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Summary:

Dell’s stock took a dive this morning after it said it lowered its revenue estimates of the year citing weak consumer demand, but while it’s server business remained strong there’s no doubt that Michael Dell, the company’s CEO is navigating a fine line

Michael Dell
photo: Dell

Dell’s stock took a dive this morning after it lowered its revenue estimates for the year, citing weak demand. While it’s server business remained strong, there’s no doubt that Michael Dell, the company’s CEO, is navigating a fine line.

On one side, Dell faces huge encroachments from Apple’s phones and tablets, which are cutting into Dell’s consumer PC and notebook business. On the other, it faces threats from Quanta and other wholesale manufacturers as efforts such as Facebook’s Open Compute threaten to reduce its importance in the server-making business for large webscale buyers and even cloud companies.

Dell’s losing streak on the consumer side.

Dell’s consumer business hit the skids this quarter and was down 3 percent from the previous quarter, although up from the previous year. However, at 19 percent of Dell’s revenue, the consumer business is an important one for Dell and one where it appears to be struggling.

Part of this is that consumer demand for laptops and desktops has been affected by Apple — not just because people are buying iPads, but also because there is a halo effect that leads consumers to purchase more Apple computers after they get stuck on the phones and tablets. Analyst Shaw Wu at Sterne, Agee & Leach told Bloomberg that he expects 45 percent of Dell’s business is vulnerable to Apple. That’s not just because the consumer market likes iPads and MacBooks, but also because enterprises and small to medium businesses are adopting the iconic machines.

There’s also a challenge to Dell’s core PC business on the consumer side because the PC is increasingly seen as a dinosaur. Today, Gartner released PC shipment sales for Europe and the U.S. that shows that while Dell’s market share increased by tens of basis points, overall units sold declined by 12.7 percent in Western Europe from the second quarter of the previous year. And while Michael Dell said on the results call that plans for the Windows 8 tablet are coming along well and that it still supports Android, these are not the tablets people are buying. Just last week, Dell canceled the five-inch Streak tablet/phone combo.

The cloud is strong now, but it could evaporate.

The server business isn’t so grim, although Dell did mention a weakness in public sector buying of servers and computers. However, the company is in the midst of transition from a low-margin server seller and a reseller of other companies’ products to a purveyor of its own, higher-margin gear.

Forrest Norrad, head of DCS

This seemed to cause analysts much chagrin as Dell saw revenue in its storage business drop rapidly after it stopped reselling EMC gear to focus on building up its portfolio of storage products. Analysts were concerned that a similar gap could occur as Dell transitions to selling its own networking gear after the Force10 acquisition.

But there’s another threat on the server side, which is Facebook’s Open Compute effort and the creation of a community of IT buyers that wants to eliminate the middlemen in server sales and go directly to ODMs such as Quanta to get exactly the type of servers they want and need. And while Dell can adapt to serve the needs of large webscale and IT buyers — it has in many ways with the creation of Dell’s Cloud Computing Solutions group for webscale customers — its inability to do so in the past partially led to the need to create a new way of looking at servers designed specifically for companies such as Facebook, Rackspace and others. Even investment banks are looking at ways to use the standard to create their own hardware.

That’s a looming threat, but a direct one. Less direct is the result of governments and SMBs that are big Dell clients moving their businesses to cloud providers. Unless Dell ensures it’s a supplier to those cloud providers (and Open Compute may make that more difficult or less profitable), it could find itself with its own Dell gear and few folks to sell it to.

The narrow path for Dell.

So Michael Dell is stuck trying to find a way to reinvigorate a consumer business where its name is synonymous with the aging PC, while developing tablets and other mobile devices to sell to both consumers and businesses. Winning against Apple in this realm won’t be easy, and there’s also plenty of low-cost Chinese competition that’s moving into this sector including ZTE, which Dell currently resells.

Meanwhile, the cloud that these mobile devices connect to may not be powered by Dell boxes anymore, but instead by gear made by the same company Dell uses to manufacture its products. So Michael Dell must hope that he can boost the higher-margin Dell-branded technology and IP to a point where it can win over enterprises and businesses.

It will also rely on services such as those to get people up and running on the cloud faster. Recent news around its Crowbar tool is an example of how Dell’s taking this road — it’s adding value to its server business by easing the task of deploying cloud computing and big data software onto them. Let’s hope the path opens up a bit to leave Dell with room to maneuver.

  1. Nokia, RIM, Dell,… No intrinsic value there. They all innovated (with Dell it was a business model, not a product) at one point, which took them into the big leagues, and once they were there, they fell for the trap that their name would keep them there, and they no longer had to innovate (or they thought they could pass off minor incremental changes as innovation). Nokia and Dell sell commodity hardware with somebody else’s software, and are arrogant enough to think that people will pay a premium for their name. RIM refused to accept the essence of technology: everything changes, and if they don’t, they will be gone.

