Dude, You Got a Dell

how Stuff Works and I love all things tech. And recently tech news sites reported that Dell Computers was preparing to go public again, because once upon a time it was a publicly traded company and then it changed back into a privately held corporation, and in July two eighteen, it announced it was getting ready to go public again

by the end of the year. And this bit of news prompted me to record these episodes about Dell Computers, where the company came from, how its path has led up to going public for a second time, and all the trials and tribulations along the way. So today we're going to start to explore the Dell story, and I could not resist using the dude, you got a Dell tagline. More on that in the second episode, but let's start at the very beginning. So on February nineteen sixty five,

Michael Dell was born in Houston, Texas. His dad was an orthodontist and his mother was a stockbroker, and his parents wanted him to consider a job in medicine, but Michael would end up pursuing a very different career. And for one thing, Michael grew up just as personal computers were really becoming a big deal. Apple Computer was founded in nineteen seventy six when Michael was eleven years old, So that was something going on in the background while

he was a kid. And meanwhile, he was learning a lot about business and finance, primarily from his mother, and he got to work early on. He thought it was interesting, this idea of making money, and he turned out to be really, really good at it, even as a little kid. Uh. He became a dishwasher for a Chinese restaurant when he was just twelve years old, and he used the money he earned to support a hobby he had. He had a hobby that had nothing to do with computers. It

was being a philatelist. What the heck is a philatalist. It's a stamp collector. Technically, it's someone who studies stamps, but a lot of people use the terms interchangeably. Let's just call him a stamp collector. So he was collecting stamps and he started having an exchange. He would do exchanges and sell stamps and buy other stamps, and eventually he was able to make two thousand dollars, which is

a huge amount of money for a little kid. And as a teenager he spent summers selling subscriptions for the Houston Post. He ditched the standard procedure, which was making cold calls, you know, just essentially going down the phone book and trying to call people at random. Um. He decided that wasn't very effective, so he created a new marketing strategy and it was really effective. He ended making eighteen thousand dollars in a year. So his first car

that he bought was a BMW. He lives a different life than I do. He also bought an Apple to computer when he was fifteen, and he took it apart to see how it worked. He put it back together again. He would later buy an IBM PC and do the same to that, and he saw that IBM already had a big leg up when it came to computers in the business world. It was a very much entrenched company. In nineteen eighty three, upon the urging of his parents, Michael Dell enrolled in the University of Texas with the

goal of being a premed student. So His whole thing was his following what his parents had told him to do go into premed He hadn't really determined what he was exactly going to specialize in. This was his freshman year in college, and in the meantime he kept turning his mind to entrepreneurial pursuits. He still had this love of business and ways of making money, and at first he began to assemble and sell upgrade AID kits for

personal computers. So this was not about building a new machine from scratch, but rather getting the components together that could turn a standard PC into a more powerful machine with more features, So stuff like more memory, expansion cards, that kind of stuff to turn your basic computer into

a higher performing machine. And he found out a lot of people wanted a personal computer, but many didn't want to spend the higher prices for a higher performing machine from the major companies, and those were selling their machines to retailers, right they were selling computers to retailers that then would mark up the machines even more, and so by the time your average consumer would go into a store to buy a computer, it would be very very expensive,

especially if you wanted something like an IBM computer. They were selling their computers at a premium of like above cost, So none of the major companies were selling directly to consumers, and Michael Delfin, you doubt. Hey, what if I were able to do that? What if I were able to sell computers straight to customers and bypass all the retailers,

cut out the middlemen. If I bought all the components myself and then built computers for people to their specifications, I could sell them for a much lower price and get make a healthy profit as long as I could buy the components at cost. If I could find a source for that. Now, uh, he knew that this was

going to be a potentially lucrative business. He also knew that a lot of people wanted a computer, but they weren't really confident in their ability to assemble a machine themselves, so they lacked the knowledge or the confidence to put together a computer. So this is where he could slip in. He wasn't quite ready to jump into that world just yet, so he continued his focus on upgrade kits to turn

basic computers into high performing machines. But he already knew where he wanted to go and to expand into a humbling actual computers in the future. So while he was a freshman in college, he began to set up a business in which he would upgrade computers for other people, mostly friends and associates. But then word got out and he started to get other people asking him to do

this sort of thing. He got advice and guidance from a guy named George Kozmetski, who had co founded Teleedne Incorporated and was then acting as dean of the University of Texas College of Business Administration. Dell would end up taking a thousand dollars out of his savings or from his family, depending upon the version of the story you come across, because I've seen both, and he used that to fund a new startup business and he called it

