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TR: What do you think is the real role of the Internet in our economy today?
Dell: At the root of any economic system is the cost of transactions. You have something you want to sell, I want to buy it, and what that transaction ultimately costs is tied to the cost of communicating information. The Internet is the latest evolution of communication technology-tremendously powerful because it enhances the flow of information. So basically it’s like a big vacuum that sucks friction out of the economy.

And there are a number of businesses that may have existed in the past on the idea that the customer has somewhat limited information, so they’re going to buy their product. In other words, you live in a small town. The customer has no other ways to get it, that’s the price. You don’t have a choice. You can’t really fly to another city and get it, that’s not practical. You don’t have other sources of information. Now all that’s changing. So the Internet can help those companies that thrive on information, like a Dell. Businesses that don’t thrive on information, that thrive on lack of information, they’re in danger.

TR: Dell’s R&D expenditures, about $700 million, are small compared to Microsoft’s $4 billion. They’re also only about 2.5 percent of revenues-minuscule for high-tech firms. Do you worry you’re not investing enough?
Dell: It’s not like the nuclear-arms race. We have to pick the amount that’s appropriate for what we want to do. Could we spend $1.75 billion? Absolutely. Could we spend $2.75 billion? Even easier. We could spend $5 billion on R&D. But the harder question is, Where is your point of diminishing returns? In a typical, classical development world, you’d say, well, we’re just going to tie this thing to the revenue, which I contend is really nuts. And so what we don’t do here is say, “Revenues are going to be $40 billion, and five percent of $40 billion is $2 billion, so let’s figure out how to spend $2 billion on R&D.”

Instead we say, “Okay, we want to have these eight-way servers. We’re going to have these storage programs. We’re going to have a full lineup of notebooks and desktops and workstations. We’re going to have these software management tools. What will it cost us to do all this?” And if that number is $842 million, then that’s the budget. And if we add three things and it goes up to $860 million, or we take out four things and it goes to $820 million, that’s the budget.

As for comparing Dell to Microsoft, it doesn’t give you the full picture. Microsoft is our partner, and we leverage the R&D work they’re doing in operating systems.

TR: So you’re actually getting the benefit of their R&D. You’re piggybacking?
Dell: Exactly. If you look at the original orientation of the industry, each computer company tried to do everything itself-its own silicon, processors, operating system, power supplies. Digital was in the business of making power supplies up until three or four years ago. Now, you say, why do you want to design power supplies? Well, maybe it’s fun, or maybe it’s what we did last year-or maybe we just think we’re better than anybody else. Maybe we got this disease called Not Invented Here.

This is the problem a lot of companies got into. Our approach is more pragmatic: if we can buy something that’s very similar to something we can create ourselves, we believe it might not be valuable for us to create it. On the other hand, if we’re thinking about creating something that nobody else has, that’s worth doing. And I can point to hundreds of unique inventions or ideas that we have driven. We had the first color notebook that was powered by batteries. We had the first 486 machine to ship. We had the first system to ship with the EISA [Extended Industry-Standard Architecture] bus. Right now our notebook team is continuing to drive very, very hard on size, weight, wireless integration-we were the first to integrate wireless into notebooks, with integrated antennas.

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