Dell Technologies: Apple, or Just Bananas?

Michael Beesley is CTO of Skyport Systems.

Today, Dell Technologies is one of the biggest hardware and software technology companies in the world with estimated annual revenues in the $60 billion range, putting it neck and neck with Huawei for the title of world’s biggest private tech company. This has truly been an amazing journey for a company founded in 1984 on a $1,000 investment to sell IBM PC clones out of a dormitory room.

Despite more than two decades of incredible success built around cost-effective manufacturing, rapid product introduction, industry best supply chain management and a direct to consumer business model, recently the company had struggled to maintain relevance and to avoid commoditization of its hardware- centric business model. In 2013, Michael Dell started taking a set of actions that amount to one of the biggest gambles ever taken in the world of technology; let’s look at what he did, why, and how it might play out going forward.

2013: Dell is taken private through a private equity funded leveraged buyout; at $24 billion it goes down in history as the largest technology buyout ever.

2016: Dell completes the $67 billion acquisition of EMC Corp, the largest technology merger in history bringing EMC, VMware, RSA, Pivotal, SecureWorks and Virtustream all under the Dell Technologies' umbrella.

So why on earth did Michael Dell and team take on an eye-watering, terrifying mountain of debt to transform and enlarge his company, when others have the reverse strategy?

The answer I believe has all to do with the rapid change being experienced in the enterprise data center, which has historically been a major profit center for infrastructure equipment and software vendors. Several things are changing:

Public Cloud (IaaS and SaaS) Growth

Public cloud (and the SaaS services hosted therein) continues to grow at a rapid rate and is literally eating the enterprise data center, which some are predicting is doomed.

Virtualization and 'Software Defined'

Technology has evolved rapidly to the point that complex, critical functionality traditionally embedded in specialized storage, networking and security products is now offered as virtualized software running in and on the hypervisor of a server.

Commoditization of Hardware

Hardware system innovation has been at a standstill for years with every vendor having access to the same reference designs from Intel, Broadcom and others. As such, margins for systems have collapsed to commodity levels.

Dell’s Success Case: 'Apple'

The success case for Dell is that it manages to stabilize the shift to cloud such that the world’s compute and storage remains evenly split between the public cloud and on-premise within enterprise. They establish a walled garden, integrated stack, including networking, storage, compute, virtualization and security, within enterprise, capturing 99 percent global profit share from a much lower market share (as Apple has done in smartphones). It is worth noting that despite years of competition from Microsoft’s System Center and from OpenStack (R.I.P – enough said), VMware still commands 90-plus percent profit share in virtualization and orchestration. In this scenario, all competitors exit the data center market and Dell enjoys a monopoly in perpetuity within the enterprise becoming the world’s most valuable company.

Dell’s Failure Case: 'Just Bananas'

The failure case involves endless migration to the public cloud to the point that the enterprise data center ceases to exist. Without the enterprise market, the global profit pool for vendors shrinks by an order of magnitude even though global compute and storage continue to increase. This is due to the scale effects and buying power of the small number of public cloud providers, combined with their penchant and abilities to engineer their own solutions if and when a commercial option becomes too expensive. In short, shops like AWS, Azure and GCE are the worst types of customer for an infrastructure or software vendor. The resulting business for Dell is at such thin margins that they cannot fund any research and development and cannot create enough cash from operations to pay the interest on their debt. They go bankrupt.

It will be fascinating to see how this all plays out over the next several years; it is very hard to predict the outcome, but one thing is for sure: The recent Dell moves will either go down in history as the bravest, wisest, most profitable move ever taken in tech, or they will go down as the most foolish, reckless, irresponsible, cash burning, company-destroying moves ever.

Only time will tell.

Opinions expressed in the article above do not necessarily reflect the opinions of Data Center Knowledge and Penton.

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