Dell Wants Your Home

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John Hamlin is leading Dellís charge into consumer electronics

For the past eight months, a team of technicians was holed up in a windowless room at Dell, testing 650 products from nearly 90 manufacturers. Their goal: to ensure that products like Sony monitors and Veo cameras — even printers made by archrival Hewlett-Packard (HP)--worked smoothly with Dell's machines. It didn't take them long to realize that Dell could build some of those products better and sell them more cheaply. So last week founder Michael Dell, 38, put the consumer-electronics industry on notice — including some of the company's own suppliers — that the world's No. 1 computer maker is attacking their territory.

By Christmas, Dell will launch a line of flat-screen TVs, an MP3 player and a downloadable music service, all to be sold exclusively online, as it does with computers.

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At the heart of Dell's strategy is a belief that the much hyped digital home is about to become a reality, with the personal computer as the brain running movies, music and photos around the house. "Over the next several years, you can expect to see much of what was previously considered consumer electronics move into this digital home vision," the CEO told TIME. "And Dell will be there."

It's a dramatic change for Dell, long a computer-hardware maker, which earns 80% of its revenue from sales to businesses. At its headquarters in Round Rock, Texas, Dell's generals are getting used to their new role, touting themselves as the guys who will offer the lowest prices for a whole new line of products. "The battle is not joined yet," says Tim Mattox, one of those generals (otherwise known as marketing V.P.s), "but you could say we're laying the foundation for trench warfare." Consumers are going to be the winners. Although Dell hasn't revealed pricing on all the products, its entry into home electronics could send price tags of flat-screen TVs into full retreat.

Dell's invasion of your living room is part of what promises to be a free-for-all in the $100 billion U.S. consumer-electronics market. Computer makers like Dell are responding to slowing sales by leaping into new arenas, going head to head against consumer giants like Sony. In August, No. 2 computer maker HP launched 158 consumer products, most notably digital cameras to work with its market-leading printers. Gateway, which hit the jackpot last year with a $2,999 plasma TV, plans to introduce 50 more consumer products for the holiday season.

Crowning the ultimate winner in the war for our home-electronics dollars may depend on which product emerges as the primary device: the computer or the television. Sony manned its battle stations last January at the Consumer Electronics Show, with CEO Kunitake Ando proclaiming that the digital future was "about televisions, not computers." The Japanese giant, whose TV and computer businesses are losing money, is repositioning its Vaio PC line as part of a wireless home network, with the TV — not the PC — as the command center. "PCs are becoming more complex," says Sony spokesman Yoshikazu Ochiai. "Now is the time for TVs to be reborn." To maintain that dominance, Sony last week revealed it is talking with Samsung, the world's leading producer of flat-screen monitors, about joining forces — a direct attack on Dell, which is the top seller of these monitors. The talks underline Sony's efforts to improve its flat-panel TV line, which has lagged behind those of competitors.

In Dell's vision, the PC will be central to the home network. "The use of the TV as a major Internet device would drive everyone else on the couch nuts," says president and COO Kevin Rollins. Dell is placing its bet on lighter, thinner PC monitors fitted with TV tuners (or digital chips) to replace the old cathode-ray boob tube. Despite Dell's challenge to Sony, Ochiai says he welcomes the competition. "It's great that computer companies are expanding the horizon of consumer electronics," he says. "They can be a threat but in a good way."

In the way that a 50-ft. wave heading for your beach house is a good opportunity to learn surfing. Maybe Sony has not felt the sting of Dell's aggressive pricing yet, or it wouldn't be so polite. Last November, when Dell priced its first consumer product, the Axim X5 handheld, at $199, it set an industry fond of $400-to-$600 tags "on its ear," says Silicon Valley tech watcher Rob Enderle. With just one model, Dell is quickly capturing nearly 38% of the PC handheld market in the U.S., forcing HP, the worldwide leader, to slash prices.

From handhelds, Dell moved in on HP's printer business last March, trying to take advantage of the initial disarray that followed HP's merger with Compaq. (HP, which had been visiting Dell's labs, stopped after that.) "Michael wanted to remove the ability of HP to lob into our business and make all the money on printers," says Rollins. But he faced doubters in-house who questioned whether customers would buy ink cartridges online. Demand was so great, however, that the company sold twice as many printers as planned in the first six months; it couldn't keep up with consumer demand, says Mike George, the company's chief marketing officer.

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