Dell prepares to walk the tightrope

Dell is positioning itself as the new IBM, aiming to have all the strengths of the great grey lady of IT services, none of the legacy weaknesses, and a portfolio of consumer products on top.

The Texas-based hardware specialist has used its inaugural Dell World conference in Austin, Texas to stress the benefits of its new strategy of making "solutions" — products that typically blend software and hardware into a single package to be sold to specific industries. It has also talked of the benefits of running a consumer hardware division and hinted at a series of Windows 8 tablets.

It's all part of Michael Dell's grand plan to modernise the company and move it up the IT stack.

"I think if you look at what we're doing, we're doing it in a very unique way," Dell told ZDNet UK. "Look at the kind of solutions we're building, they're the kind that are providing great value to customers, so we're not bounded in the past — mainframes and that way of doing business. We're all about the future."

Armed with enterprise-grade storage and networking thanks to its Force10 and Compellent buys, Dell is planning to become a company that does not just servers and PCs, but storage and networking as well. 

It's a familiar strategy. HP is pursuing the same thing with its converged infrastructure strategy, and it recently snapped up 3Par to give it a storage play. IBM has been doing it for years; EMC has it thanks to the Virtual Computing Environment coalition; and networking specialist Cisco is eyeing up servers with its Unified Computing System.

Caught between a consumer and a CIO place

What separates Dell is that it is firmly committed to running a consumer PC business alongside its enterprise play. Other than HP, no other large company with an enterprise division fits this description and HP, right now, is confused. It is moving to a new CEO; the old one talked of spinning off its PC business, and currently its intentions are unclear.

Dell is preparing to change as a company, becoming more like IBM and less hardware-driven as it seeks to gain a greater share of the enterprise market. Photo credit: Jack Clark

Dell's strategy is a gambit, relying on the company's ability to produce high-end enterprise hardware as well as devices for the consumer, and for the two product wings to feed into one another. HP tried this and it didn't work: the company has left the tablet market, closing down the division that built its WebOS operating system, selling off TouchPads at well under cost, and making redundancies. 

Dell will be different, Michael Dell thinks. He believes the company is such a large purchaser of IT components through its PC business — 95 percent of processors sold go into computers, not servers, he says — that it can keep its enterprise costs low by feeding off the supply efficiencies generated from its consumer hardware.

Over-extension

It may not be as clear cut as he thinks. What the strategy threatens is over-extension. If manufacturing your own mass market hardware is such a good idea, why did IBM get out of it and HP, Dell's chief rival, consider selling its own PC division off? 

Dell will need to invest money into both its "solutions", like the cloud and integrated packages for specific industries, along with its consumer-facing hardware. The $1bn cloud war chest is a good start, but more money will be needed.

Dell has hinted throughout Dell World that tablets are on the way. Its last major tablet was the Dell Streak and we can expect the company to come out with some Windows 8 tablets when the platform launches. But tablet development costs money and means competing with not only the largest consumer electronics company in the world — Apple — but the king of content and e-retailing — Amazon. Dell has neither the quality of the iPad 2 nor Amazon's strategy of low cost backed by a revenue stream, so it's going to have to compete on something else. 

Straddling the tightrope

The rules of economics seem to play against Dell's strategy as well. As a rule, manufacturing sectors across the developed world have shrunk as countries' service sectors have grown — finance and pharmaceuticals in the UK and high-end technology and banking in the US — while the creation of mass-market goods has been outsourced to cheaper developing countries. 

Dell seems to believe it can straddle the tightrope between services and hardware by making sure that the two are complementary. However, if the paths of these two diverge, it could be in trouble.

"In terms of what is differentiated for us [from IBM], we have more heritage of building industry-standard technologies and the whole market momentum is moving towards us," Dave Johnson, Dell's president of corporate strategy, told ZDNet UK. "Value-add applications and services are being built on [our] kind of platform."

Chip battles

Dell is betting that the x86 chips it buys for its mainstream computers in enough volume to keep costs down on its enterprise hardware will not go out of fashion.

Its assumption is that the 95 percent of bought chips that go into end-user computers will stay as x86; in practice this market is fragmenting.

ARM-powered tablets and smartphones are on the rise and devices that come with desktop functionality in a portable form factor — the iPad 2, the Asus Eee Pad Transformer tablet, or the Motorola Atrix 4G with its docking station to turn the phone into a light desktop — must scare the life out of Dell.

Right now, Michael Dell is referring to these technologies as "additive" devices that will sit alongside PCs, but they have the potential to become the primary devices. Dell's upcoming tablets could be seen as a defence against this, though if Dell is to get the requisite economies of scale it will have to use Intel's upcoming low-power x86 Atom chips. Relying on Intel to produce competitive low-power x86 chips for anything smaller than a netbook has been an unfulfilling strategy for others in the past.

Dell has been moving up the stack ever since Michael Dell was brought back into the company in 2007 and only now are we seeing the kinds of acquisitions — such as Boomi for software-as-a-service or Force10 for networking — that really prepare the ground for its extension into a full-bodied enterprise seller. 

IBM's transition took the best part of a decade and it didn't try to take the consumer market as well. Dell wants to rule it all — from the tablets to the PCs to the servers and the network that strings it all together. It's a grand strategy, and Dell will have to deliver on it while walking a tightrope.