Will Dell Succeed with New Device?

Will Dell Succeed with Its New Device? Doubtful.

According to some sources, Dell Inc. (DELL - Analyst Report) may be launching an iPod "Touch-style" pocket-sized Mobile Internet Device (MID) sometime in the second half of 2009. The gadget is expected to tap the Internet and will run on Google Inc.'s (GOOG - Analyst Report) Android software.

The device will feature a bunch of services such as music, videos, and connectivity similar to the iPhone. It is expected to be slightly bigger than Apple's (AAPL - Analyst Report) iPod Touch but may not have a cellphone. The source also commented that the production could be delayed or scrapped completely. Dell declined to comment on any plans for future product releases.

During March, in a conference call, Dell accepted that it plans to offer a handheld device but did not provide any specific details. "The company was exploring smaller-screen devices," said CEO Michael Dell.

We believe this may not be successful, as Apple has created a niche market for its iPhone and the entry in the music player market will be tough for Dell. We also do not expect Dell to catch up anytime soon with competition due to its long track record of failing new product launches (see Digital Jukebox - DJ Ditty music player line and the Axim PDAs). Dell has struggled to keep pace with the consumer market due to intense competitive pressure, particularly in the low-priced desktops and notebook market.

Dell's products lack features desired by consumers and the retail distribution of large competitors, such as Hewlett-Packard (HPQ - Analyst Report), Microsoft (MSFT - Snapshot Report) and Apple. Dell has been losing shares to H-P in the consumer market over the past few years. We believe this is largely the result of more "consumer friendly" devices and a growing retail distribution channel of H-P. Dell also lacks the product diversity enjoyed by H-P. Also, Microsoft's new product named Zune HD is expected to provide strong competition to Dell due to enhanced multimedia capabilities and an Internet browser.

Dell's U.S. Consumer business revenue declined 12.0% during fiscal 2008 and 7.5% during the first quarter of fiscal 2009. Dell is also losing market shares to H-P, Apple, Research In Motion (RIMM - Analyst Report) and Nokia (NOK - Snapshot Report). As per Gartner's preliminary forecast for the fourth calendar quarter of 2008, Dell's market share dropped to 13.2% from 14.2% in the year-ago quarter.

We maintain our SELL rating on Dell's shares with a new six-month target price of $8.00.