There was a lot of chatter at this year’s E3 Electronic Gaming Expo in Los Angeles concerning M&A and consolidation in the gaming space. But the talk didn’t focus so much on who may be acquired next; rather, it concentrated on the record $15 billion worth of deals done in the gaming space last year and what impact all that money and consolidation might have on the industry in the near future. We now have nongaming tech giants, like Amazon and Facebook, fully vested in the gaming world for the first time. The question then is: Can the companies they acquired keep innovating while now locked inside the belly of a corporate beast?
If history is any guide, innovation and creativity go away the second a deal is done. The acquiring company tends to focus all its resources into monetizing the new technology it just acquired (usually for way too much money), so that it ends up falling behind the curve. Eventually, acquiring company begins to realize that the technology or product it purchased is suddenly obsolete. The new unit is shut down, and a few years later the company’s accountants quietly write down the value of the acquisition to zero.
While there are plenty of examples of tech M&A disasters (AOL and Time Warner, Myspace and News Corp, Skype and eBay—and now Microsoft) there are only a few that can claim the deal was in any way actually good for the new company or for the industry.
Alienware, a builder of gamer-focused PCs, though, may have bucked that negative trend. When it was acquired by Dell a little over nine years ago, many in the gaming industry saw it as a lame attempt by a stodgy corporation to buy its way into the “cool kids” club. In a way that is exactly what Dell did, but instead of killing Alienware’s mojo, it seems to have intentionally left it largely to its own devices. Much of its management stayed with the company after the merger, as did its creative teams.
If you look at an Alienware product you’d be hard-pressed to find anything connecting it with a Dell. For starters, the company’s alien head logo still dominates as proudly as it did before the acquisition with no Dell logo in sight. The company still designs very unique computer chassis, like the triangle-shaped Area-51 desktop—which can shred through Windows 10 or any game in encounters—to its tiny Alpha gaming desktop, which looks and plays more like a gaming console than a PC. With its latest series, the company has built the definitive gaming laptop and has extended its usefulness by offering a stand-alone graphics card that can plug in to the laptop when extra gaming power is needed.
But the gaming world is changing rapidly. If Alienware is to stay relevant, it needs to continue innovating—on its own. For example, its Alpha desktop is a great step forward in connecting the console gaming world to the PC world, but it is questionable as to whether the Windows OS was really needed. Without it, Alienware could lower the price of the Alpha, possibly low enough to compete in price with Microsoft’s Xbox [Fortune-stock symbol=”MSFT”] or Sony’s Playstation [Fortune-stock symbol=”SNE”]. Windows 10 will supposedly be more “gamer friendly” than its Windows 8.1 predecessor, but I’ll reserve judgment until the new OS is officially released in a few weeks.
Frank Azor, who heads up Alienware for Dell was the small company’s fourth employee back in 1998. We sat down to talk about how Alienware was been able to stay creatively independent within the Dell ecosystem and how Dell’s supply chain helped it become the leader in the gaming PC market. We also discussed the company’s future plans, from VR laptops to even smaller, more powerful computers. The following interview has been condensed and edited for publication:
Fortune: Tell me about when you were first acquired. What was the dynamic with Dell at that point, and where did you end up?
Azor: So when we were acquired in 2006, the initial strategy was “let’s compete against each other because Dell had their XPS gaming product line,” but where Dell’s strengths were, we wanted to immediately take advantage of that—like supply chain, engineering, and a bunch of other areas where Dell has been best in class in the entire industry. So we started integrating those functions immediately. But it became a little challenging to compete and cooperate together.
Well, we were running into issues where we wanted to expand geographically, and Dell was facing issues like, “Yeah, well, we want to expand with XPS gaming line there, so we can really only afford to do one.” So we were like, “We can’t take a backseat. We have business goals. We want to get into new product categories.”
So there were limitations to being totally separate?
There were. So the decision was made, “Alright, look, let’s take XPS, and let’s go give the gaming business to Alienware, and let’s focus XPS on other areas like premium products and other things. So in 2008, we decided, “We’re going to now truly integrate with Dell, and we’re going to become a master brand, and a line of business within Dell.”
How did that work with Alienware in Miami and Dell in Austin?
Well, soon thereafter that’s where we started saying, “OK, let’s move resources over.” A few folks from Miami came over, and they started working in Austin for us. For example, our industrial design moved out there as well as a lot of our marketing functions. Later, engineering moved as well. So what we basically did was we looked at the two organizations and said, “Look, from the XPS gaming team and the Alienware team, these are the strengths that each have. Let’s form one team.”
How did everything shake out?
So in Miami, what we specifically do is we manage the brand overall and the business overall. So we do all of our launch and go-to-market stuff. We do all of our product management out of there. We do all of our partner relationships, so all of our game developer relationships and that sort of thing. All of our events management—so if you see us at PAX or E3 or any of those events—it’s done out of Miami.
So then everything else is done in Austin?
