The World According to Dell: From Hardware to Software and Now to the Cloud

 
 
By Chris Preimesberger  |  Posted 2011-09-19
 
 
 

The World According to Dell: From Hardware to Software and Now to the Cloud


ROUND ROCK, Texas -- Pre-med student Michael Dell started his computer-upgrading company at age 19 in his University of Texas dorm room in 1984. Twenty-seven years later, although he's traded that little place in Austin for a tad-larger headquarters 20 miles up Highway 35 in Round Rock, his company has moved about a zillion miles from where it began.

With his design-it-yourself PCs in the 1980s and 1990s, Dell liberated personal computing in its own image, providing a cost-effective alternative to IBM PCs and Apple Macintoshes. In the mid-1990s, Dell moved into the enterprise: It developed its own PowerEdge servers, resold and serviced storage hardware from EMC, and made it all economically attractive for the company's core group of customers-specifically, midrange and small businesses-to purchase and deploy the type of IT infrastructure they needed.

In 1992, at age 27, Dell (pictured) became the youngest CEO to have his company ranked in the Fortune 500. In 1996, Dell started selling computers through the Internet, the same year his company launched its first servers. Since then, the business has zoomed to a 2011 market cap of $26.6 billion.

Respect Earned

Along the way, Michael Dell has earned the respect of many people in both the IT world and the larger global business community. Enterprise Strategy Group founder and chief analyst Steve Duplessie summed up what a lot of people in the business think and say about Dell: "Michael is a true one in a billion-one in $25 billion, to be more accurate.

"I can summarize the man easily. When we were talking about a bidding war that turned into billions [in 2010, Hewlett-Packard outbid Dell to buy 3PAR for $2.4 billion, a deal that many industry observers said was overpriced], Michael said: -I still spend my shareholders' money as if it's mine-as if it's real money.'  And you know why? Because it is.

"To other mucky-mucks spending billions, it's just numbers on a spreadsheet. Michael knows it's real money. It was pretty profound. The guy is real."

Moving in New Directions


 

Now the company Dell built is briskly moving into new areas that don't involve selling and maintaining hardware-something that would have been a completely foreign concept five years ago. It is winding down its storage reseller relationship with EMC and developing new-generation IPs with storage acquisitions: EqualLogic (bought in 2007) and Compellent (in 2010).

Dell also is averaging about two new software company acquisitions per quarter. Recent examples include application optimizer KACE, data management specialist Ocarina Networks, security provider SecureWorks and cloud infrastructure integrator Boomi.

"The computer industry started out as a hardware business, but customers now are showing more interest in solutions [preconfigured combinations of software, hardware and services] than they are in products," Michael Dell told eWEEK in an interview at his office in Round Rock. "So that's obviously where we're headed.

"Look at the example of a large hospital. What they really don't need is IT. What they want are better outcomes for their patients. That means they need all sorts of tools, like evidence-based medicine, health information systems, better accuracy of prescriptions, claims adjudication systems and affiliated physician systems.

"That's what we do now. We want to provide all these tools in what people refer to as the cloud."

Filling Out Product, Service Offerings

As a result of its acquisition activity in the last five years (since Dell returned to the CEO job in January 2007 after a three-year hiatus as board chairman, replacing Kevin Rollins), the company is moving into providing cloud systems and cloud services in a big way. Put it all together, and Dell is quickly approaching the rarified air occupied by such venerable all-purpose IT companies as IBM, Hewlett-Packard (HP) and Oracle.

"When Michael returned to take back the CEO job in 2007, the company was struggling and hadn't changed its business model," said Charles King, an analyst with Pund-IT Research. "Back in 2007, change was in the air; there was a strong sense that the old model of pursuing only the business of low-margin, industry-standard products for their own sake was not going to continue to be as profitable as in the past."

Strategic Acquisitions


 

Since returning and moving his company away from its image as a maker of low-cost PCs, Dell has sought out strategic acquisitions that the company can spin into new profit centers.

"The kinds of companies we like to acquire are proven, but sort of unknown," Dell said. "We'll acquire about eight companies a year, and Dave Johnson [Dell senior vice president and chief of acquisitions] will have to look at about 250.

"The best companies are those we are already partnering with because we understand them and they understand us. We de-risk a lot of the acquisitions because we already know what we're doing."

EqualLogic, a new-generation storage company whose arrays and software fit right into the cloud-computing model, is a good example of what Dell does with its acquisitions: namely, magnifying their value into its 180-country sales network, and providing capital and personnel where required.

"When we bought EqualLogic [in 2007], they had about 3,000 customers; now they're well over 30,000 customers," Dell said. "We've had KACE for seven quarters; their business is now seven times larger than what it was before the deal.

"I don't know if we can keep doing that-eight quarters/eight times bigger, nine quarters/nine times bigger-but we'll certainly find out if we can."

Dell's Take on HP

During the interview, Dell was in an ebullient mood, which was understandable. A week earlier, his company's biggest competitor in the personal systems business, HP, had announced its plans to leave the business entirely to focus more of its energies on software and services. (According to industry analysts Gartner and IHS iSuppli, HP is the No. 1 PC maker in the world, with about 17 percent of the market; Dell has 12 percent.)

Dell, a user of Twitter, chided HP that day with this tweet: "If HP spins off their PC business ... maybe they will call it Compaq?" He was referring to HP's controversial 2002 acquisition of that PC company.

"What an opportunity for us, no question about it," Dell said. "While we are moving into software and services, we are going to continue to grow our PC businesses, as we know we can.

