From the bedroom to the boardroom

21 Nov 2002 View Comments
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Dell Computer Corporation was founded in 1984 as a mail-order business by a student working out of his bedroom.

The company was set up with capital of just $1,000. Today, sales total $31bn and founder, chairman and chief executive Michael Dell is one of the wealthiest men in the US.

The Michael Dell story is phenomenal, even by the standards of the extraordinary entrepreneurs that litter the country's history. But now, despite its size, Michael Dell's company is facing new questions.

The most important of these rests on the nature of its commitment to the direct sales model. In deference to this model the company is carrying itself into different markets, including storage and now networks.

But how long can the company sustain its growth in this way? How many new markets can it expand into?

Dell flew into London recently to talk to businessmen and journalists at a British-American business breakfast briefing. vnunet.com's sister title Computing was there.

Do you see any sign of an end to the downturn?
We're certainly not, in our planning, anticipating a massive recovery in the economy. We've been planning to grow and expand into a market that we don't think will be necessarily growing.

And that, of course, comes from expansion into new product lines, into new geographies, market share expansion and driving more value through to the customer. Fortunately we've been pretty successful at doing that.

How important is the UK market to you?
It is our biggest overseas market. We launched here about 15 years ago and, at the time, Dell's revenues were $150m.

I remember pretty distinctly when we launched our business in the UK. It was our first operation outside the US, and it happened about three years after the company started. We were a private company, we were under-capitalised, and I was 22 years old. We didn't know what we didn't know.

We had an event in the UK, and we had 22 journalists show up. Some 21 of them said: 'This won't work. It's an American concept. It's going to fail.'

And there was one journalist who said: 'Well, yeah, this might work, but I'm not really sure.' And, of course, we had enough naivety and enough conviction back then to believe that it was going to work.

What we've essentially done is taken the business model and adapted it every time we've gone to a new country.

There are no two markets that are exactly the same, but I find the economic principles - the motivations of value and service and quality - translate in every market around the world.

It works in China, it works in Brazil, it works in Japan, it works everywhere in any language. It's not an American concept and it's not an Anglo-Saxon concept.

But your market share is still bigger in the US than it is overseas. What kinds of things can you do to expand in Europe and Asia?
One factor is time. If you plot the start of a business in other countries from a point in time, you see that it takes time to build relationships with customers, unlike a dealer or distributor-based model where you kind of show up and appoint a couple of dealers and then leave.

We actually have to build relationships and bring new customers in, one at a time. You can't build an organisation with thousands of people and have all of these customer relationships quickly or easily.

But if we look at where the UK is, or where our markets in Europe or Asia are for equivalent periods, we're actually quite pleased with their development. The interesting thing is that, if you look at our non-US business, it's a spectacular success in growth and development. But the US hasn't stopped either.

You've expanded your product range beyond PCs and servers, moving into other areas, such as peripherals. How will that change your business model, if at all?
We have, about every year or so, added a new product line or a new, major thrust and some are bigger and more important than others. For example, in the mid-1990s we launched into the server business. We actually have more market share in servers now than we do in desktops and notebooks.

A couple of years later and the next obvious step was to move into storage. We're number three in storage now, but we're growing about 70 per cent year over year. So, we're moving up pretty fast in that field.

Now we've launched into networking services. We've actually been in services for a long, long time - that is, in the traditional kind of box services.

But recently we've been growing more in the managed and professional services. We've been taking over the full-seat management for organisations that want us to manage their helpdesks, assets, software, imaging and training.

And then, of course, as we install more complex systems, there's the deployment and consulting and design that goes along with that.

So, for example, a month or so ago we installed the biggest supercomputer equivalent - a high-performance computing cluster - at a university in the States. It has 5.6 teraflops of computing power.

For those of you who are involved in computer science, you will know that that's about the third most powerful supercomputer in the world. The exception here is that this supercomputer is very different from all others because it leverages industry standard Dell servers.

So, it's about 2,000 servers all connected together in a very cost-effective way. And that high end of our business is growing as well.

Dell is really the only large-scale computer systems company that completely bases all its business around standards. We think that provides us with enormous opportunities in many fields.

Is there a 'next big thing' out there; something for the market in general that can lift the technology industry out this slump and get things going again?
In the technology industry we have a history that is pretty spectacular. One way to think about this is that in the 1990s, IT went from about 10 per cent to almost 50 per cent of capital spending.