PCs Limited. And this started in January. This is the date to which Dell traces its history that PCs Limited was the company that would become Dell Computers or Dell Technologies these days. Dell ended up upgrading those computers they knew for the people at the University of Texas, and then he differentiated himself from the various computer stores by emphasizing low prices and personal customer service. So if someone had a problem with something, they could call him and

he would walk them through and fix the issue. Uh. Soon the word got around about this Dell guy and the computers that he could help build, and he started getting more orders and making more money. He began to hire a few employees to help with the work. He was actually getting more orders than he could fill personally, and soon he was making about twenty five thousand dollars per month. At that rate, it seems silly to stay

in college and get a medical degree. He was already on his way to a very successful career, so Michael Dell dropped out of college to focus on his business at the age of nineteen. At the end of nineteen eighty four, after just one year in business and focusing pretty much exclusively on selling and installing upgrade kits, not full computers, PCs Limited had made about six million dollars

in sales. Six million dollars in its first year as a college dropout, not bad, according to the company's own timeline. The following year, PCs Limited would produce its first computer, building it completely from the ground up, but assembled from purchased components, so they weren't manufacturing the various parts of

the computer. They were sourcing them from other UH manufacturers, so it was not an upgrade kit, it was an actual computer, and Dell was able to benefit from a few choices that IBM had made when it introduced its personal computer strategy back in one. I covered this in recent episodes, but i'll just give a quick overview. IBM chose to go with a non proprietary approach with the personal computer, and that set its strategy apart from Apple Computers,

which was very much in the proprietary realm. Right. So, IBM used essentially a standard off the shelf components to build its computer systems, and that meant that if you had the knowledge and the time and access to those components, you could build a machine that worked exactly the same way as an IBM machine. Essentially, you're you're using the same components or components of equivalent abilities to make a computer that processes information in exactly the same way as

an IBM machine. Moreover, IBM had licensed a version of Basic, the programming language, from Microsoft, but IBM did not get an exclusive license, which meant anyone could license that operating

or that programming language. I should say, not an operating system, so not only could you copy the hardware IBM was making by buying these components and then building your own machine, you could also run the same programming language, same version of the programming language Basic on your machine, which meant that any soft where that was built to run on IBM computers would also run on the machine you built,

because it's essentially the same thing. Moreover, Dell was able to get in touch with various IBM IBM inventory managers and buy components directly from them because IBM had this quota system for all of its components, and frequently inventory managers found that their warehouses were getting filled with these different components that didn't have any place to go. They were just taking up space, so they could sell those

two other UH entities, including Michael Dell. So he's buying the components for very low price, much lower than you would if you went to a retail store, because the retail store is going to mark it up quite a bit in order to make its profit. He was able to buy them for a low cost and then combine them together to build these computers, and that was how he was able to sell computers that could run IBM software, but at a fraction of the price that it would cost you if you want to go out and buy

an actual IBM computer. Uh this was the era of the IBM clone. That's why we called it those things. Uh So IBM was entrenched in the business world, as I said earlier, which meant that there was a ton of software already being made for IBM computers because you already had an enormous potential customer base out there. If you wanted to make software for business, you wanted to do it for IBM computers because that's that was the majority of the type of computer that was out there

in the business world. So by building a computer that could also run that but at a fraction of the cost, Michael Dell was starting to get orders from everybody because everyone wanted to have a machine that could run IBM software, but not everyone wanted to spend the premium price you needed to get that sort of machine. And when I say everyone, I don't just mean home users like people

like myself. I mean companies like small businesses, medium sized businesses, businesses that wanted to invest in computer systems, but not necessarily at the cost that it would require if they went all in with a company like IBM. This was suddenly a much more affordable option, so Michael Dell was

getting crazy numbers of orders. The first full computer produced by Dell's company was called the Turbo PC and it had an eight mega hurts Intel eight eight eight processor, had a five and a quarter inch disk drive, and it had ten hole megabytes of hard drive space. That's according to the Dell company timeline. However, I should say that I actually found examples of this computer. There's one that's listed under the National Museum of American Histories website.

