Michael Dell's promise to create "brand lust" with new products appears to be a bust - at least for now.

Dell (DELL) reported increased profit margins - but the gains came from cost-cutting, including layoffs. The company isn't investing in new products, such as cellphones and music players; Dell previously said these gizmos would diversify the company's product base and become "must-have" consumer items to compete with Apple's (AAPL) iPod and iPhone.

Dell has long dominated the corporate PC market, but commercial sales declined 5% and revenue fell 6% last quarter, The Wall Street Journal reports.

In 2004, Dell sold more computers in the US than its 4 closest rivals combined. Now, Hewlett-Packard (HPQ) leads the field with 18.8% of the market by emphasizing laptops available in stores. Dell's once-successful online sales model now looks stale, and its market share has dropped to 14.2%.

Worse, Dell has lost its cost advantage as rivals now contract with Asian factories to build their equipment. Many of Dell's factories in the US are new but can no longer compete on price. Dell is trying to sell some of its US plants, but some analysts believe the company will unload them at a loss or even pay rivals to take them.

Dell has cut about 10,000 employees in the last year. This has produced higher profit margins than Wall Street analysts expected - $0.37 per share, as compared with estimates of $0.31.

Dell, 43, left the company in 2004 and returned as CEO in 2007, vowing to cut costs and invest in new products. He's succeeded in cutting costs - but it appears that his plan to launch new high-end devices and services has stalled, in part because narrow profit margins make it impossible to spend heavily on research and development.
 

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