Dell's directors forecast a grim future for the PC industry

Dell's directors forecast a grim future for the PC industry

Summary: A lengthy proxy statement submitted to the SEC by Dell's board of directors makes a forceful case for taking the company private. A Special Committee sees a gloomy future for the PC industry and even worse prospects if Dell tries to compete with more agile rivals.

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Dell Inc. filed a special proxy statement with the U.S. Securities and Exchange Commission today, laying out its plans to take the company private.

ZDNet’s Rachel King has details on what the proposed transaction will mean for the company’s founder and CEO, Michael Dell.

My eye was drawn to a lengthy bulleted list that begins on page 47, laying out the reasons why anyone holding Dell stock might want to sell. The section, under the heading “Reasons for the Merger,” was prepared by a Special Committee made up of “four independent and disinterested directors of the Company.” (The Wall Street Journal [subscribers only] has a list of the four directors, with bios.)

The Special Committee argues that the proposed all-cash buyout represents a premium of between 25% and 37% of the Dell share price before the offer became public. If you’re a shareholder, they say, you should jump at the buyout to avoid being exposed to the “various risks and uncertainties related to continued ownership of Common Stock.” What follows is a remarkably downbeat portrait of Dell’s bleak position in a PC industry whose future is uncertain at best.

Year over year, PC shipments have begun to show steep declines after slowing for the past five years, as data from Gartner Research confirms:

pc-industry-2007-2012

The picture in 2009-2010 was slightly distorted by the worldwide recession, with shipments down sharply in 2009 as the economy struggled to come back from the 2008 banking crisis, with a bounceback in 2010 that consisted in no small part of deferred sales. If you assume that half of the shipments in 2010 were deferred from 2009, then the percentage increase in shipments over the past six years is 13, 11, 9, 7, 4, -3.

Even without adjusting for those unusual factors, the trend line is unmistakably down, and with the current economic malaise in Europe there’s every indication that the negative trend will continue.

That’s the starting point for the Dell Special Committee’s list of negatives, which opens by citing “decreasing revenues in the market for desktop and notebook PCs and the significant uncertainties as to whether, or when, this decrease will end…” The Special Committee blames the slowdown on a variety of factors:

  • continued macroeconomic pressures
  • lengthening replacement cycles
  • the uncertain adoption of the Windows 8 operating system
  • unexpected slowdowns in enterprise Windows 7 upgrades, and
  • increasing substitution of smartphones and tablets for PCs.

The industry as a whole is also under pressure thanks to “the increasing usage of alternative PC operating systems to Microsoft Windows.” Presumably that’s a reference to both Apple’s OS X, which is applying pressure at the high end of the market, and Google’s Chrome OS, which has scored some recent gains with extremely low-priced models from Samsung and Acer.

The Special Committee also notes “the increasing importance of the smartphone and tablet markets.” That trend is especially unfortunate for Dell, which “currently has vey little presence” in that market.

Dell’s historic strength in high-volume sales to large corporations is also at risk, the Special Committee says, citing “increasing adoption of ‘bring your own device’ policies by businesses, which allow employees to make their own decisions regarding which computers and/or other electronic devices.” That’s followed by a dry bit of understatement about unnamed competitors “whose products presently have greater appeal to consumers than the Company’s current products.” Ouch.

Even if the PC industry can keep the volume of PC shipments up, revenues are still a big problem across the board, thanks to “ongoing downward pricing pressure and trend towards commoditization in the desktop and notebook personal computer market.”

Several of Dell’s competitors, most notably Lenovo and ASUS, have scored gains in this down market. The secret of their success? At least in part, they’ve grown by concentrating on the low end of the market. That’s a problem for Dell, the report says. Dell’s strength has been in “higher-margin premium PC products,” the Special Committee says. The current PC market, especially in developing economies, has seen a “shift in demand … to lower-margin value products, a segment in which the Company has historically been much less competitive.”

Michael Dell, who would presumably remain as CEO of the post-buyout company that bears his name, clearly wants to get out of the increasingly cutthroat PC business, where margins are slim and getting slimmer.

More recent coverage about Dell and the PC industry's troubles on ZDNet:

Topics: Dell, Apple, Microsoft, PCs, BYOD and the Consumerization of IT

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132 comments
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  • i don't think they have much chance in tablets and smartphones either

    their brand just doesn't fit they probably want to go into the business of cloud and servers!
    L3thargic
    • What is wrong with the brand?

      More customers would recognise DELL better than Lenovo, HTC, Sony, or even Samsung -- when it comes to computers. And these mobile devices are just different form factor computers.

      Whether DELL are ready to jump big time in that business is an entirely unrelated question.
      danbi
      • Sony?

        Maybe those under 30, who are young enough never to have owned a Walkman or other piece of consumer electronics from the 1980s or before.
        hrlngrv 
        • Well Sony never had better reputation in

          when it comes to PCs, Phones, eReaders and Tablets.
          Ram U
        • Re: Sony

          SONY had great reputation for low-mid class cassette recorders and yes, the Walkman. Then for their great Trinitron display design. They had good reputation and great brand.

