What's Dell to do?

Compaq's acquisition of Digital creates a "big three" of computer companies, leaving Dell out in the cold for services and support.

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
3 min read
Compaq's acquisition of Digital creates a "big three" of computer companies, leaving Dell out in the cold and leading some to wonder how it will fare in this brave new computing world.

Although one of the largest and fastest-growing PC and notebook makers in the industry, See special coverage: Compaq's conquest Dell has suddenly become the odd man out when it comes to the capacity to act as a full-service computing company. With the acquisition of Digital, Compaq will become the third U.S.-based vendor, along with IBM and Hewlett-Packard, that can provide multinational corporations with first-class consulting services and industrial-strength Unix computers, both of which are required by many of the largest corporate customers.

The problem for Dell is that revenue and profits are increasingly derived from service contracts, according to a variety of executives and analysts in the industry. To keep up, Dell will have to find a way to either build a corporate computing "enterprise" division or find a partner in the market--or buy one.

Dell may also find it has to act quickly: Its chief partner for consulting and maintenance is currently Digital's Multivendor Customer Service (MCS) unit, which raises the specter of service conflicts since its arch rival will own Digital should the deal go through.

Compaq executives have emphatically stated that the acquisition will not change any of MCS's relationships. A Dell spokesman confirmed that Digital is a service provider for Dell, but not the only one. "We don't expect that the relationship will change, certainly not in the near term," he said.

The spokesman couldn't specify the percentage of Dell services provided by Digital, but estimated it to be close to 25 percent. Digital is Dell's second-largest service bureau, and its primary provider in the Asia-Pacific region.

"Compaq buys Tandem and guess what? Dell runs their system on Tandem servers. Dell uses Digital for its external services and Compaq buys Digital. They are in a precarious position," said Steve Cohan, president of Entre Computer Centers in Denver.

"It's an interesting situation. In the long term, they have to acquire or partner," said Jerry Sheridan, principal analyst at Dataquest. "It doesn't necessarily mean a merger, but a partner."

The merger certainly raises the potential for conflicts of interest for Dell in the long term, posited Joe Barkan, research director at Gartner Group.

Perhaps more important, the acquisition limits the choices of partners for Compaq. "There are only two major vendors with large service divisions: Digital and Unisys," Barkan said.

Unisys, interestingly enough, had long been mentioned as a potential acquisition target for Compaq. The company is one of two multinational service providers for Compaq, Digital's MCS being the other. Late last year, Unisys executives revealed that the company was even negotiating with Compaq to expand Unisys' worldwide consulting role.

Barkan did not profess inside knowledge of a Dell-Unisys transaction, but said it is within the realm of possibility.

"You have three major players--IBM, HP, and Compaq...Then there's Dell," Barkan said. "[A deal between Dell and Unisys] seems reasonable."

To provide a lesser degree of service and support, Dell might also turn to the computer reseller network, which would be an ironic turn of events. The vast network of dealers and consultants has been decimated by Dell's direct business model.

Since the rise of direct computer sales, resellers have turned to services to stay afloat. While Dell uses "the channel" in many of its deals, the company always maintains that it uses dealers as infrequently as possible.

Would computer resellers warm to Dell?

Many would not be heartbroken if Dell floundered. Not only is the company held responsible for the decline in hardware profits, but Dell's field service capabilities have improved dramatically in recent months, posing yet another threat to the channel. Dell, said some, is even receiving higher support marks than Compaq.

"Customers are enamored with them," said one reseller who requested anonymity.

"A lot of resellers are still mad at Dell," countered Entre's Cohan. "I'm not sure how receptive they will be."