It’s all over the world actually, and that’s really a testament to how great Dell is in managing all of its different divisions that we learned. For example, so we do all of our early architecture and technology development out of Austin. Then in Taiwan, where all the contract manufacturers are, we do most of the detailed development and engineering. Then we have resources spread out all over the world—we just collaborate. Dell has become extremely effective at “It doesn’t matter where you work.” We work extremely well together between using technologies on the phone and on video conferences. It doesn’t really matter where you’re located. I have two people working out of their homes in California, and you would never know because we do everything on the phone together. So the average core team is people from Austin, people from Miami, people from Taiwan, people from California—all sitting together developing a product.
That’s a huge organization. How do you stay innovative? Stay interesting?
So be your own customer. If you love the products you’re developing, and you love the brand you are representing. The idea—if you’re more passionate about it—they tend to come more naturally. And need drives invention. Any time a competitor is getting close to you, because you are so passionate about it, it’s not about just looking at a competitive analysis and saying, “Let me add another USB port to it.” It’s like, “Alright, these guys are getting close. I absolutely love this. I don’t like being threatened that way,” so need drives invention. You just start figuring shit out. You get together with the team, start talking to customers, and you just start putting crazy ideas together.
What came out of these talks? Any specific product or development?
You know we’ve been pretty famous, at least on the Alienware side, for being first in a lot of different ways. And we’re very willing to take risks. We did an 11-inch notebook when that category didn’t exist. We did the graphics amplifier—an external graphics block. For our 13-, 15-, and 17-inch notebooks, you can put an off-the-shelf graphics card into this dock. And now we’re doing the Steam Machine product. For us it’s like, “There’s no Total Available Marketshare (TAM).” There’s no total available market that we’re saying, “Hey, we want to go capture 30% market share. We’re going in and we’re making new markets, because we know gamers. We are gamers. We live in the ecosystem. We live in this environment. And we’re just like, “You know what? It’s time for this. This is a good time to go off and innovate in this area. I want this in my home, my friends want it. I’ve talked to people at PAX, and this is something I can see that they would be interested in.” And then we just go off and do it.
And you never felt smothered or pulled back at all by Dell Corporate?
Dell’s been great about giving us the freedom to run off and do these experiments. You think about it—we were acquired in 2006. Since then, we’ve done the 11-inch notebook, we’ve done the graphics amplifier, we’re doing now the Steam Machine project, the triangle chassis. I mean that’s a lot of heavy, heavy investment.
One of the great things about being a small company is that you are able to roll with the punches and move fast to get the next thing out there. Now that you are within Dell, do you ever feel like you’re being slowed down at all?
It depends. We are slower today in developing products. That’s a fact. We used to develop in about 12 months, and it takes us about 20 to 24 months to develop a product right now. But it’s all really good. Let me explain why. We used to come up with an idea, and then we would just run with the idea and start development. And then something would change, and we’d be in the middle of development and be like, “Uh, uh we gotta change it—add another hard drive slot to it. Oh shit, go retool everything. OK, well that’s going to delay the product by a month—well we can’t wait a month. Just rush it out, rush it out! Trim it up in validation. Trim up the schedule.”
Sounds a bit chaotic.
Seriously. So that’s how we used to operate. It was very fast. I would say we weren’t as careful. Now we spend about four to five months planning the product correctly. We do research, we talk to customers about our product. We go through multiple iterations of industrial design. We do competitive analysis. We engage with our partners like Intel (INTC), NVidia (NVDA), AMD (AMD), our panel suppliers. We go through this huge planning process—fand it’s a requirement. It’s not like it’s loosey-goosey type of shit.
It’s like, “OK, we have a concept entry, we have a concept exit.” We have a very strict process. There’s gates there where everything has to be reviewed by managers, by myself, by my bosses. And you can’t move on to the next level until everyone’s fully tied out. Ok, now that we’ve done our full due-diligence, now we go into, “Alright, how are we going to go and start developing this thing correctly? What’s a thermal envelope that we want to go off and execute in this product?” It’s just a whole different process. So the amount of planning that we do, and the due diligence that we do—it’s extremely rigorous now.
Does it make for a better product?
Absolutely. Our failure rates are a fraction of what they used to be when we were a small private company. You look at our customer satisfaction scores today … people like to say all this shit that “Dell screwed up Alienware”—it couldn’t be further from the truth. And the data is actually out there on the Internet. If you search for how people were complaining about Alienware when we were a small company, you’ll see a bunch of quality issues. Back then, our quality was on par with our other small competitors, which was “OK.” You look at our quality now, and we’re the best gaming quality OEM in the entire industry. Nobody comes close to us. Our failure rates are single-digit failure rates. Most of our products have 4.5 stars or above. How hard is it for a product to have 4.5 or higher stars on Amazon.com? It’s rare. You don’t see that. We have the highest reviews in almost all of Dell. And we have the highest reviews in almost the entire industry.