They have the PCs limited Turbo PC listed there UH, and it has similar stats. It has the Intel eight processor, but it only has a hard drive of three six kilobytes. That's far less than the ten megabytes UH jested by Dell. So I don't know where that disconnect is unless Michael Dell was offering configurable computers, which is probably true. A lot of Dell's money early on was made by up

selling a customer. So you would offer to build a basic computer for a certain amount and then say, oh, you know, if you spend a little bit more, we can actually add this much more memory, this much more hard drive space, another drive, maybe a printer or whatever it might be. Because again he was able to sell these for much lower than you would find in a retail establishment. He would often be able to upsell because people were they wanted a computer with those abilities, but

not have to pay the full price. It also had six of RAM at a local area network port, so you could actually network this with other computers with direct connections there was no real Internet connectivity at that point, and also had eight expansion slots so you could put ancition cards in the machine. Uh, there are conflicting records of what exactly was the first computer, but you get two first in one episode this way, so that's a bonus, right.

The price for the original Turbo PC computer was seven hundred nine dollars. Now, if you wanted to buy an IBM PC that had a similar configuration, similar features, you would be spending closer to undred to twenty five hundred dollars. So it's no wonder the Dell computers were selling so well. I'll have a lot more to say about the early days of Dell computers, but first let's take a quick

break to thank our sponsor. I mentioned earlier that Michael Dell helped set his company apart through customer service, and one of the ways he did that was by offering up the option for customers to order a computer over the phone. He placed ads in computer magazines and was directly marketing to his customer base, so you would buy direct from Michael Dell. You wouldn't have to go again

to a store for this. They could also choose customized components, so Dell's team would then assemble the computer based off the customers preferences. And because Dell was buying components from manufacturers directly, he was able to sell those computers as a significant discount compared to other machines in the market. And he also established a policy for next day at home product assistance, and if you didn't like your computer,

you could return it for a refund, risk free. The combination of his policies and the products helped propel Dell to greater success. In addition, Dell was operating his company almost like a boutique service. Rather than maintaining warehouses filled with unsold computers, Dell tried to keep just enough stock on hand to meet demand. That kept his inventory low, and that meant it kept his expenses low because he didn't have to rent out a warehouse to hold massive

amounts of inventory. Dell followed the Turbo PC with a clone of the IBM PC A T. The A T was IBMS second generation personal computer. It had an Intel eight two eighty six microprocessor, the good old two eighty six. The IBM version would set you back four thousand dollars. Dell's version was priced at one thousand, nine five dollars, which technically meant it was less than half of IBMS

price tag. By the end of nineteen eighty five, Dell had hit sales of nearly forty million dollars, so a big jump up from that six million dollars that had made the first year. Now, grant that's in sales, not in profit, right, you have to to figure out profit. You have to subtract your expenses from your sales. And because he was selling these a fairly low margin, it wasn't like he was making huge amounts of money per sale,

you know, but still it was good business. In six Dell would release the fastest performing personal computer on the market at that time. It also featured a two eight six microprocessor, but this one was clocked sixteen Mega hurts and in the mid eighties that was considered wicked fast.

In fact, PC magazine compared it to an F eight Team Jet, which might have been a touch hyperbolic in my opinion, but one sentence in the review said, quote after a few hours at sixteen mega hurts a lumbering IBM A t feels like a dusty relic from a

computer museum. End quote. The review also said that the computer specs were so impressive that it might even go toe to toe with the upcoming next generation of computers, which would be running on the eight three eight six microprocessor, so that would be the next generation of Intel's processors

to six to three eight six. Dell saw his company growing faster and faster, and he realized that he would need someone at the helm who was more experienced dealing with growing companies than he was, so he reached out to an investment banker named Edward lee Walker to come

on board as the company president and the chief operating officer. Now, lee Walker had graduated from Texas A and M University in nineteen sixty three with a degree in physics, and he followed that up with postgraduate studies in nuclear physics. He actually received some grant funds from organizations like NASA and the National Science Foundation to pursue his postgraduate work. And he also got an MBA from Harvard in nineteen sixty seven. So this is a smart guy we're talking about.

