A number of months ago, I penned a blog about how HP's EDS acquisition left Dell in an IT services lurch. One of the side points in this blog was Dell's lack of enterprise credibility.... and Dell being a potential suitor to buy Sun Microsystems (It's Your Turn Dell). Fast-forward to this week, where Sun announced they would lay off 6,000 employees. Also notice Sun's market capitalization is now down to $3.1B US. If ever there were a time for Dell to scoop up Sun, this is it.
Why would Dell buy Sun? Isn't this madness? Doesn't Dell have enough problems of it's own? Yes, they do. But let's ask ourselves how Dell got into this position (and not just blame it on the current economic conditions).
The crux of my blog went back to a time when Compaq -- lacking enterprise credibility -- was in a similar situation to Dell. Here's an excerpt:
Dell needs to do the same. They’re basically at the same point Compaq was in 1994. The Dell brand is lacking the enterprise punch to compete. And with more HP “feet on the street” than ever, Dell will increasingly be marginalized -- pushed out of accounts where they don’t have the product portfolio to “own the entire account”. They need to acquire the technology rather than slowly building internally/organically.
The blog went on to say that although Dell had some products in the enterprise space, they needed to beef up their server and storage enterprise credibility and that acquiring Sun would help Dell attain the credibility they need rather than waiting for Intel to push mini-computers out of the market using the x86 architecture.
Although x-86 servers make up a majority of the server market (especially in terms of units sold), for some applications, customers require systems that have a higher class of availability and performance. In this area, IBM and HP have products at the “mainframe” level (Z-Series and Superdome respectively) and the “workstation” level (P-Series/i-Series and Non-Stop/HP-UX respectively). Dell doesn’t. This problem is harder for Dell to solve. Perhaps Dell can wait for AMD and Intel to solve this product gap problem for them through the future scalability of the x86 server architecture. But another possible scenario is for Dell to acquire Sun (which could be had at a good price). This may sound like madness, but so did the HP/Compaq merger when Carly Firoina and Michael Capellas announced the plan in 2001. Today, the HP/Compaq merger is widely regarded as the right move because it gave HP the product portfolio and services it needed to compete with IBM in the enterprise. Dell needs the product punch and the enterprise brand credibility that Sun can provide.
Little did I know that the price would get much, much better.
Dell's business model has always been about draining profit pools. Dell jumps into a market when the competition has created a market with significant demand on a profit rich product. Dell MO is to come in at a lower price point, drive up tons of volume, and push the competition out of the market. At Dell, they call it "the curve". "The Dell curve" is drilled into the heads of Dell-ians from the day they walk through the front door. But many question the value of such a business model. What happens when there are no more profit pools to drain? What happens when margins are so slim that quality and support suffer? What perception does "low-cost leader" do to the brand? In enterprise circles, price is only one concern...availability, reliability, scalability, and management can be just as -- if not more -- important.
The margin-rich enterprise arena is where Sun excels. Sun has the credibility in enterprise hardware, operating systems, software, and several other technologies. The enterprise is Sun's home turf and they bring a truck-load of loyal enterprise customers.
The question is: would Dell make this move? It's a gamble to be sure. Dell would have to change their spots -- the way they operate, their mindset. Enterprise products are not made without investments in research.
From another viewpoint, Dell has the enough cash to make such a purchase. As of Friday, Dell had approximately $9B US in cash on hand, with about $2B US in debt. Sun, on the other hand, has $2.3B US in cash and $1.2B US in debt. And...one could make the argument that Dell should wait until the market recovers; Dell is in a better position to recover than Sun. But Dell has to think in terms of the compeition too. Dan Nosowitz from Gizmodo wrote an interesting blog on a CNET article concerning which PC company was best positioned to weather the current economic conditions.
I mean, what if HP or IBM bought Sun? What would Dell’s options be if that happened? With Sun off the market, who else could Dell buy to get into the enterprise game? Basically, no one. They’d have to settle for being a smaller player in the enterprise – hoping to grow the market organically (which could take years or never happen). HP buying Sun would leave Dell in an enterprise lurch they way HP's EDS acquisition did for services.
Dell missed their opportunity to buy EMC several years back and now they are kicking themselves. They should not make the same mistake with Sun. If HP bought Sun, Dell’s best option would probably be to move down market toward consumer devices. Meaning: become the best consumer gadget device company in the land because the enterprise space would be a much more difficult market to capture (Dell probably wouldn’t “give up” in the enterprise, but the road will only continue to get harder for them).
However, being a consumer device company would be difficult road too because 1) the margins are slim. 2) Discretionary consumer spending is much more sensitive to market downturns. 3) There is lots of competition from Apple, Sony, etc, where customer brand loyalty is strong. It’s much easier to drain profit pools where profit margins exist.
Dell has to make some hard choices. But, opportunity arises amid chaos.
[posted by: Drue Reeves]