And the people that say, “Dell screwed up Alienware,” are the ones that haven’t bought the old product or the new product. They really don’t have any perspective as to how things have changed. You grab one of our notebooks today, for example. The construction of it, how rigid, how solid it feels—the boot, resume times, the materials that we use, the price that we sell it for compared to how much we used to sell them for. Our notebooks and desktops are a fraction of the price, and we give you incredible amount of value. The materials we’re using—we used to do everything out of plastic, because that’s all we could get our hands on. This [picking up a new Alienware Laptop] is a carbon-fiber composite material that was invented with the material supplier and Dell material engineers for Alienware notebooks. We would never even have thought that was possible. We had no idea how to do that stuff before. So it’s just a whole other level of engineering and product development.
You mention price, but from my experience of building my own computer, I find that Alienware products still have a hefty premium attached to them.
The Alienware value proposition has always been, “You can always do it by yourself”—we never try to compete with DIY customers. DIY’s like to compare against us because we’re kind of the benchmark—to say, “I can build it better than Alienware”—that’s fine. Go build it better than we can. A lot of us came from the DIY space. But you know, something happens when you no longer have that much free time. You either go to school, or you get your first job, but you still want to be a gamer. You say to yourself, “I’ve got the money, but I’ve no longer got the time. Let me go get a turnkey solution.” That’s what we’ve always been about. You always build what you want to build better than anyone else is going to build it for you. It’s about when you no longer have that time and freedom—then OK, we have a solution for you, and it’s going to have a great warranty, great quality, great service, and support. Those are the main attributes.
So what’s the markup in buying an Alienware product vs. doing it yourself? From recent experience in building my own PC, I figured it has got to be at least 20%, right?
I can’t confirm or deny the markup. Honestly, the markup is a lot less than what you think it is. There’s not a lot of margin left in PCs. But do one thing that everyone forgets to do, because it’s really convenient for them to forget to do this: You have to price in an operating system—we don’t get free OS’s—and you have to value in a warranty—whatever you value it to be. To have 24/7 tech support, to be able to return your product to a depot, or to get an onsite technician—that’s not free. That costs us money. When you price those two things in, we are more affordable than building it yourself in most cases. You call us and say there’s a scratch on my unit—we’re going to replace the whole unit. It’s a whole different level of service.
How did integration with Dell work on the customer support side of the business?
Our customer support resources that we had when we were Alienware—they integrated into Dell and they’re still the same resources in place today. So they’re Dell customer service, but it is the old Alienware customer support team. So when people say, “Customer service sucks now,” they’re lying. It’s actually the same exact team—they’ve only gotten a whole lot better over the years. So there’s a lot of misconceptions out there. And you hear it a lot. Almost any brand that gets acquired by a bigger brand, people just start saying, “Oh, they’re going to screw it up.” There’s plenty of cases where that’s happened in the past, but if you see how we’ve been thriving and look at the actual reviews and product reviews, you’re like, “Yeah this is different than the products in 2005.” It’s a whole different level.
So what’s next for Alienware? Are you guys prepared for the next evolution in gaming?
Well, a lot of things. Steam Machine’s a huge bet for us. Virtual reality (VR) is a landscape that is getting very exciting. Steam made some announcements with HTC 5 at GDC around VR, so we’re planning around things like that.
How are VR and a laptop going to work together?
We have the external graphics amplifier. And it works. We’re the only ones that can deliver that performance in any type of a mobile form factor. You have one cable to the laptop for the amplifier and one for power.
So VR isn’t lame anymore?
It’s not lame at all. The technology has advanced incredibly in the last few years. This is not the 3-D hype we were talking about two or three years ago. This is real—if you experience it, especially the HTC and Steam solutions. We’ve experienced a lot of different solutions. A lot of people have great solutions out there. The HTC and Steam solution is really really compelling. But it requires an incredible amount of performance. You need like 90 frames per second not to get sick [using VR]. We’ve been delivering high frames per second, high graphics in all types of different shapes and sizes. But this isn’t just about gaming—VR is going to have applications for real estate, retail. Like today, you go into Home Depot and they’re trying to emulate a kitchen for you inside a Home Depot. Now you throw on a VR headset, and you’re in your kitchen, and they can dynamically throw in furniture and appliances.
And you want a piece of that business?
Sure. I mean this is where everything is going to merge. You need a ton of horsepower to be able to go and do that stuff. You can’t use a $200 computer. And not only Alienware, but Dell has a bunch of other products where we have every other type of shape and size and price point you can possibly deliver to meet that type of performance.
And that goes right along with Steam. If Steam is on the cutting edge of this, you want to be right there with them.
Yeah, and we’re working with Oculus as well. So we’re agnostic. We’re looking for the best solution for our customers. Steam just happens to be the latest one that was announced, which is kind of really exciting.
Is it too expensive to get a VR system? When will it really take off?
It hasn’t launched yet. You’ll start seeing stuff later this year. It’s worth it. It’s incredible. It’s amazing. You really feel like you’re in a different place. But we’re thinking VR will really go mainstream in five to 10 years.