A dollop of Michael Dell - on servers and more

While Compaq Computer Corp. currently rules the server market, the company is facing a growing threat from Dell Computer Corp., which is led by one of the industry's best-known entrepreneurs, Michael Dell.

In this interview with Network World Editor-in-Chief John Gallant and Staff Writer Marc Songini, Dell discussed the differences in strategy between his namesake company and Compaq, Dell's future plans for the server market and the role of NT in enterprise applications. He also explained why he doesn't like the idea of thin-clients and talked about why Dell won't be following Compaq's lead in acquiring networking companies.

Q. What do you see as the key differences in your server strategy compared with companies like, say, Compaq or IBM?

A. We changed the rules of the game in the server market by being the strongest proponent of the move toward an open architecture and by taking out some of the proprietary margin that existed in the server models. We redefined what the customer was able to get at various points along the curve of price/performance.

While most of our effort has been in the entry-level and mid-range of the NT server space, in the second half of this year we are going to move from being a fast follower in technology to technology leadership with a focus on [greater] rack density, storage, clustering and performance. This is going to change what customers have to pay for this technology. The great news here is that the cost of all these products is going to come down quite a bit.

Q. How far do you think NT and the Intel architecture can push up into the enterprise?

A. I don't have delusions of NT replacing all server platforms in a year or two. However, we're in a progression that is going to go on for the next five to seven years. As we get the [Intel/HP] Merced chip at the 64-bit address space, the opportunity to replace the high end of the minicomputer market and even some of the low-end of the traditional mainframe space certainly exists.

One of the other differences that highlights Dell in the server world is that we have a significant amount of our attention applied to NT and are not putting a great deal of energy into other platforms. Our strategy is to go where the puck is going to be. We see NT as the primary growth engine. While it's not meeting everyone's needs, NT is where the vast majority of the growth is. Our server business last year grew over 200%. We're effectively tied for number two in the U.S. in the NT server market and growing four times, maybe five times faster than our competitors.

Q. Does the Compaq/DEC deal change your server strategy at all?

A. No, it doesn't. The questions we get around this relate to services. The number of choices that the customer has for service is increasing dramatically every year. We've been moving toward greater availability of the services that go around these products and the number of partners that can help companies deploy these servers. We have aligned with both the leading maintenance and break/fix companies - Wang, Unisys, Decision One, these kinds of companies - and the leading outsourcing companies, companies like EDS, Andersen Consulting. Our focus is to offer the customer choices. We don't see that bundling products and service is the right answer.

Q. So you don't foresee any major acquisitions? You don't intend to follow Compaq's acquisition strategy?

A. The simple answer is no. You have very different situations going on between Dell and Compaq. We are growing four times faster than the market, and our growth has been 100% internally generated. We continue to expand our product offerings and our geographic coverage of the direct model all around the world. That generated growth in the United States last year of 59%. If we look at the opportunities we have, they are really more than we can expect to pursue ourselves. So acquiring another firm is not something we're focused on.

Q. What's the secret of Dell's success in the server market?

A. We sell direct. This is a powerful economic force in computing. It's changing the way customers are buying. The primary benefit to the customer is that you are eliminating the reseller markup. The fact is that in new technology the cost of materials declines about 1% per week. So if a competitor has 70 or 80 days of inventory and we have seven days of inventory, that's about 10 times more inventory, and a significant difference in the cost of that to the customer. There are a number of customers who are concerned about this dealer markup and this inventory disadvantage. We've been able to penetrate our largest enterprise customers and acquire new accounts with a strong server platform.

Q. Your big server partners are Microsoft and Intel. Microsoft is having a bit of a spat with the DoJ. Intel's revenue has slowed a bit, Andy Grove is stepping down as CEO. Does all that mean anything to Dell?

A. We all knew Andy was not going to be CEO of Intel forever. That wasn't a big surprise. I guess the simple answer to your question is that we see the trend to NT continuing at a very strong rate. So, no, I am not concerned.

Q. Compaq has bought up a number of networking companies and has tried to make the case for buying both servers and network components from one company. Do you see that as a valid strategy?

A. There are components of networking that are tied to the server. The obvious ones are the things that go in the box, the network adapters and that sort of thing. You could make a case that things attached to the server could be easily sold. But Compaq has to convince the reseller to sell the Compaq server and the Compaq router or the Compaq switch, rather than the Cisco or 3Com or Bay Networks' product. That's not easy. Larger network users have bought into architectures. For somebody to switch them, there's going to have to be a pretty compelling argument presented. I'm not sure it has been.

Now, there are ways that we can work with these network companies that make a lot of sense. If you look at what's going on with ActiveX and directory services, Dell is getting involved with Cisco and Microsoft there. Those are opportunities for us to use our server presence in the interest of our customers and to work with the market share leaders in networking to continue to grow.

Q. When you talk about open systems, you're talking about the interchangeability of technologies. If all this is interchangeable stuff, why should a buyer go to Dell and not Compaq or Gateway. Is price the key factor?

