Last Updated on November 13, 2018 by Dave Farquhar
The history of Dell computers is a classic story of how a little guy took on a titan of business and ended up becoming a titan himself, the kind of story Americans love to tell. Like many computer industry stories, it started with humble beginnings.
Michael Dell wasn’t a total rags to riches story. He wasn’t a pauper. He was the son of an orthodontist and a stockbroker, and showed an entrepreneurial bent starting at age 9, when he made $2,000 selling collectible stamps. As a teenager, he earned $18,000 selling newspaper subscriptions to an untapped market he found himself. Crucially, by the age of 15, he was showing an interest in computers. His parents wanted him to become a doctor.
The history of Dell computers started in a dorm room
The history of Dell computers starts at the University of Texas at Austin in 1984. As a freshman biology major, Dell got the idea to start selling upgrades for IBM PCs. Dell knew how to upgrade an ordinary IBM PC into the equivalent of a more expensive PC/XT by adding a hard drive or memory. People would take their computers up to his dorm room on the 27th floor, where he would install upgrades in their computers and they would pay him.
Dell’s business soon outgrew that 27th-floor dorm room and he was living off campus. From there he started buying unsold IBM PCs from larger suppliers, upgrading them by adding memory and hard drives, and reselling them at a profit. This practice, known as the gray market, was common in the 1980s but it was difficult to guarantee a supply of machines. Dell observed that a $3,000 IBM PC contained about $600 worth of parts, which led him to the next stage of his venture. He started assembling his own IBM compatible PCs from standard off the shelf parts, including an 8088 motherboard made in Taiwan. What he did was similar to an enthusiast building a PC from standard parts, but on a larger scale.
PC’s Limited and the direct-order model
His company, PC’s Limited, initially sold computers by phone using a build-to-order model. A customer would call in an order, and then PC’s Limited would assemble and ship it. PC’s Limited’s first product, which it simply called the Turbo PC, sold for $795 in its stock configuration. It was faster than an IBM PC and cost 1/3 the price.
By spring break, PC’s Limited was selling $80,000 worth of PCs every month. In July, Dell showed his parents a financial statement showing a profit of more than $200,000 and convinced his parents to let him drop out of college. Michael Dell wouldn’t be becoming a doctor. He dropped out of college to concentrate on selling PCs full-time, and soon his company had 30 employees.
PC’s Limited thrived for years on the direct order model. The idea was to take orders by phone or mail, and not build the PC until someone ordered it. This allowed them to control inventory and keep overhead low. It also prevented the problems IBM had with oversupply that Dell had exploited when he launched his business.
Re-branding and IPO
In 1988, PC’s Limited changed its name to Dell Computer Corporation, taking on the name of its founder and it went public, raising $30 million in its IPO and hitting a market capitalization of $85 million. By 1992, it was a Fortune 500 company, making the 27-year-old Michael Dell the youngest Fortune 500 CEO ever at the time, marking a pivotal time in the history of Dell computers. And it was Dell who successfully challenged TI’s patents regarding the microprocessor, dating back to some early-70s cooperation with Intel.
But Dell quickly hit a few bumps in the road. It experimented with selling computers at retail, but couldn’t compete with Compaq’s name recognition and Packard Bell‘s cutthroat pricing. Quality control issues also forced Dell to withdraw its laptops from the market for a time. Dell brought in some outside management and pulled out of retail.
Dell started taking online orders via the Internet in 1996, in a move that seemed controversial at the time. But you could already order pizza via the Internet by 1996, so why not a computer? It took six months for Dell to sell $1 million worth of computers online.
Taking its place among the titans
In 1999, Dell overtook IBM in PC sales. Then in 2001, Dell overtook the slumping Compaq to lead the industry in PC sales for the first time. It retained the #1 position for most of the decade, occasionally trading places with #2 HP. The upstart founded by the scrappy college kid had overtaken its two biggest competitors, Compaq and IBM. Compaq sold out to HP a year later, and IBM exited the PC business in 2003. By carefully controlling its supply chain, Dell had waged a sustained price war that pushed it to the top of the industry. It’s still one of the most popular computer brands today.
As the company grew, it took its supply chain control to a further extreme, not even ordering the parts until it had a customer. Dell would get its suppliers to keep warehouses near his factories to support the model. It was ruthless, but the arrangement did allow everyone involved to turn a profit.
Dell wasn’t the first company to sell computers direct, nor were they always the biggest, but they managed their supply chain better than rivals like Gateway 2000, so Dell could beat them on price. Dell experimented off and on with selling computers at retail through the years, but always sold the majority of its machines through direct order.
21st century struggles
In 2004, Michael Dell stepped down as CEO but remained chairman. This didn’t last, as Dell had some tough years under his replacement, Kevin Rollins. Dell’s market share slipped under increased competition from Lenovo, Acer, and a revitalized HP and the company experienced numerous quality control issues. Rollins resigned in 2007 and Michael Dell returned at CEO. Dell peaked at #26 on the Fortune 500 list in 2006.
By 2013, Dell had lost 31% of its share price in five years and falling to #51 on the Fortune 500, so Michael Dell teamed up with Silver Lake Partners and took the company private again. The logic was that without pressure for quarterly returns, the company could make the changes it needed to turn around.
The turnaround was successful, so in 2016, Dell purchased storage giant EMC at a cost of $67 billion, making it the largest tech merger in history in terms of dollars. In 2018, Dell then used EMC’s controlling interest in VMware to take the whole company public again without an IPO. This marked its return to the Fortune 500 at number 35. The enormous debt Dell incurred as a result of the EMC merger could cause problems, but for now, it appears Dell has recaptured some of its magic. The history of Dell computers isn’t over yet.