Over the past four years, as the rest of the IT industry struggled to keep above the break-even line during the economic downturn, Dell Inc. flourished. The company aggressively drove prices down and sacrificed profit margins to gain share in the markets in which it played and moved into product areas that officials felt were ripe for their direct-selling business model. Enterprises, with their shrinking IT budgets, flocked to Dell, driving its revenues from $25.2 billion in fiscal 2000 to $41.4 billion in fiscal year 2004.
With IT spending seemingly coming around again, few are predicting Dells growth will slow or doubt the company can reach its goal of $60 billion in revenue by 2007. But with the market rebound, Dell faces the challenge of keeping prices down while providing innovation with a research and development budget that is 10 percent that of competitor IBM.
While few deny Dells business model has led to soaring revenues for the company and good value for its customers, there are gaps in its offerings.
For example, Dell has not come out with a system based on Advanced Micro Devices Inc.s 64-bit Opteron processor, choosing instead to wait for Intel Corp.s upcoming Xeon chips with 64-bit extensions. Competitors Hewlett-Packard Co., IBM and Sun Microsystems Inc. all are rolling out first- and second-generation Opteron-based systems.
In addition, Dell has yet to upgrade its 1655MC blade server, which debuted two years ago and still uses Pentium III processors. Meanwhile, IBM and HP continue to roll out new blade offerings.
Real estate company Long & Foster Cos. standardized on Dell systems and storage about three years ago, attracted by the price/performance of the vendors offerings. But Long & Foster CIO Michael Koval said that Dell recently has been pressed by competitors such as HP on price and that Dell needs to expand its line of servers to include Opteron-based systems, refreshed blades and systems with more than four processors.
“Ive got to stop this build-out,” said Koval in Fairfax, Va. “I need to build up. … The biggest word in my data center is consolidate. … Im waiting for bigger [blade] systems to come out. HP and IBM already have four-ways. Theyve got these four-ways out there, and were still dealing with two-way Pentium IIIs, and thats just not going to cut it.”
However, Dell is a company with a relentless strategy of driving industry-standard technology into everything from PCs and servers to storage, printers and services, forcing competitors to bring pricing down and partnering with others to add more value to their offerings. Dell executives continue to tout their scale-out vision for the enterprise—small two- and four-way systems clustered together to create a computing environment that can handle all sizes of enterprise applications. And that wont change.
“A lot of what were doing in the enterprise is taking things that are already done … in more robust, traditional systems and bringing them down and scaling them into smaller systems,” Chairman and CEO Michael Dell said in an interview at company headquarters here last week.
Dell is so secure with the direction of the company that he is turning over the job of CEO to longtime lieutenant Kevin Rollins in July. Dell will remain chairman.
A big part of that direction features new products. Dell executives last week touched on a number of the new products the company is working on, including a four-way Itanium server, the PowerEdge 7250, which will ship within two months. Later this summer or in early fall, it will introduce systems with Intels upcoming Xeons with 64-bit extensions; several new printer products are due by the end of the year; and a new entry-level storage area network device and new cluster bundles with up to 256 nodes are also on tap.
In addition, the company will continue to work with industry partners such as Oracle Corp., SAP AG and EMC Corp. The partnerships not only are vehicles to help Dell reach deeper into the enterprise but also are avenues for enabling the company to influence its partners products to help Dell customers.
An Oracle executive credited Dell with driving Oracle to provide a special shrink-wrapped version of its Oracle 10g database with ease-of-installation features that would appeal to midmarket customers.
“Dell understands their market; they understand what their customers need,” said Rauline Ochs, group vice president for North American channels and alliances at Oracle, in Redwood Shores, Calif.
Customers understand Dells strategy
Dells alliance strategy makes sense to GlobeXplorer LLC, a Dell customer that provides satellite images and aerial photography. The Walnut Creek, Calif., company has brought in more than 40 two-way PowerEdge 1750 servers running Linux in cluster configurations. President and CEO Rob Shanks said Dells partnerships with other companies brings value to customers.
“Dells an interesting vendor because they represent a lot of different manufacturers,” Shanks said. “It often makes it easier on companies to deal with one vendor to meet a number of different needs.”
RSP Architects Inc. looked at HP, EMC and IBM storage devices two years ago, as Dell introduced its PowerVault 715 and 725 storage arrays. Tom Kouri, RSPs IT director, was particularly impressed that Dell boxes came with NSI Software Inc.s Double-Take replication software installed.
“Once I started looking at Dell versus the others, they blew them away in price, and there was a particular application in terms of replication that came with the Dell box that pushed the decision in Dells favor,” Kouri said.
But Dells price advantage could be eroding as competitors continue to lower their system prices, which could make the innovations surrounding those systems more attractive. For instance, a year ago, HPs ProLiant servers, which include unique management features, were up to 40 percent more expensive than Dells systems. But HP has dropped its prices to within single percentage points of Dells, said Brad Anderson, vice president and general manager of HPs Industry Standard Servers business, in Palo Alto, Calif.
“When youre 30 to 40 percent above Dell, you can do really cool things, but customers dont care,” Anderson said. “Now when they see all that cool stuff, it matters. There is a completely different reception to the cool things youre doing.”
For many IT buyers, price is the bottom line. Over the past year, Weather.com Inc. has reconfigured its data center so that half its servers are from Dell, in large part because of the price.
“Most [Intel-based] servers, in my opinion, are commodities,” said Dan Agronow, vice president of technology for Atlanta-based Weather.com. “For a number of different vendors, there really isnt a difference. It all comes down to price, and it all comes down to service.”
Dell, Agronow said, exceeds at both. Nevertheless, when he wanted an Opteron-based system, Agronow turned to IBM.
Department Editor John S. McCright and Senior Writer Brian Fonseca contributed to this article.