September 18, 2011 8:50 pm

Dell shrugs off harbingers of PC doom

Michael Dell says he has little interest in buying Hewlett-Packard’s PC business, but the Dell chief executive says his computer company is poised to gain market share as its larger rival undergoes a comprehensive restructuring.

Unlike HP, which last month announced plans to spin off its personal computer line and pull the plug on tablet computing, Mr Dell still believes in selling hardware, despite slowing growth and slim margins. “We are very distinct from some of our competitors,” says Mr Dell in a video interview on FT.com. “We believe the devices and the hardware still matter as part of the complete, end-to-end solution.” The scale of its PC operations, he says, gives Dell an advantage over competitors in the smaller but more lucrative server market.

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“Think about the scale economies in our business. As a company spins off its PC business, it goes from one of the top buyers in the world of disk drives and processors and memory chips to not being one of the top five,” he says. “And that raises the cost of making servers and storage products. Ultimately we believe that presents an enormous opportunity for us and you can be sure we are going to seize it.”

Dell is the world’s second-largest vendor of PCs (by units sold) with 12.9 per cent market share, compared to 18.1 per cent for HP, according to IDC, the industry analysis group. It is third in the market for server systems, behind IBM and HP.

“While there is uncertainty over the HP PC business, HP has handed Dell a big slice of business on a silver platter. Dell is perfectly placed to take advantage,” says Bob O’Donnell, analyst at IDC.

After HP spins off its hardware business, Dell will be the only one of the big IT vendors still offering a combination of services and hardware. IBM sold its laptop and PC business to China’s Lenovo, now the world’s third-largest PC company, in 2005.

PC sales have come under particular pressure in the past year as consumers in western Europe and the US migrate to buying tablets and smartphones. This month Gartner, the research company, substantially lowered its forecast for global sales growth for the sector. Last month, Dell itself was forced to cut its revenue growth forecasts for the year, citing weakening consumer demand and delayed orders by public sector customers.

Nevertheless, Mr Dell believes we are not yet in a post-PC era.

“There are a billion and a half PCs in the world and while Gartner change their estimates here and there, they also estimate there will be two billion PCs in the world by 2014. So when I look at that, I think the idea that the PC is no longer here is complete nonsense,” he says.

“You see PCs, tablets, you see smartphones. But those other devices aren’t necessarily replacing the PCs, so we are very committed to that part of the business, as part of this broader, end-to-end IT solutions company,” he says. PC growth will come mainly from emerging markets, such as China, he says. China is also a big market for Dell’s servers, as a result of deals with big internet companies such as Tencent. “Around 60 per cent of the Chinese internet runs on Dell,” Mr Dell says.

Mr Dell indicates that the IT company is still looking to compete in the difficult tablet market. Dell’s Streak tablet, launched last year, has not sold well, and HP abandoned its TouchPad tablet after finding it too difficult to compete with Apple’s iPad. Sharp, the Japanese electronics company, recently said it would stop making its Galapagos tablets.

Rumours have suggested that Dell, however, is planning to launch a tablet running Microsoft’s Windows 8 operating system next year. Mr Dell stops short of announcing any planned products but says the company is “very much in line” with Microsoft’s plans to overhaul its Windows software so that it works better for tablets. His comments indicate the company could be aiming for a device that is in between a tablet and a laptop. “The line that separates a tablet and a laptop today will get very blurry and ultimately disappear as you see many new products,” he says.

“The trouble is how to differentiate, when there are 30 other vendors making tablets based on the Android operating system. Dell will have to look at how to position itself,” says IDC’s Mr O’Donnell.

Despite its founder’s commitment to hardware, Dell is continuing to expand its services business, having bought Perot Systems, the IT services company, for $3.9bn in 2009. Since then it has made more than 10 smaller acquisitions all around services, storage or networking.

Mr Dell says the company is still looking for more targets. “We have been acquiring about eight companies a year. You will see us continue at a very rapid pace with our acquisitions,” he says. With more than $16bn in cash on its balance sheet, Dell has plenty of fire-power for purchases.

Dell is also spending $1bn on building its cloud computing infrastructure, which includes 10 data centres around the world to store the vast amount of data to be held on the cloud. About 45,000 of its 110,000 staff are now working in the services side of the business.

Mr O’Donnell at IDC believes this strategy could eventually pay off. “The services business is always hard. I am not sure anyone has really got it right. But there will be times when they can win business by offering the combination of hardware and services,” he says. “How often that will happen is unclear, but those opportunities should increase over time.”

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