By nineteen eighty six, Walker was fifty one and he was a venture capitalist. He would invest in growing companies, and he agreed to come on board and began to mentor Michael Dell, teaching the young man how to create a workable business plan and how to manage a business that was experiencing rapid growth. Walker would remain present until nineteen ninety and he would retire due to health reasons. And I never saw anything more specific than that, and frankly,

it's none of my business. Lee Walker would go on to teach courses in business management at the University of Texas at Austin, and he's also heavily involved in charitable and community investment organizations. Pretty cool. Back to Dell. In seven, the last full year the company would be called PCs Limited, the company recruited a new marketing division from Tandy Corporation. Tandy had started out as a leather goods company in

Fort Worth, Texas, way back in nineteen thirteen. But then, through a series of acquisitions and diversified holdings, the company would eventually enter into the world of electronics. It's not the only leather company to have done this, which is the interesting thing. But uh, Tandy produced the t R S, a d personal computer some people would call it the Trash eighty computer and a debut in nineteen seventy seven.

And so Tandy was one of the early computer companies out there that was competing in the birth of the home computer market. Tandy, Apple, the Commodore, those were like the big computers that were competing in the early days. Tandy was also the company that owned the Radio Shack chain of stores, and eventually the company would rename itself the Radio Shack Corporation. But let's go back to those marketing executives from Tandy who came on over to PCs Limited.

They came over and they immediately began to lay the groundwork to get Dell computers into more businesses, into more corporations. The marketing executives began to hire a large corporate sales force, and they began to establish resellers or retail establishment relationships. So their efforts increased the profit margin for PCs Limited,

but Michael didn't like what he was seeing. Michael Dell felt the department was trying to turn his company into the next IBM, and Dell felt that the marketing department did not understand his strategy of direct sales and marketing.

So Michael also didn't care for the large advertising budget the team was requesting or how many sales people they wanted to bring on, and so they clashed many times, and by early nine most of those Tandy executives had already either left the company of their own free will or had been fired, so it didn't last very long.

The last computer marketed under the PC's Limited name was a three eight six IBM clone clocked at sixteen mega hurts with a megabyte of RAM and a one point two megabyte floppy drive plus a forty megabyte hard drive, and it cost four thousand, seven hundred ninety nine dollars, a princely some, no doubt, but still about two thousand dollars cheaper than similar computers from other companies, So while it was still was really expensive, it was less expensive

than the competing machines that had comparable features. Toward the end of nineteen eight seven, Dell opened its first international subsidiary in the UK, and it did not take long for the UK branch to start doing well. In one month in nine the office sold about four million dollars worth of computers, so did pretty well. Was a really big year for the company. Not only did most of those Tandy executives go by by that was the year that PCs Limited officially changed its name to the Dell

Computer Corporation. The company opened its second subsidiary, this one in Canada, and Michael Dell's company transformed from a privately held corporation to a publicly traded one with an initial public offering. So Dell Computers had sold a hundred fifty nine million dollars worth of computers in nine seven, which

helped propel its I p O to a success. The company sold about three and a half million shares at eight dollars fifty cents per share, and they raised around thirty million dollars and ended up with a valuation of

eighty five million dollars for the company. They did hit a bit of a stumble with its planned IBM clone for the PS Slash two computer system, so the PS SLASH two was the third generation of IBM's personal computer hardware, and it was available range of options, including ones that took a more proprietary approach as opposed to using industry

standard architecture. Dell Computers announced they would offer a PS slash two compatible machine not long after IBM system became available in nine seven, but delays in design and production that Dell did not have to didn't have that computer ready to go for several months, So there are lots and lots of delays. That actually was a pretty bad black eye for Dell early on. Uh. Dell would then end up luring away Glenn Henry, who had been a