"Remember, this [global IT] is a $3 trillion business, and we think there are fabulous opportunities all through it. People are going to continue to use PCs [in various forms] for a long time to come, even though there are a lot of other good new devices out there.

"I know a lot of good people at HP, and you don't ever want to wish anybody ill. HP has been a very successful company for a long time. But they do seem to be having a tough go right now. Businesswise, of course, it's very good for Dell and our shareholders. So you have to look at it first from that standpoint."

Emerging Device Businesses


 

Dell is also in the emerging device businesses, with its Windows- and Android-based Streak tablets and Venue smartphones-another business HP is dropping. The holes in those markets formerly occupied by HP are creating a great opportunity for Dell to step right in and improve its sales in North America.

Dell sells most of its portable connected devices in the Far East and has quite a way to go to catch up to Apple and Samsung, the two world market leaders.

Those prospects-together with new business opening up in the cloud services and infrastructure markets-indicate that things are looking up for Dell.

"Last quarter, we had $1 billion in new [service contract] signings, which is a record for the company," Dell said, "and we have $15 billion or $16 billion in deferred services revenue. If you compare that to about three years ago, the number was about $5.5 billion. We've almost tripled the forward calendar of services activity. It's a substantial business."

New Moves Into Cloud Services

Dell made major cloud-related announcements at both VMworld 2011 in Las Vegas and Dreamforce in San Francisco. On Aug. 29 at VMworld, the company revealed that it will launch its first public cloud offering later this year as part of its partnership with VMware.

Dell will host VMware's new vCloud public cloud systems in Dell data centers: One is already online in Plano, Texas, and the other is under construction in the Pacific Northwest. More data centers are being planned.

"This partnership also will build private clouds for customers," said Mark Bilger, vice president and CTO of Dell Services. "By extension between the two, Dell Services will be providing hyper-cloud solutions between the private cloud data centers and Dell's public cloud offering."

So Dell and VMware are connecting a lot of dots: customers to the cloud, data centers to data centers, and data centers to outside public cloud services. There is no question that this is a full cloud-service offering with many options for customers to consider.

This will be a multitenant environment for running virtual systems. It will provide access to virtual CPUs, memory, storage networks, IP addresses, firewalls and catalog capabilities.

Dell Has a Way to Go


 

Despite its successes, Dell isn't all the way back to where some industry analysts think it should be. The stock price has been hovering in the $15 range for about two years; in late 2007, it was double that price. 

In 2009, during the height of the U.S. macroeconomic crisis, the company saw its revenues drop 16 percent in one quarter and was forced to cut expenses back by $3 billion and lay off about 2,000 workers in the PC division. Dell's most recent quarterly earnings report (Q2 2011) came in under Wall Street expectations and showed only modest gains, with revenue up a mere 1 percent over last year, totaling $15.66 billion.

Company Needs to Take Advantage of All Opportunities

So it behooves Dell & Co. to make good on all of its markets-especially those being vacated by a large competitor such as HP.

Peter Levine, a general partner at venture capital firm Andreessen Horowitz, has known and worked with Michael Dell in various relationships over "many, many years." Prior to moving into venture capital, Levine ran the data center and cloud group at Citrix, which he joined in 2007 after serving as CEO at XenSource. Previously, he was an executive at storage and security provider Veritas, which was bought by Symantec for $10 billion in 2005.

Levine said that more hardware companies are turning their focus on software infrastructure-similar to what Dell is now doing.

"I've seen them go through the evolution from being a PC/server vendor to being a full-service organization," Levine said. "The move to cloud computing-and the emphasis on software and building out a software/hardware solution stack around cloud computing-is an interesting and innovative approach for the company. They're taking their hardware and service assets, coupling that with software assets, and moving toward the cloud computing infrastructure space.

"Michael Dell is a visionary leader who's succeeded in the last couple of years to increase the value of the company from a customer perspective," Levine said. "That's ultimately how these things get measured. Their acquisitions in the service space have made them more comprehensive."

Nevertheless, Levine doesn't believe the company is completely out of the woods yet.

"There is a subtle difference between what I and other people might think of Michael Dell versus Dell as a company," Levine said. "Dell as a company, to me, still feels like a hardware company. I know they're rapidly changing that to increase their service offerings. Ultimately, I think it's going to come down to software, which is going to make a huge difference in their overall ability to deliver all these new capabilities.

"I think they're on a great path to get there. I think Michael's a visionary leader for the company-that's why he came back-and we can see a lot of things in process. Their next move, providing cloud infrastructure and hosting applications as a service, is a smart one."

Seeing a Changing Market

Pund-IT analyst King believes Michael Dell has learned some valuable lessons from other companies about what to do-and what not to do-in order to grow Dell's core business and expand into new areas.

"HP is a great example of this," King said. "It did $41 billion in the PC business last year at a 5 percent margin. Basically, a third of their business produced about 15 percent of their profits.

"What [Michael] Dell did was look around to see what other CEOs have done-especially [Samuel] Palmisano at IBM, who has moved quickly and aggressively to a software-and service-driven business, using software as a differentiator for their hardware.

"Dell will continue in the PC business and will find plenty of buyers. [Michael] Dell's kept his eye on the prize: the cloud and all the software and services that go with it.

"They're selling into nine of the top 10 Web services providers in the world, and they were the first vendor to create a hyper-scale cloud computing unit to focus specifically on those data centers. Dell may be underestimated by some people. That would be a mistake."

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