Who wants to be in the PC business? Not Dell

Turbulent PC industry clearly is not so easy to navigate these days

Have you noticed that it's just not so cool to be in the PC business these days?

Granted, it's been no secret that the PC industry has been taking it on the chin for more than a year. With a down economy and people excited about new, smaller devices like tablets and smartphones, companies and individual consumers simply aren't spending as much money on desktops and laptops these days.

And just a little more than a year ago, Hewlett-Packard, which still clings to the moniker of top PC maker worldwide, announced that executives were considering selling its PC manufacturing business. While HP later decided to keep the business, the possibility created a major stir in the industry.

Now this week, Michael Dell, founder and CEO of Dell, said during a conference sponsored by Fortune that the "new Dell" really isn't in the PC business anymore.

That's a pretty surprising statement from the man who runs the fourth-largest PC manufacturer in the world.

That's right, Dell may be slipping in the PC market rankings but it's still in the top five. And it's been in the PC business for the past 28 years.

As recently as 2011, the company was the number two PC maker, right behind HP. But then it was surpassed by rankings-climber Lenovo and then it also was passed by Acer.

And from what Michael Dell had to say this week, the company may not be looking to scramble its way back up the rankings.

"Well, in the last five years or so, we've really made a concerted shift in our business towards end-to-end IT solutions," said Dell, when asked about a comment he had made earlier that the company is really not a PC company anymore.

"And if you think about the businesses that Dell is in today, there are really four of them. Certainly, we start with the client business, which is kind of transforming with all the things that are going on in mobility and client virtualization," he said.

But after quickly mentioning his client-based business, Dell went on to talk more at length about the company's enterprise data center, server, storage, software, services and networking business.

Dell went on to add that about half of the company's gross margin does not come from PCs. He didn't respond to the question of how much of the company's margin might come from PCs five years from now.

Dan Olds, an analyst with The Gabriel Consulting Group, said, "Dell is in the process of remaking themselves. Sure, they'll still sell PCs, but they'll sell a lot of other things too."

Olds added that it's a smart move to differentiate your business when part of that business is the turbulent PC industry.

"The PC industry is marked by brutal price competition, a tough distribution model, and a constant need to stay on top of the latest trend," Olds said. "Plus, the PC segment has become even more difficult to negotiate due to other devices, like tablets and smartphones, constantly encroaching onto PC territory."

And while Olds said he doesn't see Dell, or any of the other big PC players, leaving the market anytime soon, the companies that can diversify their business are doing so.

Cases in point: Lenovo, with its smartphones; and Dell, with more enterprise products and services.

Charles King, an analyst with Pund-IT, said Dell's CEO simply doesn't want the company to be wholly or largely dependent on PC sales.

"From the standpoint of profit margins, the worst performing part of IT has been PCs and it's getting even worse," King said. "The situation doesn't automatically make PCs a bad business to be in but it does mean that in order to deliver healthy profits and growth, traditional PC vendors need to lessen their exposure in low-performing markets and balance their portfolios with higher-margin products and services or risk getting hammered by shareholders."

That was the thinking that nearly pushed HP to slice off its own PC unit last year. However, HP is the world's biggest PC maker and it just didn't make sense for the company to step away from PCs at this point, King said.

While HP decided to stick it out, Dell is still trying to forge a new path for itself.

"Dell is at the crossroads where IBM was in 2004," said Sarah Rotman Epps, an analyst with Forrester Research. "IBM shed its PC business and has thrived... Every day Dell loses share to Lenovo, Samsung, and other competitors. It can't compete on price and it can't compete on style, so what is Dell's differentiator? Dell may see itself as a services company, but that's still aspirational given its heavy investment in PCs."

Jim McGregor, principal analyst with TIRIAS Research, said Dell needs to make these changes to its business if it wants to succeed.

"Dell faces stiff competition, not only in PCs, but also in servers," McGregor said. "The good thing about focusing on enterprise customers is that they need more than just PCs and servers. They need software, services, and solutions."

"But Dell faces growing competition in these segments as the dynamics of the market change... Offering services and complete solutions is the difference between surviving and thriving," he said.

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, on Google+ or subscribe to Sharon's RSS feed. Her email address is sgaudin@computerworld.com.

See more by Sharon Gaudin on Computerworld.com.

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Sharon Gaudin

Computerworld (US)
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