When it comes to growing a company through mergers and acquisitions, Dell has opted to develop itself organically — by winning away its competitors one at time.
Michael Dell spoke to Computing Canada Monday about the Compaq/HP
merger, the company’s ability to grow in a recession, and how it decides which new markets it should enter.
CC: How will the HP/Compaq merger affect Dell’s business if it goes through?
Michael Dell: We’re ready to compete with these companies whether they’re separate or combined. We’ve been continuing to grow and gain market share. Our competitive advantage is not changed in any way by the combination of these companies.
CC: Why did Dell decide to get into services and how does your version differ from Compaq, HP or IBM?
MD: We’ve been in the services business for a long time. It’s about a US$3.5 billion for Dell; it’s the fastest growing part of our revenues. Our historical presence in the services business was what I would call the ‘close to the box’ services. These are the ones that are pretty predictable for a product company. And then we kind of expanded that into the infrastructure services — the installation, the design, the consulting, the professional services that go along with deploying storage-area networks, designing clusters for customers, implanting e-mail systems. We’re also doing some of the large outsourcing agreements, taking on seat management, contracts, those kinds of things. It’s for us a complement to the product business. I think the way it differs from an EDS or Accenture would be that we’re not developing applications, we’re not doing custom application development. Differentiating it from different product companies like IBM, we’re not getting into services business to get out of the hardware business. The services business complements or enables our hardware business.
<b?CC: Dell is offering a sub-US$1,000 notebook to the consumer market. How will the rise of low-cost notebooks affect the overall market for desktop PCs?
MD: If you look over the long period of time, generally what’s been happening is more people have been buying mobile computers as opposed to desktop computers and certainly as the price comes down you’d rather have a mobile then a fixed computer. That’s happening in just about every category of electronics that you can think of, whether it’s telephones or radios. There are some problems with that in the sense that whenever you have a new processor, like the Pentium 4, of course it comes out on the desktop. So you have kind of a reversion back to the desktop for a while. And then of course the mobile catches up and the process kind of repeats. The long term trend is clear: people want to take their data with them, they want mobile computers as we’re able to make them more affordable and obviously that increases the market for mobile.
CC: What portion of Dell’s corporate business will become notebook-based versus desktop-based?
MD: Today, notebooks would be 25 per cent, something like that. I suspect it will go up, but I don’t know the percentage. You know, the percentage will be whatever customers want it to be. We don’t try to force things on customers. We provide a wide range of products and let customers decide which ones are appropriate for them.
CC: What is the feasibility of the desktop replacement?
MD: I think the first thing to remember is the computer market is about 130 million units per year. The notebook market is about 30 million units per year. So while some people are using notebooks to replace desktops, there’s a lot of people that aren’t. There’s the cost issue; there’s also the performance issue I mentioned earlier. I think both markets will continue to exist, but obviously at the right price. One of the other big things that’s happening in mobile is wireless, 802.11, which is very exciting. A lot of people love the opportunity to be connected at 11Mbps wherever they go. GPRS, as that rolls out, also gives people the opportunity to be connected wherever the are.
CC: Why did Dell back out of the deal to sell the Unisys cellular multiprocessing 32-bit server in the high-end market under its own name?
MD: I didn’t think anyone ever recognized that we did. This was a kind of pretty obscure product we were going to market for Unisys. So of gets down to there’s not a lot of volume to that. We actually still have a marketing agreement with them, whereby we refer customers who are interested in such a product to Unisys. Although I don’t know that that’s a large number of people.
CC: What was it about the CMP that got your initial interest?
MD: Dell has a growing presence in the enterprise, No. 1 in North American server shipments on a unit basis. Certainly we’re exploring how do we extend that beyond the eight-way server. So of course we looked beyond the eight-way to 16 and 32. But it’s really not a very large market. And of course, frankly with clustering and grid computing … I’m not sure there will ever be a market.
CC: What strategy will Dell purse to gain market share in the high-end databases, transaction processing and e-commerce applications once the economy recovers?
MD: We’re gaining share in the segment as well as the more application-centric or front-end server segment, the e-mail servers as well. First of all, we’ll do what Dell does best, which is deliver great value to customers. Also in these areas alliances and partnerships are very important. So companies like Microsoft and EDA Systems and a whole host of others that we work with — PeopleSoft, Siebel, SAP. Aligning our products and theirs together, and also using our own internal professional services organization to help customers apply our complex enterprise products into those kinds of solution environments.
