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Dell expands into services market

The direct PC seller is increasingly moving into the market for connecting, creating and managing e-commerce operations that run on its PCs, often at prices lower than competitors.

For most of its history, Dell Computer has stayed out the services market, but that is changing rapidly.

Dell, which has been largely known as a manufacturer, is increasingly moving into the market for connecting, creating and managing e-commerce operations that run on its PCs, often at prices lower than competitors.

On Monday, for instance, it is expected to unveil an alliance with Network Solutions (NSI) under which the PC company will sell NSI-approved domain names to its customers for $25--$10 less than what the registrar charges. NSI, in turn, will recommend Dellhost.com as a hosting service.

Dell also will begin to offer services that will allow a customer to set up a Web presence in 24 hours and shift from a competitive hosting strategy in 48 hours.

The push toward services comes from both necessity and opportunity. With margins on hardware dropping, the company is seeking new, and possibly more lucrative, markets. At the same time, its existing customers and its financial strength give it a solid platform for entering the services market.

Dell isn't the first PC company to expand into services; actually, it's one of the last. IBM, Compaq Computer and Hewlett-Packard have worldwide services organizations staffed with thousands of engineers that can do everything from warranty repairs to designing global storage networks.

Rather than build a huge services group internally, Dell will often partner with established companies and divvy the revenues.

"Dell wants to be the Neiman Marcus," said Piper Jaffray analyst Amir Ahari. "The retailer buys from all these designers--or in Dell's case, they partner with all these other manufacturers and companies--and what you see is the shell of the retailer, where they really make money on the difference between what they paid and what they're selling it for. That's the model Dell is trying to evolve into."

"Tomorrow's dollars are not going to come from a desktop sale," Ahari added. "They're going to come from how much footprint do you own in a data center or a department or workgroup organization. That translates into more storage sales and more services sales."

The push began last year. The company hired Steve Felice, former CEO of service provider DecisionOne, and put him in charge of Dell Expert Services. This group oversees various services, including Dellhost.com, and forms alliances with application service providers and other companies.

Historically, the shift will mean that the company will be reselling services for other companies, which to some degree goes against its core strength. Dell sells PCs directly to customers, bypassing middlemen. In the future, it will be the middleman.

The shift is ASP middlemen try to simplify the market"amusing in a way," said International Data Corp. analyst Roger Kay. "When you say you're direct, you're saying you're cutting out the middleman. So if you are the middleman, it's kind of ironic."

Gartner Group analyst Kevin Knox said Dell's major concerns will be Compaq, HP and IBM. All three have larger service groups and are tweaking their manufacturing and sales strategies to eliminate Dell's advantages in selling direct.

"If--and I'll put the big if there--Compaq, HP and IBM can go direct, they're going to have a pretty strong offering because they have a broader breadth of services and products," Knox said.

Despite acknowledging a shift in direction, company executives say it is a circumspect shift.

Web hosting, for example, constitutes one of the larger services thrusts for the company. It's a topic Dell knows well: It runs one of the biggest e-commerce sites on the Web. With Dellhost.com, the company comes to market with a huge wealth of knowledge for creating, managing and building data centers.

The division also will be selling servers, said Tim Mattox, vice president of Dell Hosting Group. To build this system and serve its customers, Dellhost.com is going to become a huge buyer of its own hardware. The customer might pay a monthly service fee, but the transaction generates hardware revenues.

"We want to wrap services around where they are related to hardware," said Mattox. Of the hosting division, he added, "I think it will be massive."

In other areas, the push will be less dramatic. Inside the Expert Services Group are subgroups such as Dell Technology Consulting, which advises clients on high-level IT decisions, such as building data centers, and E-consulting, which provides advice on developing Web strategies.

Consulting fees in both of these markets can be fairly lucrative, but Dell's groups will mostly act in an advisory capacity. The company's consultants will be on site and participate in projects, but the heavy lifting will mostly be accomplished by established players such as Andersen Consulting.

"You will never see an army of Dell consultants out there," said Gary Cotshott, vice president of services at the PC seller.

Between these poles, Dell has been greatly expanding its break-add-fix staff. Dell employs approximately 6,000 technicians worldwide, said Cotshott. The company contracts with Unisys and Wang for fieldwork but will likely continue to expand hiring.