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Dell has backed away from its smartphone plans, outlined last summer, and ruled out any attack on the handset market, despite its overall ambition of becoming a consumer electronics major.

Chief operating officer Kevin Rollins said this week that the presence of Nokia would make handsets a difficult market to break into and that the sector is less attractive than other consumer devices because so much profit and balance of power goes to the mobile operators.

Dell’s success in PCs – where it has 17% market share worldwide – is based on its direct sales model and legendary supply chain efficiencies. This could not be replicated in mobile phones – although there are direct sales, the role of the carriers in the route to market is critical; and unlike the inefficient PC industry that Dell entered, the mobile phone business is very lean, and Nokia could give Dell a run for its money in competing for the prize for supply chain efficiency.

The new strategy reverses Dell’s plans, announced in July, to launch a smartphone based on Windows Mobile. The company says it retains its determination to be the first PC maker with a realistic claim to deliver much-vaunted ‘ubiquitous connectivity’ but will focus this effort on the traditional Axim PDA, and will integrate Wi-Fi and cellular mobile connectivity into this device as well as into most of its notebook range.

Despite the rhetoric, this basically relegates Dell's mobile strategy to be the same as Hewlett- Packard's – extend the PC range with a handheld, fully featured, wireless client that will be offered to enterprise and consumer clients as they shift from notebooks to handhelds for mobile use.

But this is a short term market, especially in Europe and Asia, with the smartphone rapidly stealing share from the PDA and even the classic PDA makers, notably Palm, trying to move into smartphones. They will face the same challenges from which Dell is backing away, notably the strength of Nokia and the unfamiliarity of the carrier-focused sales model but they know that without this shift, their core products will become marginalized.

For Dell, the PDA does not have to be core and it has the luxury to back away from phones and focus on more open electronics markets. Hence the reversal of its announcement in July that it would make Axim a mainstream mobile device and would create a fully fledged smartphone towards the end of 2004, which it would sell through operators. At the time, the company was entranced by the higher margins in smartphones compared to PCs. "We didn’t know these sorts of margins still existed in computers," said Dell's head of wireless marketing, Anthony Bonadero, at the time.

Now market share is taking precedence over margin and the smartphone suddenly appears less attractive – even less so with Dell's commitment to the Microsoft operating system, which is unlikely to gain significant share against Symbian and which Dell itself said would not be robust for mobile devices until its third iteration.

The loss of the Dell program will be a blow to Microsoft, since the PC maker did have a good chance of building a strong business in enterprise focused cellphones, the area where Windows Mobile also has the best chance of succeeding. Dell's aggressive moves into both Wi-Fi and cellular, its famously efficient manufacturing and logistics processes and its strong presence in the corporate market all gave it the potential to be well ahead of almost all its rivals in ubiquitous internet access, especially if it had decided to go ahead with a cellphone range.

But now it is focusing on growth consumer markets and so the relatively niche enterprise smartphone sector can be left to others, and to the incoming Nokia. Given Dell's market share ambitions, this is probably a wise decision.

© Copyright Rethink Research Associates 2003.

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