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    1. I’m not sure you know what intrinsic or commodity means, at least with respect to Nokia.

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    2. Partially agreed with you, Nokia, RIM and Dell may not be performing that well..but we should not forget they have been leaders in innovation and quality for a long time…and i think it will be too early to say that they will be gone…Surely they will be back again with best of the products and people will love them as always..

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      1. If you believe that then you should buy shares in those companies. :)

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  2. I bought a Dell Streak to test app development on Android, and I truly liked the device. Good build quality. But, absolutely no support.

    How Dell could get into the market hoping to hop along without any software upgrades is beyond me. They could play of they had a strong product, since many companies are beginning to consider tablets for business tasks. I’m personally moving to such a company shortly to design mobile apps, and left a large drug store chain where I design an iPad app for pharmacists.

    Strategically, these companies have to learn to innovate on hardware and services. Dell just doesn’t have it, and it was difficult to drop $650 on one of their attempts. The boxes littering our offices just are not appealing in the new world of work.

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  3. The Venue Pro was the right idea on the wrong carrier and with terrible execution.

    Make me a good Android phone and watch your sales soar!

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  4. Dell needs to shut down and give its shareholders back as much money as it can and then pass quietly into the night.

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  5. Josh Glazebrook Wednesday, August 17, 2011

    This company won’t ever succeed if they continue to put out ugly computers made of cheap plastic along with their Indian call center support.

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  6. Dell has been once the leading seller of laptops and computers, but in today’s scenario market conditions are really different since the evolution of smart phones and tablets, To gain back Dell would have to be innovative and improve upon quality and style then only they can hope to come back in market…

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  7. Lindsworth Horatio Deer Thursday, August 18, 2011

    Innovation is in Apple design and research DNA, as evident form their frequent patent filings and significant product iterations and software updates. Not Dell; they are retailers of a product that has very unfriendly customer care and concerns themselves little with customer interaction or even basic product aesthetics.

    Apple maintains what they sell and do not “sponge” off their good name. The day Apple stops innovating, they die. This is the trap that has befallen Dell, as they slip into the long night of the “post-PC era” as describe by Apple CEO Steve Jobs, now increasing looking to be an Android powered future with Tablets and smartphones.

    http://mythoughtsontechnologyandjamaica.blogspot.com/2011/08/android-tablets-marketshare-gain-over.html

    Innovation will save them in the long run from the juggernaut called Android!

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    1. I thought Apple was synonymous with making toy computers that can’t play games like real machines and are forever beleaguered and in danger of going under? Wait, what decade is this?

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      1. Lindsworth Horatio Deer Tuesday, August 23, 2011

        Innovation is key. Their “toys” as you so style them are now standards adored by the technerati of the Developed world!! The “danger” of the past as abated, thanks to Apple design engineers and the Jonathan Rubenstein, who decided to folow his star back to Palm..and the death embrace of HP, who are al about profits and pleasing their shareholders and not interested in innovation!

        Rest assured I do not praise Apple with idle words. Behold, at the very door, Android’s Droids are coming ……..So I patronize Apple for their Bravery….but pour scorn on Dell for their Fear…of Google Android OS and their long term ambitions in both the PC and Tablet Markets!!!

        http://mythoughtsontechnologyandjamaica.blogspot.com/2011/08/android-tablets-marketshare-gain-over.html

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  8. Lindsworth Horatio Deer Thursday, August 18, 2011

    Truly, the Apple iPad and its ecosystem of products is an acceleration of the coming Long Night of the “post-PC era” to quote Apple CEO Steve Jobs!!

    http://www.geezam.com/apple-ipad-effect-post-pc-era/

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  9. “it’s server business” should be:
    “its server business”.

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  10. Christian Krejcik Friday, August 19, 2011

    Interesting article but one glaring hole…Dell’s new strategic direction…Dell is moving from a PC/Hardware company to a Cloud Services solution provider. See acquisition of Boomi (check out boomi.com to get a flavor for what Dell is set to do). Additionally Dell is a few weeks away from a major announcement at Salesforce.com’s annual user conference, Dreamforce, where Dell will announce that they will be the first (and only) U.S. company to resell the popular CRM software. This is just one example of the upcoming announcements and partnerships Dell has secured and will be leveraging through the Cloud integration application Boomi. BTW Boomi integrates all disparate applications including on-premise and behind firewalls. Cool stuff! I just bought a lot of Dell stock.

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    1. Julie Dinkins-Borkowski Saturday, August 20, 2011

      Now thats what Im talking about! Good to see some truth being said finally.

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