Technology

Servers Become Dell's Comeback Weapon


After a few troubled years, Dell is back on course and grabbing market share by being everything server

Need evidence of Dell's resurgence? Look to the company's performance in servers. Dell's share of the U.S. market is widening, a sign that it's on the comeback trail in enterprise computing.

Dell's share of the $28.7 billion market for x86 servers, the most widely sold, grew to 36% in the U.S. in the first quarter. My bet is Dell's (DELL) share will exceed 40% this quarter. A big reason is Microsoft (MSFT). Even as the company and Yahoo (YHOO) dithered over a possible takeover or combination of their Web businesses, Microsoft was forging ahead with its own plans.

One prong of Microsoft's strategy is to build out its own mega-datacenters to compete with the likes of Google (GOOG), Amazon (AMZN), and eBay (EBAY) in wheeling around huge quantities of computing power for its own services as well as those of partners. These huge datacenters host applications, like Google Earth, used by millions of people around the world.

Commercial Business: The Big Game

Dell has the lion's share of Microsoft datacenter business and closed a server order for tens of thousands of units in the first quarter. Most of those are being delivered this quarter. Given that the U.S. x86 server market falls in the range of 700,000 units a quarter, an order this size represents a substantial single-digit proportion—easily boosting Dell's share above 40%.

While many analysts and investors tend to focus on Dell's performance in the consumer segment of the PC market, commercial business remains a majority of the volume and profit for PC vendors. And servers—those beefy computers that sit in the middle of the network, hosting applications accessed by desktops and notebooks—are the most profitable among PC types. Desktops tend to yield gross margins in the 8% to 12% range, and notebooks hit 12% to 18%; servers come in at a much fatter 18% to 26%.

The Microsoft order isn't the only card Dell has to play. Dell recently broadened its x86 server line, which had been undernourished, to include at least one offering in each of the various categories, including those boasting a dual processor or quad processor, ones that slide into a rack, or those that make up all-inclusive towers. Whatever you want server-wise, Dell has.

And Dell has brought depth to its server line as well. Through one program, Dell provides the hardware to companies that in turn load software and configure the server to fit their own purposes—say, running a Web site or handling e-mail. For example, Dell PowerEdge servers form the guts in the search appliances that Google in turn sells to enterprises for their own internal use. IronPort Systems uses Dell server hardware for its security appliances, which are sold to the world's largest Internet Service Providers.

Symantec (SYMC) has a spam-protection appliance built the same way. These companies—as well as others including Cisco Systems (CSCO), General Electric (GE), Honeywell (HON), and McAfee (MFE)—brand as their own boxes that Dell has custom-configured for them.

Overcoming a rocky recent past

In addition, through its Data Center Solutions Group, Dell builds clouds, the large groups of computers whose collective power can be tapped remotely, via the Internet. Customers for DCS-built clouds include Yahoo! (YHOO), Facebook, and Akamai (AKAM) as well as big Chinese Internet companies like Baidu (BIDU), Tudou, Tencent Holdings, and Youku. Big Oil avails itself of DCS's services, as do a number of Wall Street firms.

Dell has also designed servers for other markets, including virtualization, which lets companies slash costs by distributing computing tasks more efficiently among various machines.

Closing the gap with HP

Although the stars seem to be aligning for Dell in the enterprise market, success is far from assured. Dell has to move past the instability of the past several years, which saw major management changes, federal investigations, share loss, and financial distress. The first quarter of 2008 (BusinessWeek.com, 5/30/08) really rocked, but in fairly recent memory earnings have been choppy.

And though Dell is doing fine at the low end of the x86 server market (in single- and dual-processor systems), Hewlett-Packard's (HPQ) mix is higher (more quads), which means HP makes on average more revenue and profit on each unit shipped. What's more, HP has acquired EDS to enhance its enterprise services position. HP currently ranks No. 2 behind Dell in the U.S., with 28.5% of the market, according to IDC figures.

Dell has taken a different approach, harnessing in-house talent to create customizable offerings for customers. By building solid hardware into which its customers can pour their software, Dell is able to reach a wide array of customers without having to support them with a large services organization. The approach may give Dell a leg up, judging from recent and projected growth.

In the $28.7 billion global market for servers, Dell trailed HP in the first quarter, according to IDC figures. But it was the only major player to achieve double-digit growth, and in the current quarter, Dell is likely to close the current eight-point gap with leader HP another notch. We're talking about a big pie here—and Dell is coming in for a decent slice of it.


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