Dell Needs a Convergence Device Strategy Badly

According to a recent Forrester report, 1 billion PCs will be in use by 2008 and 2 billion PCs by 2015. A beneficiary of this market is Dell, which is the No.2 vendor in the PC market with a 16.1% market share (IDC, Q2 2007). However, a majority of the next billion PCs will likely be convergence devices and as I have said before, Dell needs to come up with a convergence device strategy to be a true beneficiary. As it stands, I haven’t seen one yet.

Dell (NasdaqGS:DELL), for long, had been a darling of Wall Street, but fell out of favor as its direct selling model became commodity. Its business is organized in the geographic segments, Americas; Europe, Middle East and Africa (EMEA), and Asia Pacific-Japan (APJ). Its products and services are organized under its core products of Desktop PCs, Mobility, Software & Peripherals, Servers & Networking, Enhanced Services, and Storage. It is the No. 4 vendor in the total disk storage systems market with 9.8% share and in the server systems market with 11.6%.

Earlier in January, Michael Dell, the founder of the company, returned as CEO replacing Kevin Rollins, under whose stewardship, the company has floundered.

Following this, in April, Dell exited the stagnant handheld market and stopped selling its Axim PDAs. The PDA market has moved to smartphones, a harbinger to the broader convergence trend, and Dell’s Axim line has not kept up.

In the PC market, where Dell lost its position as the top vendor to HP last year, it is coming to terms with the changes in buying behavior. Diversifying from its direct sales approach, it has started selling its PCs at Walmart stores. It also plans to sell through Sam’s Clubs in North and South America, Bic Camera Inc. of Japan and Carphone. To target the next billion PC customers, 775 million of which will be from Brazil, Russia, India, and China as per the, Dell has opened factories in Brazil and India.

On the product side, there haven’t been any breakthrough innovations. It has introduced the ultra-thin portable notebook, the XPSTM M1330, and its new Inspiron notebooks feature mobile broadband, built-in webcams, and more color options. There has been some supply chain issues to tackle on this line.

In July, Dell acquired SilverBack Technologies, Inc., a service delivery platform provider for remote monitoring and management of IT infrastructure. This acquisition would likely help with Dell’s own customer service which had developed a horrendous reputation. In August, Dell acquired ASAP Software, a leading software solutions and licensing services provider for $340 million. It continued its acquisition spree with Zing Systems Inc., a provider of streaming audio technology, to continue its efforts in the consumer market. This quarter, Dell’s announcements have included Unified Communications partnerships with Nortel and Microsoft.

Clearly, Michael Dell has a lot of cleaning up to do. The Unified Communications strategy is interesting to salvage Dell’s position in the enterprise. What concerns me, however, is the lack of a Convergence Device strategy, especially, the lack of expertise building in the cellular phone business. I had thought that Dell would make a bid for Palm. They can still do that, as Palm engineers its own turnaround. But the overall strategy void is of supreme concern.

On the financial front, for Q2 fiscal 2008, Dell reported preliminary revenue of $14.8 billion, up from $14.6 billion in Q1, fiscal 2008. Operating income was $896 million and EPS was $0.32. Server revenue was $1.6 billion. Storage revenues were $0.6 billion, a sequential increase of 20% from $0.5 billion in Q1. Revenue from mobility products decreased to $3.9 billion, from $4 billion in Q1. Desktop revenue increased to $5.0 billion from $4.9 billion in Q1. Enhanced services revenue was $1.3 billion and software and peripherals revenue was $2.4 billion, up from $2.3 billion in the previous quarter.

Dell hasn’t filed any financial reports since last year following the SEC’s investigation. It will be restating its financial statements for fiscal 2003, 2004, 2005 and 2006. It is expected to file its 2007 fiscal year report in November. Its stock is trading around $28 after touching a 52-week high of $29.61 in July. Its market cap is around $62.8 billion.

If you compare that with RIMM, one of the stars of the convergence device movement, you would find a market cap that is almost equivalent, on a revenue that is dramatically lower. RIMM’s revenue is only $3 Billion.

So what are all those factories in Brazil and India going to produce, Michael, if they don’t produce Convergence Devices?