computer scientist over at IBM. Henry worked on product development for Dell, ended up tossing the design for the ps slash two clone and starting over entirely. He said, this is so far down the wrong path, we need to go back to the drawing board. He also helped establish Dell's R and D team, which eventually had a hundred and fifty or so engineers in it under his guidance. Meanwhile,

the market was becoming more crowded. Japanese companies were beginning to offer their own IBM cloned computers for very low prices, and Dell faced some pretty tough competition in a space that it had been dominant in for several years. And when we come back, I'll talk about another problem Dell faced in the late eighties, But first let's take another quick break to thank our sponsor. When Dell Computers held

its i p O, computer demand was super high. In fact, it was more than what the company could meet, and so in an effort to scale up operations and take advantage of demand, the company began to spend the cash it raised during the i p O to secure warehouse space and manufacturing capacity to actually build up inventory, something

it had never really done before. But that strategy ended up coming back to hunt Dell because during the fourth quarter of demand for computers actually went on the decline, and that left Dell with full warehouses and little operating cash. They'd spent all our money and their inventory wasn't moving anywhere. So it was the type of situation Michael Dell had worked really hard to avoid back when his company was much smaller, and he tried to keep his inventory low.

But obviously when you get to a certain scale, it becomes much more difficult to operate in that way. Even so, with these events and these setbacks, the company was doing pretty well overall. By night nine, Glenn Henry was working on creating a new Dell computers capable of producing high quality images with special graphics cards and better quality monitors, which helped the company aim at high performing PCs. It

was a market that was starting to take off. It wasn't just about processing power anymore, and that was also about graphics and sound. Gamers were largely fueling this as well, not to mention people who are working in media, so Dell suddenly had a new market to aim for. They also introduced their first laptop computer in nineteen eighty nine. It was called the three sixteen LT and this was a bit of a beast. Then again, all early laptops

were pretty big and clunky. This one had a three and a half inch disk drive, which meant the whole case was pretty thick in order to fit the drive and its uh machinery. The laptop weight thirteen and a half pounds, but that was only without a battery. If you added a battery that would add several more pounds to the device. It had a three six processor clocked at sixteen Mega hurts and it came standard with one megabyte of RAM, upgradable to eight. They also had built

in dial up modem. The screen size was nine and a half inches on the diagonal with a resolution of six forty by four eighty pixels. It was mono chromatic, so no full color display yet, and you could buy it for the princely sum yet again of thirty five dollars. Portability can be yours for the low low price of three thousand, five hundred dollars. And keep in mind this is early nineties, so it would be much more expensive today. The US operations for Dell hit two hundred fifty seven

point eight million dollars in aals. The UK division hit forty million dollars in sales, so sales were going very very well as the company scaled up. Michael Dell stressed the importance of keeping the focus on customer service and experience, which they were able to do for a few more years, but that would start to slip not too long from

this point. Salespeople were supposed to take six weeks of training before they could even start taking calls, and they were trained also to help up sell options to customers. Like I mentioned before, that's where Dell made a lot of its money. So if you called into Dell to order a baseline computer, chances are the salesperson you talked to would bring up other options such as more memory

or filling up those expansion cards are slots with cards. Uh. Dell was known for a very quick turnaround as well, so that was a big selling point. Once a salesperson turned in a customer order to the manufacturing facility, that order would have to be filled within five days. So keep in mind, these computers are built to specification. It's you could order a base model and you would get it just as fast as you would if you decided

to add some bells and whistles to it. So it was a very different approach than what you would find if you just walked into a store and bought a computer off the shelf. Dell was also taking another stab at the corporate world. The company began to make servers

for Anderson Consulting and other big clients. By the end of nineteen ninety, about of Dell's sales came from corporate clients, and in total, sales equaled five forty six million dollars and the company was shooting up the ranks among PC manufacturers. In nine, it had ranked number twenty two out of all companies computer companies. In nineteen ninety one year later

