Dell's PC strategy leaves it stranded
Dell faces a PC conundrum. The company isn't playing the commodity PC game and is losing share as a result. It desperately needs to grow other parts of its business to offset the declines.
Dell is stuck in a vice with its PC business.
On one side, Dell has decided to focus on margins and stay away from the commodity PC game played by Asia's juggernauts. That business decision is entirely logical. The problem is that Dell's market share is eroding quickly and the company needs the PC business to work so it can transition its business to software and cloud infrastructure.
If Dell's PC business wasn't collapsing its plan would work well. However, the PC business isn't cooperating.
Among the problems:
- Dell's PC units fell 12 percent in the third quarter from a year ago.
- The company isn't focusing on low-end systems, which is keeping it out of emerging markets in many respects.
- Laptop sales are falling and notebook revenues was down 26 percent in the third quarter.
- As Dell's market share erodes so does the scale needed to make any money.
Evercore analyst Rob Cihra said:
We see structural hurdles unchanged, including our belief that while it walks away from pricing Dell still needs PC scale/channels for any enterprise transition to work, and either way seems unable to fill up the enterprise side of its revs tub as fast as PCs drain out the other.
Hewlett-Packard faces the same issue as Dell. HP decided to play in the low end of the PC market and defend share -- even though Lenovo is now tied or in the lead depending on whether you use IDC or Gartner data.
Dell executives said they are sticking with their PC plan, but the business is taking on water. Ultimately, Dell wants to be more than a PC company. The catch is it needs a graceful exit that doesn't seem to be coming.
Barclays analyst Ben Reitzes said:
Dell seems to be facing a challenging PC market as tablet cannibalization—even in corporate markets—and a pause for Windows 8 have led to significant shipment declines. Checks indicate significant market confusion around Ultrabooks & Windows 8. While acknowledging an attractive valuation, we remain cautious long term as the company manages through a challenging transition away from PCs toward enterprise solutions.
The Dell's PC strategy is worth watching, but the company may be screwed for quarters to come when it comes to revenue growth.
This story originally posted as "Dell's PC strategy: Damned if it does, damned if it doesn't" on ZDNet.