Dell’s Predicament  

Dell just reported their fourth quarter results. While revenue was up 2% compared to the same period last year, profit was down 10%. From the press release:

Revenue in the quarter was $16 billion, a 2 percent increase over the previous year. […] Earnings per share in the quarter was 43 cents, down 10 percent from the previous year.

After basically admitting defeat in the consumer PC market and promising to focus on enterprise IT and “mobile services” last year, Dell has found itself in the midst of a confusing transition. It is caught between two markets that are dramatically changing. Consumer PCs are dying. Enterprise IT problems are being solved increasingly by “cloud-based” solutions using generic or custom-built equipment. The future viability of Dell’s hardware products, which already have razor-thin margins, does not look great.

A few weeks ago, the company announced that it had started an in-house enterprise software group. Maybe they can solve their problems with software. But that would require basically reinventing the company, and HP is doing almost the exact same thing. The competition for nebulous “enterprise software solutions” is already fierce, and Dell doesn’t have a lot of experience with software.

Regarding Dell’s PC and mobility segments, which are responsible for about 50% of revenue, Michael Dell remains positive when speaking publicly. But I think he’s being dishonest. Tablets are going to replace the vast majority of commodity PCs. This is pretty obvious. Even Dell himself admitted to being blindsided by the popularity of them in a Wall Street Journal interview last year:

WSJ: You’ve been back as CEO for four years now. What has surprised you the most about the evolution of the tech industry in that time?

Mr. Dell: I’d say [the] rapid rise of the tablet. I didn’t completely see that coming.

Tablets aren’t really new, in the sense that the tablet PC idea’s been around for a while. Obviously, more recent products have been much more successful. What’s interesting [is that] business users are not going to give up smartphones. Won’t give up PCs. So now you have a PC, you have a smartphone and you have a tablet. Sounds pretty good. Industry growth.

While productive corporate employees might not give up PCs, the vast majority of other workers will. That is not industry growth; that is transition and consolidation. When thinking in the long term, Dell’s PC group can be basically ignored. It’s the end of an era, and it puts the company in a terrifying predicament. There is now no clear end game for Dell, and the company’s core competencies are being rendered irrelevant by evolution.

Update: See also: HP’s Predicament


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