Dell moves up the food chain

Michael Dell comments on the current PC market and Dell Computer's steady expansion into storage, servers and, most recently, services.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
5 min read
Although Dell Computer made its name in desktop PCs for the corporate market, the company has steadily expanded its reach into storage, servers and, most recently, services--areas often highly associated with complex research and development.

In an interview at the Comdex trade show in Las Vegas last week, CEO Michael Dell explained why his company can take on the likes of IBM and Sun Microsystems.

CNET News.com: First off, what is your opinion on the state of the PC market? Is it slowing down?
Well, I'd say the market overall is pretty good. The IDC data that came out for the third quarter suggests growth somewhere in the midteens. In any economy you look at anywhere in the world, even in economies that are shrinking in size, information products continue to grow as a percentage of GDP. So it's a pretty good business to be in.

The thing you have to remember about the computing market is that...it's sort of a replacement market. In the U.S. and in most markets, desktops are replaced about every three years. There are times when it's better than others. You see signs that the U.S. economy is slowing, which certainly show up in some decline in the rate of purchase.

Is there a sense of saturation in the U.S. market?
Well, I've never really believed in the theory of saturation for a couple of reasons. One is that you've got like 450 million computers out there and you have 6 billion people. Half of them aren't going to buy computers--that's probably true, at least today. But the thing you have to remember about the computing market is that first of all it's sort of a replacement market. In the U.S. and in most markets, desktops are replaced about every three years, notebooks are replaced about every two years.

Now there are things that can accelerate or slow down that replacement cycle. For example, in the notebook market, wireless is accelerating the replacement cycle. In the desktop market you haven't really had a lot of reason to go buy a new desktop until perhaps...when the Pentium 4 comes out.

During the last conference call, you talked about moving the company toward services and servers and away from the historical emphasis on desktops. What's going to be involved in that transition?
We've sold a million servers. One out of four servers sold today in America is a Dell. So in many ways we've already made a lot of progress in this.

The market is heading in our direction in the sense that if you went back five or 10 years ago and you wanted to install an email server, it was a more proprietary, custom-type experience, whereas today you go to Dell.com, you order your server. Boom, boom, here it comes and you've got it done. A surprising percentage of people can do that themselves.

At the same time, we've grown our own capability to provide services to those people. We have...teams that will come out and install complex systems. We have system engineers and system consultants that will design complex networks, including the storage area networks.

We have about a $2.6 billion services business, and it's growing faster than the whole business.

IBM and Hewlett-Packard conduct a lot of their own independent research. With Dell, it sounds like you want to rely on the R&D of Intel and Microsoft and the Linux collective.
Well, I don't want to reinvent the things that they have invented. I mean, one of the beauties of our business system is that we can leverage their inventions. (But) if you go down to the U.S. Patent and Trademark Office, you'll find Dell has filed well over a thousand patents. And there are some pretty significant technologies in there.

I think a lot of people are underestimating our ability to penetrate the storage world. Most folks we talk to don't really look at Dell as much of a leader in the storage area network (SAN) marketplace because it's hideously complex.
Au contraire! Au contraire! Go ask Gartner Group who the companies are that ship SANs. No. 2 is Dell.

By revenue?
I don't think they track revenue. This is units. We're No. 2 in SAN shipments.

I think a lot of people are underestimating our ability to penetrate the storage world, just as they underestimated our ability to penetrate the server world, or perhaps they don't understand the degree to which we've already penetrated. I mean, "them is the facts."

I would admittedly say that we're probably more in the sort of low- to midrange space today. But what's interesting about this is that if you look at what we're selling today as an entry-level network-attached storage, last year that was sort of a mid-range NAS. And next year we're coming out with a sort of high-end NAS product that definitely sort of maps right on top of anything that anybody else in the NAS world is doing.

How do you move into these markets?
A lot of these companies have proprietary cost structures. Seven years ago, Sun was basically a workstation company with a little server business or a very small server business. Now Sun is a really big server company with a very small workstation business. What's happened in workstations I think is going to happen in servers, and it's going to happen in storage as well. Where do they go next?

Who do you worry about more today and, say, maybe three years from now?
I think near term clearly it's the Intel-based competitors; longer term, definitely Sun.

Let's shift to consumer for a moment. For years, everyone has talked about the post-PC era and are now coming out with intelligent devices. Do you think Dell will move into these markets?
Yeah, we're looking at all those things. I mean, we sell a lot of these kind of products through DellWare. As we see market interest there, we'd certainly consider entering those spaces.

Is there a watershed moment in these kinds of markets? At what point, for example, would you enter the handheld market?
You look at the handheld market, you have Palm, who has, by most estimations, 80-plus percent market share. You've got Pocket PC, who has got let's say the bigger portion of the remaining 20 percent. But you've got a whole bunch of other things. You've got (Research in Motion), you've got Symbian, et cetera. Lots of other cats and dogs.

That, in some sense, is a sort of problematic situation for us because unless there's a clear industry standard, it's not as obvious which one you go with.

I think when it gets more interesting is when you put wireless inside the handheld. All the handhelds today, they don't have wireless--obsolete is a one-word description.