How HP Caught Up To Dell

Call it poetic justice, but it appears advantages Dell enjoyed with its direct build-to-order strategy has finally become its Achilles heel. With the final tally in for 2006, Hewlett-Packard is now in a veritable dead-heat for PC market share with its archrival.

Figures released last week by Gartner Dataquest show both companies with a 15.9 percent worldwide market share for 2006; HP's worldwide PC sales grew 19.2 percent in 2006, compared with Dell's 3.5 percent. But if Q4 is any indicator of HP's momentum and Dell's problems -- HP's U.S. sales were up 16 percent while Dell's were off by 17.3 percent -- 2007 could be defining.

Also chipping away at Dell: Acer and Toshiba, which saw 37.1 percent and 27.3 percent worldwide sales growth for 2006, respectively (though each only owns single-digit market share). Lenovo grew nominally at 10.9 percent, posting effectively flat market share year-over year.

But the real shift is happening among the two market leaders. HP and Dell have achieved pricing parity in the market, and newly designed notebooks with consistent perhipheral interfaces have broadened HP's appeal. Most notably HP has made major changes to its channel program, making it more appealing for solution providers to sell PCs again.

Among the changes implemented last year were competitively pricing preconfigured systems, the elimination of its telemarketing operation, and the addition of the New Business Opportunity rebate program and Attach Plus offering, which offers higher margins to partners who add PCs and other products to overall solutions they sell.

"They have really cleaned up their PartnerOne channel program," says Gartner analyst Mikako Kitagawa, noting the company's efforts to reward its most loyal partners at the expense of those who sell less HP product. "They have created a distinction between real channel partners and nominal ones."

Kitagawa points out that Dell's build-to-order model actually is now less profitable than HP's emphasis on preconfigured systems. Indeed, a growing number of solution providers are now providing their customers with PCs from HP. That includes Michael Anderson, president of Glendale, Ill.-based Digital Services. For years, he had offered white boxes from Equus Computers because there were no margins on HP systems. That has changed.

"Within the last year, we've flipped from whitebox sales to HP desktops," Anderson says, noting he will stick with HP as long as the company keeps his company profitable. "We are ready to switch back again if we have to because we have to maintain the margin."

Looking ahead, HP wants to keep its momentum going. Last week, it launched an ad campaign with the tagline: "What could be more direct than face to face?" Still, some say the vendor may need all the help it can get. Keeping pace with the past few years will prove difficult, predicts Gartner's Kitagawa. That's because PC sales are likely to taper off this year and next.

"The market is going to be in a slow growth period in 2007 and 2008," she says. "The upgrade cycle is going to slow. The reason is that the professional market is already very saturated."

Despite that forecast, Anderson says he is experiencing the opposite. "We are ramping up," he says. "This has been our biggest January ever in terms of PC box orders."