By Tom Krazit and Michael Kanellos
Thursday, February 01 2007 09:58 AM
URL: http://www.zdnetasia.com/news/hardware/0,39042972,61986298,00.htm

Dell announced Wednesday that Kevin Rollins has resigned as chief executive officer, and company founder Michael Dell has retaken the helm of the PC company.

This is not a short-term assignment," said Bob Pearson, a Dell spokesman. Dell, who founded the PC company in 1984, will retain his duties as chairman of the board of directors.

Rollins has also stepped down from the board of directors. In addition to announcing Rollins' departure, the company said that it now expects its fourth-quarter results to be below analyst expectations for both revenue and earnings per share.

The board of directors was involved in Rollins' decision to resign from the company, Pearson said. But he did not elaborate on whether Rollins was asked to resign by the board.

Rollins' departure comes after a terrible year for the company, during which it lost its lead in PC market share to Hewlett-Packard and an investigation by the SEC for possible accounting improprieties began. Several executives have left the company in recent months, including CFO Jim Schneider, who was slated to leave the company at the end of January.

"Kevin has been a great business partner and friend," Dell said in a press release. "He has made significant contributions to our business over the past 10 years. I wish him much success in the future."

Pearson would not comment on whether Rollins' departure was tied to the investigations into the company's accounting procedures. Dell is currently under investigation by the SEC over accounting issues that the company has said could result in significant restatements to its earnings before the 2006 fiscal year. The company has not specified the exact nature of the accounting issues, but has said they involve revenue recognition, and they do not appear to be associated with the stock-options backdating practice that has ensnared hundreds of companies over the past year.

Rollins took over the CEO reins in 2004 after several years spent as president and chief operating officer, during which he was characterized as a co-leader of the company with Dell. Rollins was brought into Dell in 1996 from management consulting firm Bain & Co. as an experienced business veteran tasked with helping Dell grow the company he founded in his dorm room.

A direct link to Rollins' biography had been scrapped from Dell's Web site but the information could still be found Wednesday afternoon immediately following the announcement. Dell's stock rose 4 percent in after-hours trading. Trading was briefly halted from 4:45 p.m. EST to 4:50 p.m. EST.

Dell had stood by Rollins throughout 2006, when some financial analysts were looking for someone to blame for the company's struggles, but the pressure appears to have become too great, analysts said.

"It's surprising. Rollins had the confidence of (Michael) Dell, but when you look at the numbers you can see why" Dell has retaken the helm, said Richard Shim, an analyst at IDC. "They have been suffering from a corporate market slump, and the usual bag of tricks--leveraging the supply chain and their economies of scale--haven't worked."

Dell was an unstoppable force in the PC industry from 1997 through 2004 and consistently gained market share from its competitors--even during slumps in the industry. At the time, Rollins was so confident about Dell's future that he set lofty goals for yearly revenue, promising to take in US$60 billion in annual revenue by this year and US$80 billion in revenue by the end of the decade.

A downward spiral

Consumer complaints about customer service, however, began to gather in 2004. For years, Dell managed to convince consumers that it had the lowest-priced PCs on the market. But its price advantage was tied heavily to its ultra-efficient manufacturing process for desktop PCs. That advantage became less important as the market began to shift in favor of notebooks. At the same time, complaints about Dell's service grew as the company began to shift its support technicians to overseas locations.

Companies such as Hewlett-Packard and Acer regrouped as well. They took steps to become more efficient, following Dell's lead, and also took advantage of an uptick in retail PC purchases.

In 2006, Dell actually started growing slower than the market, the first time that has happened since the company started back in the mid-1980s. HP overtook Dell as the largest PC manufacturer midway through 2006. Dell fell short of that US$60 billion target during its 2006 fiscal year, with US$55.9 billion in revenue, and the US$80 billion target seems to have vanished.

The decline of PC prices, with the commensurate increases in performance, have also played havoc with Dell's business model, noted Charles Smulders, an analyst at Gartner. Dell for years maintained a strategy of upselling customers, getting them to upgrade processors or memory. Now, Dell is selling cheaper PCs. That has eroded revenue growth and put pressure on margins.

"Now, even low-end PCs are able to deliver the performance customers need," he said. "The Achilles' heel has been the precipitous fall of average selling prices in the last few years."

Another problem for Dell has been its place in the consumer market. Consumers account for only 15 percent of Dell's revenue, a figure that's been consistent for several years despite Dell's foray into TVs and other consumer devices. The problem, said Shim, is that consumers want to touch and see what they will buy first, and that means going to retail stores. Dell prefers to sell directly over the Web or by the phone.

The situation was not helped by a massive battery recall in August 2006, which was the largest recall in the history of the consumer elecronics industry at the time. Sony, whose battery technology was the basis of the problem, has accepted blame for the recall. But it was a flaming Dell notebook that first appeared in a video widely circulated on the Internet, and Dell was the first of many PC companies to announce a recall.

Dell also failed to capture the imagination of consumers with its products, which were viewed as dull at best and ugly at worst, said Samir Bhavnani, an analyst with Current Analysis. "Rollins was excellent at supply chain and logistics but did not seem to understand the importance of industrial design," he said.

Customer service was another big problem Dell has had, said John Spooner, at Technology Business Research. "They tried to grow the business too quickly and it outstripped the infrastructure they put into place."

Rollins announced plans to invest $150 million in customer service improvements this year, but the company admits it waited too long to sense the growing dissatisfaction with its products and customer service.

Another market trend that Dell was late to recognize under Rollins' tenure was the growing demand for Advanced Micro Devices' processors. Dell clung steadfast to its exclusive support for Intel's processors despite dozens of independent benchmarks showing that AMD's Opteron server processor clearly outperformed Intel's Xeon processor over the last few years. Intel was also late to release a dual-core Xeon processor, while AMD had a dual-core Opteron in the market for months, a competitive imbalance exploited by HP's server group.

Many in the PC and server industry believe this fealty was due to pricing guarantees made by Intel for Dell's exclusive support. But the competitive pressure became too strong to ignore, and last year Rollins reversed course and announced plans to release desktops, notebooks and servers based on AMD's chips despite saying for years that he had no interest in doing so.

So, Michael Dell must now implement the new strategy the company has been calling "Dell 2.0" alone. When it comes to selling higher-end gear such as servers--one major expansion beyond Dell's original PC business--the company needs to provide more innovative products, better support and better services, said Gabriel Consulting Group analyst Dan Olds.

A change in the head man, however, may not work miracles, said Stephen Baker of NPD Techworld. The company has emphasized for years that Rollins and Dell work in tandem with each other, and Michael Dell was often seen more as the one with his eye on the consumer business. The change is likely mostly a way to placate investors.

"It just shows you how powerful Wall Street is," Baker said. "They wanted him out."

CNET News.com's Stephen Shankland contributed to this report.