Dell filing reveals poor state of PC industry

Dell has revealed the dire state of the PC industry, poor take-up of Windows and the need to invest in research and development

Dell has revealed the dire state of the PC industry, poor take-up of Windows and the need for the company to invest in research and development (R&D).

The company’s chairman, Michael Dell (pictured), is battling to win over the hearts and minds of Dell shareholders, in a bid to reprivatise and reinvent the company.

US billionaire investor Carl Icahn and private equity group Blackstone are to fight Michael Dell in a bidding war over the computer company he founded.

In one of the filings with the US Securities and Exchange Commission (SEC), which was sent to staff, Dell noted that the company would be hiring additional R&D, services and sales personnel to extend the depth and breadth of its capabilities and to increase the number of customers to whom such services and solutions are provided.

In a letter to employees, he stated: “Dell’s strategy of becoming an integrated provider of end-to-end IT solutions is expected to require additional investments in converged infrastructure solutions, software, cloud solutions, application development and modernisation, consulting, and managed security services. 

"In addition, it is likely that we will need to make additional acquisitions to complete our transformation.”

Declining PC demand

The company suffered big losses in its most recent quarter due to poor PC sales. 

Dell reported an 11% decrease in revenues in the fourth quarter of 2012, compared with the same period last year. Its desktop and mobility business declined by 20%. Much of this is due to the poor performance of the PC business.

These figures were mirrored by market analysts. IDC’s Global PC Tracker for the fourth quarter of 2012 showed global shipments of desktop and laptop hardware slumped by 6.4% year-on-year. 

Gartner noted that in 2010, half of device spending was on traditional desktop and notebook PCs, and 25% on smartphones. In contrast, it predicted that by 2017, half of device spending would be on smartphones, and 20% on traditional desktop and notebook PCs.

Dell filed several reports with the SEC at the end of March, including one, of 274 pages, which outlined why the company needs to move away from the commodity PC business.

The report highlighted the long-term challenges facing the company, including a general lengthening of the replacement cycle for PC products, uncertain adoption of the Windows 8 operating system and unexpected slowdowns in enterprise Windows 7 upgrades.

The filing also stated that PC sales may also be potentially affected by consumer interest in tablets and smartphones, especially given that Dell does not make a smartphone device.

Separation of the PC businesses would be difficult and have negative effects for Dell's customers and growth prospects

Brian Gladden, Dell

Dell must become a strategic supplier

Desktop hardware may not be considered strategic, but Dell needs to become a strategic supplier.

To do so, Dell needs substantial additional investment to continue its current strategy of developing integrated end-to-end technology solutions for its enterprise customers. The filing explicitly mentioned extending existing capabilities, such as cloud services, suggesting the company wants to build its enterprise cloud business.

The filing noted that Dell cannot remain competitive in the end-user computing business (EUC desktop and laptop PCs), but offloading these to focus on enterprise solutions and services (ESS) would be risky.

“Separation of the company’s EUC and ESS businesses would be difficult to execute and would entail significant dis-synergies, with negative effects for the company’s customers and growth prospects,” said Dell chief financial officer Brian Gladden.

A new approach to hardware investment

Whatever happens to Dell in the near future, CIOs need to plan for change.

“Users should design scenarios using a number of factors, including, but not limited to, the size of their investment in the given technology area, the amount of overlap within Dell's portfolio, the level of commoditisation and margin profile of the technology area, and timeframes considered for the investment,” said Gartner research director Adrian Connell.

In the light of what has been revealed by these filings, it would seem the days of the major PC refresh are long gone. Dell is not the only PC company suffering from a decline in sales. Market leader HP’s personal systems division made massive losses in the first quarter of 2013. The company reported that personal systems revenue was down 8% year on year, commercial revenue decreased by 4%, and consumer revenue declined by 13%.

Businesses may not be fully ready to jump on the desktop virtualisation bandwagon, which will separate PC hardware from the business applications users need to run. But people are migrating from Windows XP to Windows 7, and have suitable hardware to run desktop virtualisation in the future.  

The cannibalisation of PC sales by tablet devices and smartphones shows that people in business prefer these devices to corporate laptops. So it may no longer be necessary to refresh PC hardware so frequently.

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