I'm not convinced that there will be growth as a share of the capital spending as much as there will be shifts in the way that money is spent.

A lot of people are saying: 'When will the spending come back?' Well, for some companies, it may never come back because the way users are ordering their spending is dramatically changing.

One example on the high end: Linux is the new Unix. Customers that previously had a Unix system are moving away from those and moving on to Linux.

And that is a tremendous economic advantage for customers. It's a dislocation for those proprietary Unix vendors, and it's an opportunity for us.

So, in the quarter we've just finished, our revenues grew about 22 per cent. Fortunately our earnings grew a bit faster so I don't understand what the problem is.

At some point is there an acquisition plan or some big jump that you take?
I'm not a huge fan of massive mergers and combinations. I think in our case we have a very unique business model and a unique culture, and the prospect of screwing that up by smashing our company together with another company is not my idea of a good time. And I'm in this for a good time.

You've spoken about Linux being the new Unix. Do you see a limitation to the way Linux could be deployed on the desktop?
Well, we're talking more about the server and the enterprise than the desktop. Linux is on the desktop, and we support customers who use that, although the demand is not particularly strong.

But Unix has really appeared more on the mid-range and higher-end servers, and that's where we see the transition. The desktop is where the vast majority use Windows.

There were a number of attempts in the past and we are continuing with Linux. We support those to the extent that our customers want them. But we don't see a whole lot of traction there.

We are not really a technology ingredient company. We're the guys who are providing what we know customers want to buy.

Where do you stand on patents?
We were not the biggest computer company, we were not the most capitalised computer company, we were not the most famous computer company. So we had to prove that what we had was better.

This forced us to invent new ways of doing things that delivered a lot better value. If you look at our patents the vast majority are product related, but there's actually quite a lot of process intellectual property there as well.

I think beyond patents and all that, there's an execution advantage that is critical for a business like ours. It's a daily struggle and that's not something that is easily copied.

Speaking of innovation, what do you intend to do about the Tablet PC? Do you think it will be something to disrupt the current model of the marketplace for PCs and notebooks?
I'm not really sure. The projections are that there would be a couple of hundred thousand of these sold.

The market for notebook computers is 25 million to 30 million, so it would be a very, very small percentage of the market for mobile computers, and an even smaller percentage of the total market. I think the question is, can you create some new uses that are breakthroughs?

We're doing a pilot right now, in the healthcare sector, to understand what the real demand for this is. Technologically, it's very simple, that's not the issue. So, based on what we see, the demand will dictate when and to what extent we participate.

DELL'S BACKING A WINNER WITH LINUX

While Michael Dell sounded hesitant about the future of Linux when he spoke to us in London earlier this month, he had developed his thoughts by the time he got to Oracle World in San Francisco last week. The days of the Unix mainframe are numbered, he said.

While promoting his company's deal with Oracle and Red Hat to provide Linux applications on Dell servers, Dell said that cost was the main reason why users are moving away from Unix.

"If we look at today's enterprise customers they are concerned with how to reduce the costs of IT while maintaining high levels of performance," he said.

Quoting figures from researcher IDC, Dell explained that the Unix share of the server operating system market had decreased by half over the past five years, compared to Windows and Linux which have almost tripled.

"In Linux, we have found a Unix that is a better answer. We think Linux is the new Unix," he said. "The days of proprietary Unix are rapidly ending in terms of this being the only platform available to run mission critical applications."

Mobile operator Orange has recently deployed Oracle running on Red Hat Linux and Dell servers in the UK to deliver and manage multimedia services to customers, according to Dell.

"Customers are figuring this out and making the switch. We see systems such as Linux taking off in a big way," he said.

And Dell is bullish about his new network products. He describes his company as more "agile" because it sells direct, which means that it knows what customers are buying, how much and when, in real time.

"That allows us to know what's going on and to adjust," he said. "Because we sell direct to customers we know demand. There are a number of businesses where sales are not really sales - they are sales into the channel. Ours is real demand."

This is why he can sell his network products more cheaply than his competitors, Dell maintains.

The PowerConnect range of layer-two local area network (Lan) switches will connect PCs and servers at wire speed and build Lans in branch offices. They can now be bought alongside Dell servers, desktops, notebooks and storage products.

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