A. Price is certainly a factor, although it tends to get overplayed. Dell has a price advantage as a function of this direct model and the inventory advantage. However, that's only the surface of this. One of the financial analysts did a survey of 300 customers about two weeks ago and basically asked, "Do you get better services from Dell or from the resellers?" Dell won overwhelmingly.

You might say, "That's interesting. I didn't know Dell offered services." But the problem is that services is one of these huge, overused words that means a lot of things to a lot of different people. What Dell is focused on are the services that matter to our customers when it comes to making a decision to buy our product. So these are things like break/fix service, answering the telephone, spare parts availability, the integration of customer specific software on the product that's being built.

For example, in the case of a large retailer rolling out thousands of servers all across the U.S., we'll load those with their own software and work with an integrator who will install those for us and bring up a retail network system. It's understanding which services are important and deploying those as opposed to saying, "Let's go compete with EDS."

Q. As NT pushes up farther into the enterprise, will customers require more service from Dell?

A. We have about 1,000 system engineers, system consultants and account execs throughout the U.S. that cover our largest customers. That number has been roughly doubling every year. So there are a lot of people out there helping in the deployment and understanding of these products. There's no question that as these products get more complicated, we need more of that. But there's also a point of specialization here: we don't necessarily want to get in a business that plenty of other firms handle. In fact, I would liken our strategy to Cisco's. Cisco has a very high market share among the largest networks in this country. Their services strategy is very similar to ours, which is to align with the leading services and integration companies. Their sales into large accounts are very often direct, as ours are.

Q. It seems Compaq wants to be another IBM. Where will Dell be happy?

A. I'm not sure the idea of the vertically integrated computer company is the right answer anymore. The economy is changing and the cost of connecting companies together in a horizontal fashion has gone down quite a bit. The real opportunity is for customers to be able to select among the best providers in a variety of different areas: application software, databases, systems providers, service and solution providers.

By the way, another point on the service market is that over half of the service industry is actually inside the customers themselves. That's an important point because a lot of our customers are quite happy buying product from us and deploying it themselves. If you believe that every year NT servers get at least a little bit easier to deploy, then that's going to work to our advantage.

Our goal is to focus on leading the market in terms of customer loyalty. Obviously, we'd like to grow our business. But we're focused on a balance of priorities. For us it's growth, profitability, liquidity, cash flow and ensuring that we've got the highest level of customer loyalty of any vendor out there.

Q. You've said Dell would be committing something like a quarter of a billion dollars to R&D.

A. It's a little more than that this year, but that's about right, yeah.

Q. Where will that money be deployed? What types of technology will Dell be improving or creating?

A. This is not a new thing for us. We have 1,600 engineers in our product organization. The development efforts of Dell sometimes get overshadowed by the direct model, which people see as the manifestation of the company. But that's not really that accurate a picture of what Dell does. If you go to the Patent Office you'll see several hundred patents with our name on them and get a better sense for the kinds of things we're doing.

It's pretty broad. We're working in clustering, the storage area, mobile computing, desktop computing. We've got lots of effort going into systems management. And not all of the innovations here come in silicon or motherboards or video chips or things like that. We have created this whole build-to-order process and have a significant intellectual property portfolio and development effort around that. We're going to build close to 7 million PCs this year. A couple million of them will have customer-specific software loaded on them at the time of build.

Q. Do you have an internal goal to be number one in the server market by a specific time?

A. Well, we have internal goals but we don't share them outside because they might be construed as projections and we're not in the business of giving projections. If you look at our competitors' share, for me to say we're going to be number one this year or next year, that's not realistic. We can grow at much faster than the market growth rate. But our goal is not to grow at any cost. That's not our focus. Our focus is consistent, steady growth and outperforming the market.

Q. Can you clarify Dell's stance on thin clients?

A. We see the network computer as counter to the whole move to Windows NT. So for the NC to take off, the trend toward NT has to sp and reverse itself, which we don't see happening. The other problem with the NC is that it doesn't have any support in an unconnected fashion. So if I take those users that are going to NT and those users who require mobile computing out of the equation, we're talking about a very small portion of the market.

Q. Is there a thin-client model that you think is more interesting? Say, the Windows-based terminal model?

A. What you're likely to see emerge is the best of both worlds, the managed client that takes away the users' ability to cause events that add cost to a company. The state of that machine would be stored on the server so you've got a robust and redundant capability. But we're not promoting the NC architecture.

Q. But do you promote the Windows-based terminal architecture, and would you offer products in that space?

A. Not particularly. It tends to have a fairly narrow appeal in medium-sized businesses. Basically, you're running the state of the machine on the server itself. After you get past a certain number of users, it could be eight, it could be 10, it could be 15 depending on the load of the applications, you start to have real performance problems. Now, this might be more interesting when you have a 64-bit address space.

Q. What should network managers expect in a Merced/NT 5.0 world? What's going to be different?

A. The first thing is they shouldn't expect it anytime real soon. But we've got an opportunity to take this whole open microprocessor computing architecture all the way through the minicomputer and up to the low-end of the mainframe architecture and do it with an economic model that is much more favorable for customers and provides much more choice.

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