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Dell's new souped-up machines woo gamers
No. 1 PC maker pins bottom-line hopes on discerning gamers with deep pockets.
November 3, 2005: 1:11 PM EST
by Amanda Cantrell, CNN/Money staff writer
Dell's new XPS line of computers
Dell's new XPS line of computers

NEW YORK (CNN/Money) - With its new line of souped-up computers, Dell is going after performance-hungry gamers who are not quite up to building their own machines.

But will they bite this holiday season? And if it they do, how much will that affect Dell's (up $0.31 to $29.65, Research) bottom line?

Undoubtedly, the company is hoping to juice up sales in the fourth quarter and benefit from the onslaught of holiday shopping. The fourth quarter is particularly important to Dell since it announced this week that its earnings and revenue for the third quarter will likely come in lower than originally forecast.

Dell is reporting its third-quarter results next week and said it's expecting sales of $13.9 billion and earnings of 39 cents a share, below its earlier forecast of $14.1 billion to $14.5 billion in revenues and below analysts' expectations of $14.3 billion. Analysts had been expecting earnings of 40 cents a share. The company blamed the shortfall on weak consumer sales.

Dell also said it will take a charge of roughly $450 million in the third quarter that is related to repairing some computer systems.

The company hopes its new XPS line of computers, which are more expensive and high-end than previous models, will appeal to customers who demand higher performance than typical PC users. This includes gaming enthusiasts, who want faster speeds, better graphics and better performance overall.

Dell addressed these needs by outfitting XPS computers with advanced graphics cards, as well as the fastest processors Intel has to offer, including "dual core" processors, which are essentially microchips with two brains. Analysts say it remains to be seen whether the computer gaming community will bite.

"Courting gamers among the most discerning, clannish and vocal of PC users won't be easy for Dell," wrote Simon Yates, an analyst for Forrester Research, in a recent report on Dell.

Yates said this is because the Dell brand doesn't yet convey "premium and elite." But with XPS gaming-capable machines in the $2,500 to $3,000 range, the computer maker is trying to reach gaming enthusiasts who build their own performance PCs or buy custom systems, he wrote.

Yates says that gamers are a highly networked community that exchanges strategies and opinions on message boards; if they don't like Dell's offering, they could use these message boards to persuade other users to avoid its products.

Dell + AMD?

The strategy of courting higher-end customers could pay off for Dell, as these customers are a profitable segment and because Dell's rivals have successfully courted them for some time, according to Mark Stahlman, an analyst with Caris & Company.

"It's clear there is a segment of the consumer market that is price insensitive and more interested in advanced features than concerned about getting the lowest possible price," Stahlman said. "That's a segment Apple does very well in; so does Hewlett-Packard. Dell has to try to sell to that customer."

In his note, Yates wrote that while it may not yet be perceived as such, Dell is already an up-market consumer brand, commanding a 30 percent share in households earning more than $75,000, versus HP's 24 percent.

By appealing to this segment, rather than the uber-gamers who make their own machines, Dell could score. But Stahlman thinks Dell already faces a couple of roadblocks.

"Knowledgeable, high-end buyers today want AMD," said Stahlman. "Dell doesn't sell AMD. So they have gone into this important market with one hand tied behind their back."

In his report, Forrester analyst Yates said one way for Dell to address this issue is to make the XPS 600 line an entry point for Dell to introduce AMD's Athlon 64 processors into its machines, as gamers love the performance of that processor, he wrote. But AMD does not currently have the production capacity to service a customer like Dell, according to Stahlman.

That said, Intel offers a couple of important advantages over AMD one is capacity. While Intel has reported that it's currently suffering from short supply of chipsets, Stahlman said that Intel will always make sure Dell has all the processors it needs.

Customer service critical

Gaming customers also require high-quality customer support, Yates said. Dell customers have complained in the past about long hold times and unsatisfactory service, but the company is hoping to avoid this problem with XPS. It has created a dedicated sales and support team for it.

Yates said gaming enthusiasts will demand not only better and faster support, but also expert advice on how to get as much performance as possible out of their PCs.

"This is a customer that needs some special attention, so that is a sensible part of the package for Dell to offer," said Caris's Stahlman.

The company's fourth quarter results will show whether Dell's courtship strategy will pay off. The company will report fourth quarter results in January, and Wall Street analysts are expecting sales of about $15 billion.

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Xbox 360 will be hard to come by: More here.

Nasdaq leads stock rally: Click here.

Stahlman does not own shares of Dell, and his firm has no banking ties to the company.  Top of page

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