dell Wants Your Home

By Cathy Booth Thomas/Round Rock

For the past eight months, a team of technicians was holed up in a windowless room at Dell, testing 650 products from nearly 90 manufacturers. Their goal: to ensure that products like Sony monitors and Veo cameras--even printers made by archrival Hewlett-Packard (HP)--worked smoothly with Dell's machines. It didn't take them long to realize that Dell could build some of those products better and sell them more cheaply. So last week founder Michael Dell, 38, put the consumer-electronics industry on notice--including some of the company's own suppliers--that the world's No. 1 computer maker is attacking their territory.

By Christmas, Dell will launch a line of flat-screen TVs, an MP3 player and a downloadable music service, all to be sold exclusively online, as it does with computers.

At the heart of Dell's strategy is a belief that the much hyped digital home is about to become a reality, with the personal computer as the brain running movies, music and photos around the house. "Over the next several years, you can expect to see much of what was previously considered consumer electronics move into this digital home vision," the CEO told TIME. "And Dell will be there."

It's a dramatic change for Dell, long a computer-hardware maker, which earns 80% of its revenue from sales to businesses. At its headquarters in Round Rock, Texas, Dell's generals are getting used to their new role, touting themselves as the guys who will offer the lowest prices for a whole new line of products. "The battle is not joined yet," says Tim Mattox, one of those generals (otherwise known as marketing V.P.s), "but you could say we're laying the foundation for trench warfare." Consumers are going to be the winners. Although Dell hasn't revealed pricing on all the products, its entry into home electronics could send price tags of flat-screen TVs into full retreat.

Dell's invasion of your living room is part of what promises to be a free-for-all in the $100 billion U.S. consumer-electronics market. Computer makers like Dell are responding to slowing sales by leaping into new arenas, going head to head against consumer giants like Sony. In August, No. 2 computer maker HP launched 158 consumer products, most notably digital cameras to work with its market-leading printers. Gateway, which hit the jackpot last year with a $2,999 plasma TV, plans to introduce 50 more consumer products for the holiday season.

Crowning the ultimate winner in the war for our home-electronics dollars may depend on which product emerges as the primary device: the computer or the television. Sony manned its battle stations last January at the Consumer Electronics Show, with CEO Kunitake Ando proclaiming that the digital future was "about televisions, not computers." The Japanese giant, whose TV and computer businesses are losing money, is repositioning its Vaio PC line as part of a wireless home network, with the TV--not the PC--as the command center. "PCs are becoming more complex," says Sony spokesman Yoshikazu Ochiai. "Now is the time for TVs to be reborn." To maintain that dominance, Sony last week revealed it is talking with Samsung, the world's leading producer of flat-screen monitors, about joining forces--a direct attack on Dell, which is the top seller of these monitors. The talks underline Sony's efforts to improve its flat-panel TV line, which has lagged behind those of competitors.

In Dell's vision, the PC will be central to the home network. "The use of the TV as a major Internet device would drive everyone else on the couch nuts," says president and COO Kevin Rollins. Dell is placing its bet on lighter, thinner PC monitors fitted with TV tuners (or digital chips) to replace the old cathode-ray boob tube. Despite Dell's challenge to Sony, Ochiai says he welcomes the competition. "It's great that computer companies are expanding the horizon of consumer electronics," he says. "They can be a threat but in a good way."

In the way that a 50-ft. wave heading for your beach house is a good opportunity to learn surfing. Maybe Sony has not felt the sting of Dell's aggressive pricing yet, or it wouldn't be so polite. Last November, when Dell priced its first consumer product, the Axim X5 handheld, at $199, it set an industry fond of $400-to-$600 tags "on its ear," says Silicon Valley tech watcher Rob Enderle. With just one model, Dell is quickly capturing nearly 38% of the PC handheld market in the U.S., forcing HP, the worldwide leader, to slash prices.

From handhelds, Dell moved in on HP's printer business last March, trying to take advantage of the initial disarray that followed HP's merger with Compaq. (HP, which had been visiting Dell's labs, stopped after that.) "Michael wanted to remove the ability of HP to lob into our business and make all the money on printers," says Rollins. But he faced doubters in-house who questioned whether customers would buy ink cartridges online. Demand was so great, however, that the company sold twice as many printers as planned in the first six months; it couldn't keep up with consumer demand, says Mike George, the company's chief marketing officer.

Even after that, Dell was not planning its all-out move into consumer goods, executives say. But by summer, as they looked closely at competitors' products, they decided to take the plunge. While rumors were spreading that Dell was working with Microsoft on new products like smart phones, it changed its name, dropping the word computer to become just Dell Inc.

Callers to Dell's support lines, meanwhile, were already looking to Dell for help with their consumer electronics. Their big complaint wasn't about hardware anymore but that many new digital gizmos did not work with Dell computers. "Consumers feel they haven't been well served by consumer-electronics companies," says George. "These companies always have the next hot thing, which doesn't work with the last hot thing and doesn't work with the competitor's next hot thing. So you're always in the wreck-and-rebuild stage."

It was an important lesson, because Dell isn't likely to produce many next hot things. The company, which spends a mere 1.5% of its $38 billion in revenue on research, isn't concerned with being innovative, says John Hamlin, general manager of Dell's U.S. consumer business. "We're not first," he says. "We just do it better. We're not embarrassed to admit it. We've come out of nowhere to be the No. 3 consumer brand in the U.S. in less than five years, while Coca-Cola has been doing it for 100 years." Of course, adds Hamlin: "We're not in this to be No. 3. No. 1 is the only target around here."

For now the No. 1 in consumer electronics remains Sony, a true innovator. To conquer the consumer market, Dell wants to solve the gadget-compatibility issue and speed the transition to the digital home. So Dell recently--and quietly--began offering basic home installation of computer networks for $119. The Dell.com site, which will be revamped on Oct. 10, even has a search engine to help homeowners locate providers of broadband service, another prerequisite for the coming digital transformation.

To manage all the music, video and digital photos pouring out of new gadgets on the market, the company last week copied its competitors and introduced a Microsoft program, dubbed the Dell Media Experience, that will come preloaded on all new Dell Dimension computers. "In time we hope it will become a central repository for the family," says senior vice president John Medica. For now, at least, the product has one big advantage: it's free.

Dell is approaching its latest challenge with characteristic swagger. Consumer electronics is cutthroat, goes the knock, and selling high-ticket TVs online won't be easy. Shoppers like to see their TVs before buying. "Yeah, I heard that about computers too," says Dell dismissively. As the only computer company to make money for eight straight quarters during the recession, Dell has little time for skeptics who constantly try to paint it as an unimaginative box mover. Three years ago, the company was No. 6 in computers, with a puny 6% share of the U.S. market. Today it leads, with nearly a 30% share. Enderle says Dell's consumer foray, more so than HP's or Gateway's, is a "bellwether" of changing markets. "When a market is about to explode, Dell moves in," he says. "If it's moving into flat-panel screens, then you can be pretty sure that a lot of them will be sold this year."

Dell denies that his company, born nearly 20 years ago in his University of Texas dorm room, is truly morphing into a consumer-electronics company. He just sees a way to make more money. "I wouldn't say we're going to be Sony," he says coyly. "But look at large markets where products cost more than they should, and it's almost a certainty we'll go into them." So get some popcorn, settle into a recliner and stay tuned for more announcements. --With reporting by Yuki Oda and Toko Sekiguichi/Tokyo

With reporting by Yuki Oda and Toko Sekiguichi/Tokyo