It was an unusual year for Dell Inc. The company that surged over the past few years as many of its rivals stumbled found itself in the unfamiliar position of being the target of criticism.
For the first time since 2001, Dell missed analyst expectations in both the second and third quarters, forcing it to revamp part of its PC business and lay off about 1,000 employees.
At the same time, Dell was beset by complaints surrounding its support services, particularly in its consumer business.
All this has led to calls by some industry observers for Dell to change its ways—supplement its direct-sales model with a channel strategy, and its Intel Corp.-based systems with chips from Advanced Micro Devices Inc.
It also helped fuel more fierce competition from rivals such as Hewlett-Packard Co. and Sun Microsystems Inc., which see a Dell that has been weakened by perceived missteps.
However, Dell executives, while recognizing there were some problems, say the business model is sound and that plans theyve put in place around both products and support will smooth out any wrinkles from the past year.
“Theres some folks who maybe posted a little better improvement over where they were in 2004, but if you look at relative comparisons, on really any metric you like, its hard to compare,” President and CEO Kevin Rollins said here in an interview with eWEEK.
“Financial performance, growth, revenue, share, profitability, new product introduction—particularly growth in the enterprise—theres really no one whos done any better than we have. Weve made some stumbles in terms of our relationship with Wall Street, but that really shouldnt have a whole lot to do with our customers.”
The disappointing earnings did help fuel the unusually negative press over the second half of the year, as did a few other issues.
Dell officials pointed to problems with faulty capacitors in its GX270 and GX280 OptiPlex desktops as one cause of the third-quarter numbers.
The capacitors—which help store power and regulate motherboard voltage—came from third-party suppliers, and Dell stopped shipping computers with those capacitors. Last month, Dell recalled about 35,000 notebook battery packs that could overheat.
However, Rollins and others said that despite the blips, business is very good and that initiatives in place will address concerns and keep the companys momentum going into this year.
The companys server and PC businesses will closely align with the new technology coming from Intel, including more dual-core chips and features such as on-chip virtualization and security.
In addition, Dell is bulking up its support service to address concerns from smaller businesses and consumers, including a program called TechConnect, in which a Dell technician will take control of a customers computer over the Internet and fix it directly while the customer waits.
That program currently is being piloted with about 2,200 customers, Rollins said.
They also say Dell will continue to push into the more lucrative high-end enterprise space—where officials claim a 40 percent or more market share—through both hardware and services.
The company still expects to grow revenue to $80 billion in the next few years.
Dells financial hiccups have more to do with the companys expectations than with its business strategy, said Brooks Gray, an analyst with Technology Business Research Inc. The company should give financial guidance thats in line with the current market, Gray said.
“PCs still represent a majority of the business, making it increasingly difficult for Dell to meet those historic profit margins,” said Gray in Hampton, N.H. Still, “their operating model … is very strong, the strongest in the industry.”
Other industry analysts see a company that is hurting itself by not being flexible in an industry thats constantly changing.
Emerging markets represent the best growth opportunities for PCs, but the direct-sales model may not be well-suited for those countries, and a channel strategy is necessary. In addition, Dell may be missing out on trends elsewhere in the industry, they said.
Charles King, an analyst with Pund-IT Inc., said that while Dell is strong in the Windows server market, its missing out on two other key enterprise trends—Linux and Opteron.
“Dell doesnt have a viable strategy in either of those,” said King in Hayward, Calif. “Dell has been very Microsoft [Corp.]-centric. If it became more aggressive about Linux, it would be able to get a bigger piece of the pie.”
Alternative Sales Channels
The lack of a channel strategy also means Dell could be losing PC sales on the low end, Gray said. With prices continuing to drop, more people who otherwise would not have bought a PC—or who would have bought only one—now are going to their local retail outlet to purchase their computers.
“The company is exploring alternate sales channels,” Gray said. “At the same time, the resell channel views Dell as a threat and always will.”
Rollins said there are no plans to create a larger channel strategy, arguing that keeping in touch with customers enables Dell to offer better service and support. Dell has used retailers, such as Costco Wholesale Corp., Target Brands Inc. and home-shopping network QVC Inc. to reduce inventories of older products, but it wont grow beyond that, Rollins said.
