Dell faces hurdles as server competition heats up

SAN FRANCISCO, USA: Dell Inc faces an uphill battle in the corporate server market with new and powerful competitors, though shifting alliances in the field may not directly hurt the company in the short term.

Network equipment maker Cisco Systems Inc this week announced it would start selling computer servers -- powerful computers that run networks -- and sources say International Business Machines Corp is negotiating for a takeover of Sun Microsystems Inc.

Hewlett-Packard Co also moved aggressively last year, with the purchase of EDS, to offer a more complete package of technology services to its business customers.

"Dell may be the odd person out in this musical chairs (game)" said Morningstar analyst Rick Hanna. "They are a commodity hardware supplier and the world is passing them by; the world's moving beyond that into the cloud and much more into software and services computing."

Dell will announce a major slate of new products focused on business customers next week and also discuss its strategy for the market. It declined to comment on the IBM-Sun news.

The company lags both IBM and HP in the server market, with a 2008 market share of around 12 percent, according to research group IDC. Its focus has been on low- to mid-range servers based on standard industry components, known as x86 servers; Dell ranks second in that market.

Thus, an IBM-Sun combination would mainly pose a direct threat to HP in the high-end Unix server market, where Dell is not a player. Dell might actually stand to gain some market share that would be surrendered through an IBM-Sun merger, analysts said.

"Right now the bigger focus for them is blocking and tackling and dealing with the international slowdown ... But some share will be lost in this combination of Sun and IBM and they're the third-largest player in the space, and they'll pick some of that up," said Avi Cohen, head of research at Avian Securities.

In the long run, however, critics say Dell is dealing in a low-margin, commodity business and it has not done enough on the innovation front.



New products next week

Steve Schuckenbrock, president of Dell's large enterprise business, told Reuters Dell can win market share because its servers help customers drive down costs. The servers are based on commonly available, industry-standard hardware and software, unlike competing products that use proprietary technology.

"Dell is the only company that is purely focused on open standard architected solutions," Schuckenbrock said in an interview. "Our competitors tend to want to do proprietary things, and we don't think the world needs more proprietary solutions from anybody."

As for Cisco, it remains to be seen how successful the company will be in moving into servers based on Intel Corp's x86 chips. Cisco has partnered with EMC Corp, VMware Inc and others to incorporate computing, storage and software products into a single system.

"If it leads to Cisco being a tier one server vendor, that certainly could affect Dell. There's a fixed pie," said Gordon Haff, principal IT advisor at research group Illuminata.

Schuckenbrock, a former EDS executive who was named to his current post in December, downplayed Cisco's entrance.

"I think they've got a lot to learn as they delve into the server space. I don't think the market is begging for another proprietary approach to servers," he said.

Servers and networking made up 10 percent of Dell's revenue in fiscal 2009, while storage made up 4 percent. Personal computers made up around 60 percent.

Schuckenbrock said he "absolutely" sees servers as a growth driver. "We see it as a growth business both in terms of taking share from the competitors" and in making Dell's server and storage infrastructure the backbone of companies.

Acquisitions

Bankers and analysts expect a new wave in dealmaking to emerge in the tech sector this year as cash-rich IBM, HP and Cisco draw battle lines.

When asked whether Dell, which has around $9 billion in cash, is looking to make any acquisitions, Schuckenbrock was open to the idea. Dell bought data storage network company EqualLogic for $1.4 billion in 2008, its largest-ever acquisition.

"We're constantly looking for the right pieces to be added to our current capability. The focus I think would tend to be on continued expansion in the data center, software and services and some of that can be organic and some of that'll be inorganic. But we're open to both approaches," he said.

Dell has been working through a prolonged and painful turnaround, as overall sales declined. The company has been shedding jobs as it focuses on profitability over growth.

M. Eric Johnson, director of the Center for Digital Strategies at the Tuck School of Business at Dartmouth, criticized Dell's strategy as "just staying in the game."

"Dell has been so preoccupied in trying to get its own cost structure right that in some ways it's not really able to react to a lot of these things going on around it. It's working so hard to get its own house it order," Johnson said.

Shares of Round Rock, Texas-based Dell were off 21 cents to $9.83 in late-afternoon trade on the Nasdaq, up from their year-low of $7.84 in February but far off their year-high of $26.04 last August.