Arik Hesseldahl

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Inside Dell’s Scorched-Earth PC and Server Price-War Plan

forest_fireDell, the struggling computer maker that plans to go private in a leveraged buyout transaction, has a plan to compete aggressively to retake some of its lost share in the market for personal computers and servers. Its main weapon will be price cuts that are intended, in one stroke, to force competitors to respond with profit-sapping price cuts of their own, and give Dell the opportunity to boost its share of the market and sell related products.

The plan was revealed in a presentation to industry analysts at a hotel in Austin last week. In it, Dell executives including Jeff Clarke, Dell’s vice chairman and president, and Marius Haas, the head of its Enterprise business, painted a picture of how Dell plans to operate as a privately held company.

No reporters were allowed to attend the meeting. But Patrick Moorhead, head of Moor Insights and Strategy and a longtime executive at chipmaker Advanced Micro Devices, was there, and gave me the download. He attended a similar meeting last year, and was struck by an apparent change in the attitude of the Dell execs presenting. “They had some swagger that they didn’t have last year,” he said. “They’re feeling confident. … There’s going to be a few years of pain for the rest of the industry, and Dell is going to provide it.”

Here’s why: Assuming that it won’t need to make shareholders happy by growing its earnings per share every quarter, as public companies have to do, Dell plans to combine actions to rein in costs by simplifying its product lineup and tightening up its supply chain, with cuts to prices. “It’s almost as if Dell is acting like it’s a private company already, and is asking the industry for its reaction to it,” Moorhead told me.

Clarke made one key statement during his remarks, which Moorhead paraphrased like so: “We are not going to retreat anymore. We are going to compete in every country, at every price point.”

There are signs that parts of this strategy are already working. When it reported earnings on May 22, HP saw declines in its PC business but remained atop the global market. HP CEO Meg Whitman said that it walked away from several PC deals in order to protect its profitability. She didn’t name Dell as the cause, but it’s No. 3 in the world, behind HP and China’s Lenovo.

“You could tell he’d been waiting months to say that,” Moorhead told me.

In another presentation, Haas struck a similar tone, and outlined Dell’s plans to accept smaller profit margins on its industry-standard server line as a means to try and attach other enterprise-oriented products like storage and networking.

One slide from Haas’s presentation deck shows Dell servers making gross margins of about 20 percent, while storage products make gross margins of about 50 percent, and networking products 65 percent.

“The way Dell sees it, any sales it makes in networking and storage is accretive,” Moorhead said. “It’s really simple. If Dell boosts its market share in servers and sells more networking and storage products alongside those servers, the worst-case scenario is that its profit margins remain the same. But in the process they’re going to put some hurt on Hewlett-Packard, IBM and Cisco Systems.”

Dell is already showing some progress in the server business. Haas and CEO Michael Dell gave a handful of interviews, bragging about the company’s rise in server market share in the first quarter of this year. It remains the No. 2 player globally, behind HP, and HP’s share declined.

HP has its own cards to play, but it’s going to be awhile before it’s apparent. The company unveiled its Project Moonshot server earlier this year, and has pinned much of the hope of a recovery in its enterprise hardware business on that. However, it’s still too early to know whether enterprise customers will line up with purchase orders. HP says it doesn’t expect Moonshot sales to start showing up in HP’s results until next year.

Cisco, the networking giant, has in recent years pivoted into selling industry-standard servers coupled with networking and storage. It calls the product its Unified Computing System. It has risen to become the No. 3 vendor in blade servers behind HP and IBM.

Moorhead called Dell’s plan the best strategy with the highest potential for success in its quest to turn its business around. “These are tactics that have been in Dell’s DNA from the beginning. They know how to run this play and run it well.”

Of course, this is all taking place against the backdrop of Dell’s $24.4 billion leveraged buyout plan, which it announced in February. The offer, which is being partially financed with the private equity firm Silver Lake Partners and a loan from Microsoft, values Dell at $13.65 a share.

Dell shareholders, including the activist investor Carl Icahn and Southeastern Asset Management, Dell’s largest outside shareholder, are opposing the deal, and last week urged shareholders to abstain from Dell’s proxy vote on the proposal, which is scheduled for July 18.

(Image from Wikimedia Commons)

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