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An Out-of-This-World Business

With larger PC-makers struggling, why is Alienware doing so well?

Description: Manufacturer of specially configured PCs for gamers
Founders: Alex Aguila and Nelson Gonzalez
Location: Miami
2004 sales: $112 million
http://www.alienware.com

Alex Aguila and Nelson Gonzalez must not be from around here. As CEO and president, respectively, of Alienware Corp. Inc., they apparently haven't heard that you can't make money building PCs.

Conventional wisdom says desktops are low-priced commodities with thin margins--and analysts foresee a shakeout this year that will sideline some of the largest manufacturers. IBM already said "the heck with it" and sold its desktop operation to China's Lenovo. If the company that the PC was named after can't make money building PCs, then what chance do two thirtysomethings from Miami have?

Apparently, a good one. Alienware has become one of the country's fastest-growing private companies with revenues that zoomed past $112 million in fiscal 2004. That's a few zeros shy of the numbers Dell and Hewlett-Packard put up--but hey, you or I could live on it.

PC margins weren't great in 1996 either, when Alienware started. Prices were falling and so were formerly bright brand names. Soon, desktops were being given away to anyone who signed up for internet service. But Alienware never sold those kinds of PCs. Instead, the company markets fully packed machines to the backwards-baseball-cap crowd. It turns out that young gamers will pay $3,000 to $5,000 or more for something that will let them frag before being fragged.

So PC-makers like Alienware pack liquid-cooled CPUs, dual graphics engines and surround sound into cases with motifs that look like they belong on the bottom of a skateboard. Alienware's Area 51 line looks like a cross between Steven Spielberg's cuddly extraterrestrial and that silicon-dripping monster that keeps chasing Sigourney Weaver around.

Such machines account for a small slice of all PCs, says Alan Promisel, analyst with IDC Research in Framingham, Massachusetts, but they represent "a subsegment with attractive enough margins that large OEMs like Dell and HP have introduced game models." Intel has even created an Extreme Edition of its Pentium 4; game programmers might be the first to use all 64 bits in an AMD 64-bit processor.

A growing number of jobs--such as graphics design, video editing, publishing and engineering--require more than the average business PC. Obsessed with photo-realistic human-humanoid interactions, gamers have become a test bed for graphical applications and a core market supporting the high-cost components they require.

Aguila and Gonzalez are taking the next logical step and packing some of that expertise into business workstations, servers and portables--even a Bot desktop that touches down in the middle of Dell's backyard.

Bootstrapping

Never having worked at Dell or Intel, Gonzalez and Aguila didn't have the benefits of conventional wisdom or VC connections. But, says Aguila, Gonzalez is a "hardware guru," so when his friend suggested they start Alienware, he quit his clinical technician job right away.

Others were less receptive."Everyone told us, 'This is insane,'" recalls Aguila. "We got laughed out of every bank in Miami. So we maxed out the credit cards and went to work."

That first year, the pair barely covered expenses, thanks to $10,000 of their own money and sales of customized machines to local gamers. But in the second year, Area 51 PCs scored well in gaming magazine reviews, and orders surged. Alienware filled them using the same revenue model early PC-makers used: First they pay, then you build.

Money upfront means no receivables to underwrite, no inventory to depreciate and no bad debt. Tight cash controls, just-in-time inventory and careful attention to its only distribution channel--its website--have enabled the company to fund growth from revenues.

Now, of course, Alienware gets supplier terms and merchant bank services, but life is no less challenging. What used to be a sweet little seam of color is being mined by everyone from Falcon Northwest and VooDoo to the PC giants. And now that it has corporate and government sales, Alienware also has receivables to support.

The company's saving grace continues to be the positive control and market feedback it gets by selling direct. A creature of the e-commerce boom, Alienware has demo systems in more than 800 Electronic Boutiques, but sells exclusively on its website. "We don't want inventory," says Aguila, who now appreciates his mom's early advice: "Quit playing games or you'll never amount to anything."

These days, Aguila has one hand locked on Alienware's supply chain and the other on its cash cycle. Gaming is one thing, but colonizing offices dominated by the likes of Dell and HP is another level of competition.

Analysts are probably right about the PC shakeout. There probably are tough times ahead. But, at the same time, marketwide averages and conventional wisdom are just generalizations. Markets aren't homogenous, and there is never just one winner.

If Alienware's successes demonstrate anything, it's that entrepreneurial life forms can thrive in even the most hostile environments.

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