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Making money by making gamers drool

No $500 desktops here. Alienware proves there's money in high-end PCs tricked out to woo over computer gamers.
Gian Sanchez packs up desktop computers for shipping at the Alienware factory in Miami.Wilfredo Lee / AP
/ Source: The Associated Press

Just a few months after cleaning out his bank account and quitting his job to help start up a childhood friend's new computer company, Alex Aguila sat alone in the fledgling firm's office and began to have some second thoughts.

Banks had laughed at their concept of selling expensive PCs for video gamers at a time when other computer companies were cutting prices to grab more customers. The fact that the new company, Alienware, took its name from UFO lore didn't help either.

Aguila and his friend, Nelson Gonzalez, had just $10,000 between them.

"I was there and all the walls were black ... and the phones were sitting there and not ringing. And I'm thinking, 'What did I do?'" said Aguila.

But 10 years later, Miami-based Alienware Corp. is widely acclaimed by video gamers and on track to hit $225 million in sales this year, up from $172 million in 2005. The success of the privately held company has lured others, including industry leader Dell Inc., to target the high-end market, too.

"The PC industry is quickly becoming commoditized as prices come down and penetration rates go up. ... But there are certain segments where folks can still make a lot of money," said Richard Shim, an analyst at the research firm IDC.

Companies such as Alienware, VoodooPC and Falcon Northwest have been pioneers in capturing customers willing to spend $7,000 or more for a computer, he said. Performance in high-demand games and applications is worth any price for many of those people, who are mainly men with a lot of disposable income.

Gonzalez, 40, envisioned a big market for these PCs in 1996 when he came up with the idea for Alienware, so named because of his interest in UFOs, science fiction and the "X Files." He and Aguila, 38, grew up playing video games, and they always had to upgrade motherboards, microprocessors and graphics cards in their PCs to handle the latest programs.

He was an information technology manager at a small post-production company and Aguila was a medical technician with little business experience, so they didn't think they'd get too far.

"Initially the expectation was 50 machines a month, maybe a 100, and we don't have to work for anybody," said Gonzalez, the company's CEO.

They got a favorable review of their first machine by a magazine now known as Maximum PC. The next review was even more flattering: the magazine PC Gamer liked Alienware's work so much that an editor didn't want to send the computer back, Gonzalez said.

From that time on, sales multiplied as they borrowed Dell's direct sales model to eliminate retailers. Alienware's buzz among gamers grew as it released turbocharged PCs with sleek UFO-themed designs with cases that resemble alien heads and have flashing lights in their eyes.

Its Area 51 and Aurora lines of PCs come in colors like conspiracy blue and cyborg green.

Alienware's least expensive laptops and desktops today start at around $700, but the top-of-the-line, liquid-cooled ALX models can approach $10,000 when fully tricked out with dual-core processors, hard drives that can store up to a terabyte of data, and state-of-the-art graphics cards.

An average Alienware PC costs about $3,000 to $4,000, hundreds of dollars more than similarly configured machines from mainstream manufacturers. Gonzalez said the extra money pays for performance and customer service that competitors can't match.

Alienware's "unparalleled level" of customer service also helped fuel its growth, said Michael Gartenberg, a vice president at Jupiter Research.

The company has a Costa Rica call center with about 300 workers — all of whom are Alienware employees and not contractors. As a result, they feel like they're part of the team, Gonzalez said. Its computers are assembled by hand at Alienware's Miami headquarters.

Alienware's success has drawn the attention of the computer market's big players. Dell revamped its XPS line in 2001 to feature high-powered, high-priced computers to better compete with companies like Alienware and Voodoo.

Gartenberg said that Dell's immense size and greater financial resources could eventually mean trouble for Alienware. But Gonzalez and Aguila welcome the challenge and see Dell's move as validation of their belief in the gaming niche. Dell declined to comment.

Alienware has branched out a bit by offering cheaper computers. It also has growing sales of workstations and servers — not shaped like alien heads — to corporate and government clients, such as Lockheed Martin and the U.S. Army.

Gaming PCs, however, still make up 80 percent of sales, Gonzalez said.

Still, that expansion has led some to complain that Alienware is losing its focus on its core, video game-playing customers.

"Especially in that audience, the notion of street cred plays a factor in what these consumers will buy. These niche players do run that risk. But at the same time these companies have to grow their business," Shim said.

Some gamers also say that Alienware PCs are now overpriced. Adam Campbell, a 26-year-old gamer from the Milwaukee suburb of Cudahy, Wis., recently bought a Dell XPS computer to replace an Alienware PC because of a deal he got. But he's still a fan.

"You talk to any PC gamer anywhere in the U.S., if they tell you that they wouldn't prefer an Alienware PC, they're lying," he said.

Gonzalez and Aguila, who is the company's president, have heard the criticism about "selling out" and going corporate, but they say they still are in touch with their roots.

"I remember being in awe the very first time we ever sold a PC and that somebody trusted us with $5,000. I was like 'Wow, we really have got to make this PC special for this person.' I'm very proud to say that to this day, that still exists," Aguila said.

"We're a bunch of nerds and geeks at heart," Gonzalez added.