“Well do those occasionally,” Rollins said. “Those are more sell-through items, but, no, our issue is to work with the customer and know what they want and to keep that intimate relationship with them and not have a middleman step between us and them.”
The market opportunities are large enough not to have to go through resellers, and the companys product road maps will ensure continued enterprise success, Rollins said.
Paul Gottsegen, vice president of worldwide enterprise marketing in Dells product group, said Dell servers will keep in step with Intels processor road map.
The company already has outfitted its entire line of systems with Intels first dual-core Xeons and will upgrade them when the chip maker launches the next-generation Xeons early this year. Dells strategy also is fueling a wider interest in dual core, Gottsegen said.
“Early adopters are taking advantage of [dual core],” Gottsegen said. “What were doing by putting it into one- and two-socket systems is bringing it to [small and midsize businesses], beyond the early adopters.”
In other areas, Dell in the first half of this year will release OpenManage Printer Manager for the enterprise-class printer environment, which will ease the setup, monitoring and reporting capabilities on the devices, said Tony Mara, senior manager of product marketing for the companys imaging and printing unit.
Steven Meyer, vice president of marketing for Dells services division, said the company will continue filling out the offerings of its seven services suites, including support services, planning and assessment, and managed clients.
Dell also will continue leveraging its partnership with EMC Corp. in the storage space, said Darren Thomas, vice president and general manager of Dells storage business.
The partnership has given Dell greater traction in the enterprise, while opening up business for EMC in the midrange and low end, he said. The fruits of that partnership are evidenced by the successful penetration of Dells small-market-focused AX100 and the larger-size Dell/EMC Fibre Channel CX product line.
Rollins said its such partnerships that enable Dell to offer customers complete packages without having to go the acquisition route, as other vendors have.
Such partnerships have been a key benefit for Duckwall-Alco Stores Inc., which began standardizing the technology in its corporate headquarters in Abilene, Kan., and in its 257 stores in the central United States on Dell products about two years ago.
Tony Corradi, vice president and chief technology officer at Duckwall-Alco, said the retailer has been able to secure good pricing on products from Dell partners such as Oracle Corp. and Cisco Systems Inc.
“Weve been able to leverage relationships Dell has [with ISVs and hardware makers] for discounts that we wouldnt have been able to get with them because of our size,” Corradi said.
Other Dell customers said the company is addressing the concerns they have. Secure-24 Inc., a hosting company based in Southfield, Mich., has been replacing its HP and IBM systems over the past four years with Dell servers and Dell/EMC storage systems.
“We see a cost advantage in buying Dell technology of 15 percent,” said Volker Straub, chief operating officer at Secure-24.
In addition, Dells service and solutions-oriented approach has helped Secure-24 more quickly and effectively bring the technology into its three data centers, Straub said. The company currently runs about 200 Dell PowerEdge servers and two Dell/EMC SANs (storage area networks).
Despite Dells success over the past few years, competitors are viewing the company as vulnerable on several points, including its reliance on Intel and what they see as a thin-solutions offering.
HP, of Palo Alto, Calif., has been pressuring Dell on pricing for its servers and PCs, which places a greater focus on innovation and overall offerings, said Colin Lacey, director of platform marketing for HPs industry-standard server business.
“HP is very focused on streamlining operations and managing costs and pushing those savings back onto the customer,” Lacey said. “Weve been able to put more pressure on Dell in pricing … As we start to close that gap, it neutralizes that advantage [Dell historically has had in operation efficiencies].”
Sun Microsystems Inc. also is taking aim at Dell, not only with its Opteron-based “Galaxy” systems but also with its new UltraSPARC T1 servers.
The new chips offer up to eight cores and are aimed at the Web transaction arena, which is an important area for Dell. Dell dismisses those competitive threats, particularly those from Sun.
“Im in the field a lot, and [Galaxy systems havent] come up at all, which means this isnt really having any ripple,” Gottsegen said.
In the PC space, Dell also is facing a reinvigorated Gateway Inc.—which has reached profitability over the past few quarters—and Lenovo Group Ltd., which bought IBMs PC business last year.
The greater competition and the realities of the market are going to force Dell to become more conservative in its economic outlook, said Gray.
Dell doesnt want to raise expectations too high and then not meet them. “They have to be patient, as they always have been,” Gray said. “They need to set lower expectations than they have.”
Senior Writer Brian Fonseca contributed to this report.