it had shot up to number six. One of the first systems Dell produced for corporations was the Dell System T E series, such as the four five T E and the four thirty three T E. These boasted the four eighty six processor, which was the newest model from Tell, and the higher end four thirty three T E model sold for twelve thousand, one hundred nine nine dollars, which is a lot of money, but it was still less than half of what Compact was charging for its similarly

powerful FOR eight six thirty three server, which had a price tag of thirty thousand dollars. So while it was an incredibly expensive machine that would be dwarfed by even a budget PC today, it was still very affordable compared to the competition. Dell also opened up a manufacturing center in Limerick, Ireland in nineteen nine to increase its production capacity, specifically in order to serve markets in Europe and Africa more readily. And despite the increase in sales and despite

growing so rapidly. The company's actual profits were not quite as impressive. Dell had lower profit margins than some other manufacturing companies, and in nineteen nine, Dell produced too many memory chips and was unable to sell as many as the company had projected. Plus it had to cancel a big project that would have seen Dell produce workstations for companies. Those setbacks whittled the actual profit for Dell in down

to five million dollars. It's still pretty impressive, but when you view it against the more than five hundred forty million dollars in sales, questions have to be asked. If you sell five forty million dollars worth of stuff, but at the end of the day your take home is only five million, people start asking questions like where did all the rest of that money have to go to? How much are your operations costing? But in this this particular year had a lot of hard things hit the company.

Was also when Lee Walker stepped down as president and CEO of Dell Computers, Michael Dell reached out to another executive named Morton Meyerson to take over the company. Meyerson had previously led the company Electronic Data Systems, which was founded by former presidential hopeful Ross Perot back in eighteen sixty two. Meyerson had led Electronic Data Systems from nineteen seventy nine to nineteen eight seven and retired three years after General Motors had Required acquired rather d E. D

S for two point five billion dollars. Myerson came in originally to help Dell transition to the next phase UH and had successfully held together during an explosive period of growth. Now the company needed to transition into a large corporation. Dell Computers was transforming in many ways around this time.

While the company had begun as a direct sales computer company aiming at individual customers and corporations, now the emphasis was really shifting to those larger clients like big companies and government agencies, And starting in nineteen ninety, Dell began to explore options by dealing with resellers, those retail establishments, specifically ones like Softwarehouse Superstores which later changed its name to comp us A Walmart was another one, Sam's Club Staples,

and I'm sure you all know the US. But the way that reselling works is you have a merchant or a company they end up buying computers from a manufacturer at a certain price. They agree upon the price, so the reseller ends up buying those machines. The reseller then sells those machines to customers, UH, typically at a markup. You could sell them for at cost, but then you're

not making any profit. And unless you're doing it in a way to try and convince the customer to buy other stuff that is marked up for a profit, it doesn't make good business sense. So the problem was, however, it would eventually prompt the company to reconsider its relationship with these retailers in because profit margins were getting really thin for Dell, and part of that was because of this this strategy to use resellers, but we'll get to

that bit in our next episode. Around this time, in the early nineteen nineties, the PC market was in trouble for the most part. There was an economic recession going on in the world, and consumers had less money to spend on expensive computers. So some of the big names like Apple and IBM, we're having their own crises brought

about by various questionable decisions. But Dell Computers was actually coming out ahead because the company had been focused on comparably powerful computers at a much lower price than competitors would offer. So people still needed computers, they just couldn't shell out the big bucks for the brands front like Compact or Apple or IBM, So Dell continued to do pretty well during that recession, at least at first. In Fortune magazine would name Dell Computers among the Fortune five

hundred list. That list ranks the five hundred largest US corporations according to total revenue for the most recent fiscal year for those companies. Dell appeared on it for the first time in and that made Michael Dell the youngest CEO of a Fortune five hundred company. He was twenty seven years old at that time. But things were not necessarily going to go smoothly for Dell and his company in the near future. That, my friends, is what we

call a cliffhanger. You'll have to join me for the next episode to find out what happened to Dell, or you know, read an article or something, but no, tune into my episode. And if you guys have suggestions for topics I should tackle in future episodes of Tech Stuff, whether it's a company, a technology, a personality in tech. Maybe there's someone I should interview or have on as a guest host, send me a message. The email for the show is text stuff at how stuff works dot com,

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