CC: Why has Dell stayed away from mergers and acquisitions and focused on growing the company organically?
MD: First of all, it works. One reason: If you look at mergers and acquisitions in our industry, in the hardware sector you go back to the creation of Unisys, which was a combination of Sperry and Boroughs, HP and Apollo, SGI and Cray, AT&T and NCR, Compaq and Digital, Compaq and Tandem. It’s not clear that any of those really created industry-leading companies. We acquire customers one at a time and that’s worked well for us.
CC: Are you open to the possibility of participating in M&As?
MD: No. We’re pretty happy with the way things are looking. We have considered acquisitions for a long time –10, 15 years ago we considered mergers and acquisitions. We consider them all the time, that doesn’t mean that we will do them. Certainly a possibility if we’re presented with opportunities. You might be able to guess some of the opportunities we were presented with in the last year or so. Just because we’re presented with something or just because our competitors are doing something, doesn’t mean it makes sense for Dell.
CC: Any plans to get into the PDA market, and why are you staying away from it?
MD: We look for three things in markets: We look for large markets that are profitable, that have clear industry standards. And actually in the PDA market we don’t see any of those three conditions existing. If those conditions existed then you would expect Dell would enter the market, yes.
CC: When do you anticipate those conditions are going to met?
MD: If it happens in six months, we’ll be in the market in six months. But if it’s six years, we’ll be in the market in six years. The product development is not the hard part here. The hard part if getting a large market that is profitable that has clear standards. If you look at the size of the market, for example, there are about two million Pocket PCs sold per year versus about 130 million PCs. It’s not a very large market. Second, you look at the companies in that business, they’re not profitable. Third, industry standards. You’ve got lots of companies, you’ve got PocketPC, you’ve got RIM BlackBerry, got Palm, got Symbian. Got lots of different characters out there, so there’s no clear standard yet.
CC: What kind of partnerships do you pursue if not M&As to remain competitive?
MD: We partner with the key industry leading companies — Intel, Microsoft, Oracle, SAP, PeopleSoft, Siebel, Unisys etc.
CC: What makes these partnerships successful for Dell
MD: If you look at the partnerships we have with these companies, first of all, Dell has the preeminent customer relationships in the industry as a function of our direct relationship strategy and the market share position that Dell has. So these companies want to partner with us, we want to partner with them. Enabling us to bring their ingredients to customers and further leveraging our presence in the market.
CC: How does Dell deal with competitors copying the Dell direct model?
MD: If you look at this concept of copying Dell, it’s actually been around for a long time, First evidence of it appeared in the latter part of the 1980s. It really heated up in the early ’90s when virtually all of our competitors announced they were copying Dell. In 1992, about 10 years ago, we were a US$1 billion company, and virtually all of our major competitors — Compaq, IBM, et cetera — announced they were copying Dell. In the 10 years since that time, we grew from US$1 billion to almost US$32 billion. I’m not sure that copying Dell has been all that successful for them. But I’m sure if you ask them you’ll get a different answer.
CC: How is Dell performing within Canada and which areas are you working to having a strong presence in?
MD: Canada’s a great market for us. It’s one of the markets we’ve been in for a long time. We started our business there in 1988, four years after the company was started. We’ve got a very strong team there. We’ll continue to expand our enterprise presence there, our services presence. We have a broad range of products and services there. We’re also going after the consumer market there, which is relatively new for us.
CC: Why do you want to go after the Canadian consumer?
MD: The consumer market represents about 18 per cent of the market, but for Dell it’s significantly less, so we’re just trying to get our fair share of that market.
CC: How sustainable is it for Dell to continue its market leadership through a straight out price war?
MD: This position of talking about a price war — I think there’s a few points to be made here. First, is that if you believe there’s a price war, then you also believe that the companies who lose the most money are the most embroiled in a price war. Does that make sense? That’s not us. That’s our competitors. In fact, Dell’s profits are healthy and growing and this really comes from an advantage cost structure. It’s true we’re able to provide the best prices in the industry. But that’s because our business model works better than our competitors. We will continue to deliver the best value in the industry, best pricing in the industry and that’s our job. Our job is to do that. It’s not our job to make sure our competitors make money. If you want to call that a price war, then fine. But our job is to give value to our customers and we always think of more ways of doing that, new ways of doing that. That’s an ongoing thing. That’s not new thing. We don’t see that changing.