          However, they have messed it all up. Perhaps SONY believed at one moment, that the "brand" is all it takes and they could continue to sell the same stuff without innovation, just on the name. So the cassette players were forgotten, they made the gross error to assume that the "Walkman" brands is divine - sticking it to lousy quality mobile phones, they also believed that Trinitron is so great, that they should not worry about the new, lower cost LCD technology. This is probably related to their culture, but it ultimately does not work worldwide where innovation happens all of the sudden.
          Curious, Microsoft is doing exactly the same mistake that SONY did with the "Walkman" brand -- try to brand anything "personal computer" as "Windows". Huge mistake. People need new names to differentiate.

          But SONY never had any serious reputation for making computers.
          danbi
          • Not Really

            Sony Vaio's back in the day were awesome. They were small, light, and had more powerful processors than others. Of course they were more expensive too.
            Maha888
          • Way more expensive

            And still had the same plastics construction. SONY continued to believe that it is their name that sell products.
            danbi
  • PC+ Era, transformation to new Form factors, Ultrabooks, AIO, Convertibles

    another mistake that assume that PC is dying, the drop in 2012 was due replacement of tablets to the low end NETBOOKS that a more like media player and browsing PC

    Netbooks a category died and may be res-erected by Chroombooks

    IDC and other think PC will grow in years to come.

    it is a matter of new bread of affordable Ultrabooks & AIO PC & Hybrids to replace the gap, all will happen with Haswell CPUs range by Intel (june) and Windows 8 Blue Update

    PC in transition, Summer the start of a new PC+ era
    Khaled Mourad
    • Where's the data?

      Do you have any data to support your contention that people are replacing tablets with netbooks? If anything the trend has gone the other way. If what you are suggesting is true, then tech stores should be stocked with many models of netbook while tablet displays should be dwindling. And yet the opposite is true.
      dsf3g
    • What if

      What if, the "PC" is dying just because people no longer want "Windows"?

      Anything, that does not use Windows on it, sells. That alone should ring a bell in someone's head (provided it's not empty).
      danbi
      • Mac Sales

        It looks like the bad news for some PC makers includes Apple.

        http://www.ubergizmo.com/2013/01/apple-mac-sales-down-21-percent/

        Does it means that people neither wants OS X? Interesting that while Apple and other PC makers went down, Lenovo grew the last 13 quarters. And most of their PCs include Windows.

        http://beta.fool.com/leokornsun/2013/02/01/lenovo-little-pc-maker-could/23125/

        Maybe OS X / Windows 8 are not the cause for PC's slowdown at all.
        dvm
        • Lenovo

          Like I mentioned in another thread, you should not compare any normal business to a Chinese government backed Lenovo. They operate with different 'currency'.

          As for Apple, their Mac sales have always been up and down. One very good reason is the longevity of most Mac computers. But truth is, most people discovered they don't really need desktop computer. Anyway, all the desktop, notebook, tablet and smartphone are personal computers and Apple being the oldest personal computer builder left, does not really care which form factor users prefer this decade, or the next.

          But, if it takes Lenovo to save Windows, let it be.
          danbi
          • Lenovo

            Does most of their sales to enterprise. IBM has a special relationship with them since they were once IBM's hardware arm and they probably have the same managers in place when they owned them. When IBM scores a contract in many cases it's a win for Lenovo.
            Maha888
      • The PC is Dying...

        because people already have Windows. I remember Ballmer being asked about tablets and iPhones. The host asked the audience how many people owned a smart phone or tablet and about 2/3 of them raised their hand. Then Ballmer asked how many people in the audience owned a Windows computer and almost 100% of the people raised their hand.
        Maha888
    • PC+Era is real, but does not signal growth

      Yes, Everyone has a PC plus another type of mobile device, but I have found that most people say that their PC is good enough, and they upgrade their phones and tablets instead. Seems like PC upgrades are on a 3-4 years cycle, smartphones and tablets 2-3 year cycle.
      Sean Foley
    • Don't Count AMD Out

      AMD coming I think Summer with New APUs For Low Voltage for Hybrid System as well as tablet
      and great Battery life when paired with Windows 8 . With Intel New Chip and AMD New Chips I feel Summer going in Holiday season there going a lot new Touch Desktops .Laptop/Tablets and Tablet base System Running Wins 8 or Wins 8Pro With Blue witch I think going service Pack it going make Windows 8 Shine on Hardware . I feel RT might be dead with in 1 year . Now If Micorsoft Charges for Blue Windows 8 Will die also
      dansfuzzypaws
  • Dell have alot of competation in the consumer PC Space

    Mac, Lenovo, Asus, Acer
    Khaled Mourad
    • Mac?

      Please, tell how the Mac is competitive. Price, value, standardization, or simply closed infrastructure based necessity?
      TechNickle
      • Mac sales increase on Yearly basis

        Dell is focusing on Business rather than Consumer
        Khaled Mourad
      • Competitive

        The Mac is competitive because people are buying it... Macbooks in particular.
        dsf3g