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Viewpoint June 19,=20 2008, 12:01AM EST

Servers Become Dell's Comeback Weapon

After a few troubled years, Dell is back on course and grabbing = market share=20 by being everything server

by Roger = L. Kay=20

Need evidence of Dell's resurgence? Look to the company's performance = in=20 servers. Dell's share of the U.S. market is widening, a sign that it's = on the=20 comeback trail in enterprise computing.

Dell's share of the $28.7 billion market for x86 servers, the most = widely=20 sold, grew to 36% in the U.S. in the first quarter. My bet is Dell's (DELL) = share will=20 exceed 40% this quarter. A big reason is Microsoft (MSFT). = Even as the=20 company and Yahoo (YHOO) dithered over a possible takeover or combination = of their=20 Web businesses, Microsoft was forging ahead with its own plans.

One prong of Microsoft's strategy is to build out its own = mega-datacenters to=20 compete with the likes of Google (GOOG), Amazon (AMZN), and eBay (EBAY) in wheeling around huge quantities of computing = power for=20 its own services as well as those of partners. These huge datacenters = host=20 applications, like Google Earth, used by millions of people around the = world.=20

Commercial Business: The Big Game

Dell has the lion's share of Microsoft datacenter business and closed = a=20 server order for tens of thousands of units in the first quarter. Most = of those=20 are being delivered this quarter. Given that the U.S. x86 server market = falls in=20 the range of 700,000 units a quarter, an order this size represents a=20 substantial single-digit proportion=E2=80=94easily boosting Dell's share = above 40%.

While many analysts and investors tend to focus on Dell's performance = in the=20 consumer segment of the PC market, commercial business remains a = majority of the=20 volume and profit for PC vendors. And servers=E2=80=94those beefy = computers that sit in=20 the middle of the network, hosting applications accessed by desktops and = notebooks=E2=80=94are the most profitable among PC types. Desktops tend = to yield gross=20 margins in the 8% to 12% range, and notebooks hit 12% to 18%; servers = come in at=20 a much fatter 18% to 26%.

The Microsoft order isn't the only card Dell has to play. Dell = recently=20 broadened its x86 server line, which had been undernourished, to include = at=20 least one offering in each of the various categories, including those = boasting a=20 dual processor or quad processor, ones that slide into a rack, or those = that=20 make up all-inclusive towers. Whatever you want server-wise, Dell has. =

And Dell has brought depth to its server line as well. Through one = program,=20 Dell provides the hardware to companies that in turn load software and = configure=20 the server to fit their own purposes=E2=80=94say, running a Web site or = handling e-mail.=20 For example, Dell PowerEdge servers form the guts in the search = appliances that=20 Google in turn sells to enterprises for their own internal use. IronPort=20 Systems uses Dell server hardware for its security appliances, which = are=20 sold to the world's largest Internet Service Providers.

Symantec (SYMC)=20 has a spam-protection appliance built the same way. These = companies=E2=80=94as well as=20 others including Cisco Systems (CSCO), General Electric (GE), = Honeywell (HON), and = McAfee (MFE)=E2=80=94brand as their=20 own boxes that Dell has custom-configured for them.

Overcoming a rocky recent past

In addition, through its Data Center Solutions Group, Dell builds = clouds, the=20 large groups of computers whose collective power can be tapped remotely, = via the=20 Internet. Customers for DCS-built clouds include Yahoo! (YHOO), Facebook,=20 and Akamai (AKAM)=20 as well as big Chinese Internet companies like Baidu (BIDU), Tudou,=20 Tencent=20 Holdings, and Youku.=20 Big Oil avails itself of DCS's services, as do a number of Wall Street = firms.=20

Dell has also designed servers for other markets, including = virtualization,=20 which lets companies slash costs by distributing computing tasks more=20 efficiently among various machines.

Closing the gap with HP

Although the stars seem to be aligning for Dell in the enterprise = market,=20 success is far from assured. Dell has to move past the instability of = the past=20 several years, which saw major management changes, federal = investigations, share=20 loss, and financial distress. The=20 first quarter of 2008 (BusinessWeek.com, 5/30/08) really rocked, but = in=20 fairly recent memory earnings have been choppy.

And though Dell is doing fine at the low end of the x86 server market = (in=20 single- and dual-processor systems), Hewlett-Packard's (HPQ) mix = is higher=20 (more quads), which means HP makes on average more revenue and profit on = each=20 unit shipped. What's more, HP has acquired EDS to enhance its enterprise = services position. HP currently ranks No. 2 behind Dell in the U.S., = with 28.5%=20 of the market, according to IDC figures.

Dell has taken a different approach, harnessing in-house talent to = create=20 customizable offerings for customers. By building solid hardware into = which its=20 customers can pour their software, Dell is able to reach a wide array of = customers without having to support them with a large services = organization. The=20 approach may give Dell a leg up, judging from recent and projected = growth.

In the $28.7 billion global market for servers, Dell trailed HP in = the first=20 quarter, according to IDC figures. But it was the only major player to = achieve=20 double-digit growth, and in the current quarter, Dell is likely to close = the=20 current eight-point gap with leader HP another notch. We're talking = about a big=20 pie here=E2=80=94and Dell is coming in for a decent slice of it.

Kay is the founder and president of Endpoint = Technologies=20 Associates (http://www.ndpta.com/).

=20