Gobi Takes Aim at Dell's Goliath

Total outsourcing is enabling small firms to threaten the PC giants with mere pebbles.
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In Round Rock, Texas, it's easy to see nothing but

Dell

(DELL) - Get Report

: Dell manufacturing hubs, Dell corporate offices, Dell buildings all around.

Over the past 15 years, through bravado, vision and a dose of luck, Michael Dell has built up a personal computer empire that churns out 9 million PCs annually and employs 25,000 workers. Today, Dell is on track to take in $20 billion in annual revenue as it cements its high-tech global brand name.

Almost half a world away, a host of wannabes are gearing up to take on Mr. Dell. In a sparse 12,000-foot office space in Manhattan, three ex-

D.E. Shaw

brokers with no experience in the computer business are planning to revolutionize the PC industry. Their 1-year-old computer company,

Gobi

, has 30 employees, a radical business model and, of course, a dream. "We have our own version of Dell's just-in-time inventory," says Gobi President and CFO Sudhir Shrotri from the company's modest headquarters just outside Wall Street's shadow.

That means total outsourcing. Gobi's manufacturing plant?

California-based "

Solectron

(SLR)

builds our boxes," says Shrotri. And customer service? "We outsource that as well." What about your Internet service?

Concentric

, a national ISP based in San Jose, handles that. "We aren't a PC OEM

original equipment manufacturer like a

Compaq

(CPQ)

; we are a service provider," says Shrotri matter-of-factly. It is a new strategy. Gobi, along with other newbie PC outfits, outsources everything.

The arrival of Gobi -- which is the name of desert in Mongolia and means "cauliflower" in Hindi -- shouldn't surprise people who have been following the computer industry. Irvine, Calif.-based

eMachines

, has emerged in only 10 months, to become the No. 4 retail seller of PCs in the U.S. The barriers to entry in the increasingly commoditized PC business have fallen off a cliff, forcing established players such as Dell and Compaq to adapt or lose substantial market share.

"This new PC model is a quantifiable trend that has PC makers in a kind of a panic," says Emily Meehan, an analyst at the

Yankee Group

that follows consumer adoption trends. Today the No. 1 reason to buy a PC is to get online, and these new companies are using a clever strategy to package a PC with Internet service.

PC Start-Ups Proliferate

The competition among this new breed of PC start-ups is fierce. Apart from Gobi, other players include

Microworkz.com

,

Free-PC

,

InterSquid

and

DirectWeb

. Microworkz.com is offering its new machine iToaster, which allows easy access to the Internet, for $199; Free-PC literally gives away computers in exchange for the right to bombard users with constant advertising. InterSquid and DirectWeb, along with Gobi, prefer monthly ISP payments in exchange for a free PC.

Gobi, which requires customers' personal information, charges $75 in up-front fees for a PC with a Celeron 333 Mhz processor and a 15-inch monitor. At $25.99 a month for the three-year contract, the customer gets unlimited Internet access through Concentric. That's $1,011 for a PC and three years of Internet use. At the end of the three-year commitment, Gobi customers can upgrade to a newer system. Gobi will then pass on the older unit to charity. "Technology shouldn't discriminate against those who can't afford it," says Shrotri, who helped start up a software development center in India while he was at D.E. Shaw with Gobi CEO Ganesh Ramakrishnan and COO Jeremy Schneider.

In true start-up fashion, Gobi's top three executives, all under 30 with just 15 years of experience between them, operate out of one small room. Shrotri uses an

Acer

desktop unit. "We want our customers to get Gobis first," says Shrotri, sweeping his arm towards the middle of the empty office, which is littered with Gobi's orange and green-striped PC boxes. "Soon all of our employees will have Gobis."

Gobi started shipping PCs in April, but the executives are keeping mum about how many units the company has sold. They also won't reveal much about first-year revenue projections.

To accomplish its goal of selling 1 million units by April 2000 it's going to need cash to roll out a larger advertising strategy, which is currently limited to some print ads and radio spots on

Howard Stern

shows. "People see our online site and have been throwing VC money at us, but we have been walking out of the room," he says.

They better not wait too long.

America Online

(AOL)

,

Microsoft

(MSFT) - Get Report

and

Prodigy

(PRGY)

all are offering rebates for people to buy PCs along with Internet service commitments. PC manufacturers such as

Gateway

(GTW)

are also

hurtling headlong into the PC-ISP selling model.

Gobi depends on other companies to do much of its logistical work. But that brings its own dilemmas. If there is a problem with a customer, they can't solve it. "That's what worries me: What if Solectron or Concentric doesn't want to work for Gobi anymore?" says a money manager who follows the PC industry. "What happens to Gobi's customers who are tied up in these contracts?" The money manager has a long position in Dell.

One thing's for sure: There will be a lot of consolidation in the industry. "It's the new innovative start-ups like Gobi that give the big guns the ideas," says Yankee Group's Meehan, who sees the larger companies co-opting these new models for themselves. While PC makers pick and choose the ideas that work for them, these young upstarts at Gobi and elsewhere will be working constantly to make their businesses succeed. "I never leave here," says Gobi's 29-year-old Shrotri. "I'm here seven days a week because we have to make this work."

The alternative is that a big bad PC manufacturer will gobble them up.