Inside Dell’s Scorched-Earth PC and Server Price-War Plan
June 3, 2013 at
8:05 am PT
struggling computer maker that plans to go private in a leveraged buyout
transaction, has a plan to compete aggressively to retake some of its lost
share in the market for personal computers and servers. Its main weapon will
be price cuts that are intended, in one stroke, to force competitors to
respond with profit-sapping price cuts of their own, and give Dell the
opportunity to boost its share of the market and sell related products.
The plan was revealed in a
presentation to industry analysts at a hotel in Austin last week. In it,
Dell executives including
Jeff Clarke, Dell’s vice chairman and president, and
Marius Haas, the head of its Enterprise business, painted a picture of
how Dell plans to operate as a privately held company.
No reporters were allowed
to attend the meeting. But Patrick Moorhead, head of Moor Insights and
Strategy and a longtime executive at chipmaker Advanced Micro Devices, was
there, and gave me the download. He attended a similar meeting last year,
and was struck by an apparent change in the attitude of the Dell execs
presenting. “They had some swagger that they didn’t have last year,” he
said. “They’re feeling confident. … There’s going to be a few years of pain
for the rest of the industry, and Dell is going to provide it.”
Here’s why: Assuming that
it won’t need to make shareholders happy by growing its earnings per share
every quarter, as public companies have to do, Dell plans to combine actions
to rein in costs by simplifying its product lineup and tightening up its
supply chain, with cuts to prices. “It’s almost as if Dell is acting like
it’s a private company already, and is asking the industry for its reaction
to it,” Moorhead told me.
Clarke made one key
statement during his remarks, which Moorhead paraphrased like so: “We are
not going to retreat anymore. We are going to compete in every country, at
every price point.”
There are signs that parts
of this strategy are already working. When it reported earnings on May 22,
HP saw declines in its PC business but remained atop the global market. HP
CEO Meg Whitman said that it
walked away from several PC deals in order to protect its profitability.
She didn’t name Dell as the cause, but it’s No. 3 in the world, behind HP
and China’s Lenovo.
“You could tell he’d been
waiting months to say that,” Moorhead told me.
In another presentation,
Haas struck a similar tone, and outlined Dell’s plans to accept smaller
profit margins on its industry-standard server line as a means to try and
attach other enterprise-oriented products like storage and networking.
One slide from Haas’s
presentation deck shows Dell servers making gross margins of about 20
percent, while storage products make gross margins of about 50 percent, and
networking products 65 percent.
“The way Dell sees it, any
sales it makes in networking and storage is accretive,” Moorhead said. “It’s
really simple. If Dell boosts its market share in servers and sells more
networking and storage products alongside those servers, the worst-case
scenario is that its profit margins remain the same. But in the process
they’re going to put some hurt on Hewlett-Packard, IBM and Cisco Systems.”
Dell is already showing
some progress in the server business. Haas and CEO Michael Dell gave a
handful of interviews, bragging about the company’s rise in server
market share in the first quarter of this year. It remains the No. 2 player
globally, behind HP, and HP’s share declined.
HP has its own cards to
play, but it’s going to be awhile before it’s apparent. The company unveiled
Project Moonshot server earlier this year, and has pinned much of the
hope of a recovery in its enterprise hardware business on that. However,
still too early to know whether enterprise customers will line up with
purchase orders. HP says it doesn’t expect Moonshot sales to start showing
up in HP’s results
until next year.
Cisco, the networking
giant, has in recent years pivoted into selling industry-standard servers
coupled with networking and storage. It calls the product its Unified
Computing System. It has risen to become the
No. 3 vendor in blade servers behind HP and IBM.
Moorhead called Dell’s
plan the best strategy with the highest potential for success in its quest
to turn its business around. “These are tactics that have been in Dell’s DNA
from the beginning. They know how to run this play and run it well.”
Of course, this is all
taking place against the backdrop of
Dell’s $24.4 billion leveraged buyout plan, which it announced in
February. The offer, which is being partially financed with the private
equity firm Silver Lake Partners and a loan from Microsoft, values Dell at
$13.65 a share.
including the activist investor Carl Icahn and Southeastern Asset
Management, Dell’s largest outside shareholder, are opposing the deal, and
urged shareholders to abstain from Dell’s proxy vote on the proposal,
scheduled for July 18.