Michael Dell, chairman and CEO of Dell Inc.
Now that Michael Dell has taken his company private after a brutal eight-month battle over the future of the company, is the company better positioned to turn itself around? Perhaps, in time. But until then it’s looking like Dell could shake things up in the market for corporate cloud computing.
During Dell’s 29-year history, the company has made its mark on the tech industry. In an era when many of the most successful brand-name tech companies hailed from Silicon Valley, Dell became success story in Round Rock, Texas. Had you invested $1000 in the company in early 1990, it would have been worth nearly $113,000 ten years later.
Part of that surge would have come from the dot-com boom, but much of it would have happened before it, when Dell was seen as a leading innovator in laptops, just as they were becoming fast, powerful and portable enough to be popular with corporate and consumer customers. Dell faced IBM, Toshiba, Sony Compaq and others but consistently grew its market share.
Dell computers had the reputation for being reliable and affordable, depending on the models, but what really set it apart was the just-in-time ordering system Michael Dell built. It steered buyers to an online site that let them customize PC to their preferences, shaving overhead costs and allowing Dell to better compete on both price and service.
If, on the other hand, you had the bad timing to buy Dell’s stock at $54 a share in early 2000 and sold when the stock was trading near $9 a share, your investment would have fallen by 84%. The biggest challenges Dell faced in that period were changes to the PC market: first, price wars that turned PCs into low-profit commodities; then the rise of tablets and smartphones that reduced demand for larger computing devices.
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In 2007, Michael Dell returned to the role of CEO at the company, determined to steer it away from its reliance on PCs. Instead, Dell moved into more profitable and growing areas, building on its close ties to corporate customers.
In going private, Michael Dell isn’t planning to change course again, but rather double down on his long-term strategy to turn Dell into an IT services company that can compete with IBM, HP, Cisco and others. That transition has been happening slowly for years. In its last fiscal year, half of Dell’s revenue still came from laptop and desktop PCs, another fifth came from servers and storage, while the remaining 30% was evenly split between services and third-party software and peripherals.
Since 2008, Dell has tried to reduce its reliance on low-margin PCs and servers by buying its way into higher-margin markets like storage and cloud computing. The company paid $1.4 billion for storage company EqualLogic in 2008 and $3.9 billion for IT services giant Perot Systems the following year. More recently, Dell has bought a dozen networking, security and cloud-computing companies like Compellent in 2010 and Quest last year.
The results have been mixed. Revenue from laptops fell 13% year-over-year in the six months through August 2, 2013, although desktop revenue was flat. Storage revenue fell 9% while server sales rose 12% as Dell began to experiment with price cuts. Services revenue grew by only 2%.
Meanwhile, Dell’s operating expenses in the period rose to 17.3% of revenue from 15.5% a year earlier, thanks to an increase in both R&D and marketing costs. As a private company, Dell plans spend even more on these areas to become a stronger purveyor of cloud technology to small and mid-sized companies.
Dell may have a nice mix of products and services that companies need to manage their technology needs, but rivals like HP and IBM have a broader and deeper suite of offerings. In interviews and meetings with analysts, Dell has signaled its strategy. It’s much like what worked for Dell back when it was dominating the PC sales market 15 years ago: a focus on service and low prices.
Both parts of that strategy will be easier for Dell now that it’s private. Dell can buy more small players in cloud computing and storage, avoiding investor anxiety about the bidding wars that can often break out over such deals. Here, Dell’s options are limited because the company will need to raise more capital from Silver Lake or others to finance deals.
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It’s on pricing that Dell can become aggressive. Dell’s advantage is not just that it’s now private, it’s that its main rivals are still subject to the demands of public investors. And public investors hate to see profit margins decline. Dell can slash costs on servers and PCs to boost market share and try to sell higher-margin storage and networking products to strengthen its presence in those markets.
This could put a lot of pressure on public companies. Enterprise software and services have been sluggish businesses in recent years as companies watch their IT budgets. In that market, Dell has an advantage by cutting prices. HP and IBM will have to walk away from a price war, or enter one and deal with unhappy investors when their margins slump.
In a recent interview, Michael Dell outlined this strategy: “The easiest point of entry into a customer for us are PCs and servers,” he said. “It’s because they’re ubiquitous products used by every company. Then you have a platform that you can build upon into storage, security, services.”
In that interview, Dell also talked about his company”democratizing the ability for companies to gain access to IT.” Dell will likely remain public for five-to-eight years, plenty of time to disrupt hardware and enterprise software markets by waging price wars in more areas.
Michael Dell battled hard against Carl Icahn to maintain control of his company as it sought refuge from the vicissitudes of public markets. Icahn’s proposals may have better served public investors at the time, but Dell’s strategies may strengthen its position in old and new markets by slashing costs. That may be good news for Dell’s potential customers. But it can hardly be welcome news to Dell’s still-public rivals.