Reason traditional OEMs never entered
Some investors criticize Dell Inc. (NASDAQ:DELL) for never entering into the smartphone space, and blame it on Dell’s stagnating performance. Thinking of this from a more practical standpoint, Dell made the right decision not to enter. It saved itself from losing billions of dollars in development-related costs. Not to mention, Dell could have had its phones pile up in inventory at AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) stores across North America.
A firm must produce and sell at least 1.5 million devices in order to enter the market. If Dell Inc. (NASDAQ:DELL) isn’t able to do this, Dell will be stuck with a ton of inventory because the major phone carriers will most likely return the excess inventory.
Dell Inc. (NASDAQ:DELL) has been focused on investing its efforts into enterprise solutions instead. The company was able to report 10% year-over-year revenue growth in the enterprise solutions group in its latest quarter. The company grew its software business from $38 million to $295 million in revenue, year-over-year, during the first quarter. The company hopes to focus on software and enterprise solutions in order to become more profitable. Both of those markets provide better upside to Dell Inc. (NASDAQ:DELL) and its shareholders as they leverage Dell’s years of experience in the computer space.
Traditional mobile companies are also struggling
Five years ago, no one ever thought that the market for the high-end smartphone computing would become so large. In fact, a vast majority of companies were forced to enter into the market as they were already manufacturers of cell phones, and the logical product extension was to sell smartphones, even if it meant selling them at a loss.
Two examples of companies that barely broke even or are operating at a small loss include HTC and Research In Motion Ltd (NASDAQ:BBRY). That being the case, the weak performance brought by these company’s should attest to the wisdom longer-term executives in Silicon Valley have been able to recognize.
If you can’t become one of the most dominant players in a market in the next five years, chances are it would probably be pretty smart not to compete. Even Facebook Inc (NASDAQ:FB) with all of its experience and knowledge on user preferences and application development failed to create a mobile-operating system that could catch fire. HTC had to slash prices on its HTC First device (Facebook Inc (NASDAQ:FB) phone) to $0.99 and even then AT&T Inc. (NYSE:T) has had difficulty with clearing out the inventory of these phones. AT&T Inc. (NYSE:T) is sending these phones back to HTC.
This is why investors should never bank on the success of new products because products fail more often than they succeed.
Facebook Inc (NASDAQ:FB) has ramped research and development, spending by 500% since its IPO. While its first flagship product launch outside of its social network was a failure, at least the company is putting in an honest effort to diversify its business operation. I think the company will need to go back to the drawing board and figure out a stronger product strategy. In the meantime, its core advertising business is likely to provide reasonable upside.
Conclusion
Competing in mobile isn’t the cure to everything. Companies lose relevance; the market is becoming more segmented into larger players. Even whales like Facebook Inc (NASDAQ:FB) have trouble with coming up with compelling product ideas in the space. Some companies like Dell Inc. (NASDAQ:DELL) have been able to avoid the disaster of over-expanding.
Investors would do better by investing into Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) and QUALCOMM, Inc. (NASDAQ:QCOM) as they are less exposed to the potential success or failure of different mobile phones.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Facebook Inc (NASDAQ:FB). The Motley Fool owns shares of Facebook and Qualcomm.
The article Smartphone Means High Risk originally appeared on Fool.com.
Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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