Dell ventures into high-end to save profits
- Article 25 of 77
- Information Age, December 2001
Michael Dell, founder and CEO of Dell Computer, has a problem: With the company's core PC market continuing to decline, how can he return the company to the fast growth it enjoyed up until just a year ago?
Dell's answer is to push the company into high-end, higher margin products, such as more powerful servers and storage devices – a goal it has pursued with only limited success for several years. The question is, do customers really want to buy their enterprise equipment from a company associated with a 'pile-it-high, sell-it-cheap' philosophy?
The answer, according to Dell, is yes. “In every part of the world, our highest growth rates were in enterprise products and portable computers,” said Michael Dell at the announcement of the company's most recent financial results. Both these product lines carry considerably higher profit margins than standard desktop PCs.
Dell points to sales of the company's PowerEdge servers as an indication of its success. In the third quarter to 2 November, unit sales leapt by 24% compared to the same period a year earlier, helping it to consolidate its second-place position in the market and to close up on market leader Compaq.
However, PowerEdge represents the low end of the server market and even the most expensive PowerEdge servers start at just $12,400. Dell's whole server and storage business is heavily Intel system based and this only represents a small proportion of the overall server business. The global market for all servers is worth around $60 billion a year, and the runaway leader is IBM with a 30% share.
But to take advantage of its increasing presence in the Intel server market and, perhaps, reflecting its ambition to move into the mid-range and beyond, Dell has struck a potentially far-reaching deal with storage giant EMC to re-sell EMC's Clariion storage devices.
Bringing in the technology in this way also suits Dell's strategy of keeping its costs low and, in particular, keeps research and development (R&D) costs to an absolute minimum – Dell spends a miserly 2% of revenues on R&D.
By selling Clariion storage devices alongside its PowerEdge servers, Dell can potentially double the value of every server sale. Customers have the advantage that they only need to go to one vendor instead of two and have added peace of mind that the two products – both server and storage – ought to work well together.
But will customers buy it? Dell is certainly winning sales and market share, albeit at the low-end. In fiscal 2001, storage hardware sales are forecast to increase by 70% to $1.4 billion, but to emulate that success outside the low end is another matter entirely.
Despite the improvements that Microsoft has made to Windows NT/2000, independent software vendors (ISVs) still generally favour Unix operating systems as the platform of choice for their major enterprise applications. The Gartner Group says that non-Microsoft platforms are still technically far superior and Unix vendors will be the primary beneficiaries of server consolidation.
Yet Dell lacks any credible Unix option and its approach to the Linux open source operating system has been inconsistent. As a result, Dell may soon have to face up to some difficult choices – or simply get used to much lower rates of growth.