I thought this was a nice piece on the agreement between DELL and IBM in the Slate. Of course we already knew this, but one has to wonder what the herd is thinking when such a deal is announced. I mean, DELLs and IBMs projections for revenue and earnings are always rosy going forward. What's new?
>>Dell and IBM: "Agreement" as Advertisement?
By James Surowiecki
When is a contract not a contract? When it's an "agreement," like the
one announced last week by computer giants Dell and IBM, who said
that over the next seven years Dell plans to buy $16 billion in
components from Big Blue.
The quirk in what was called a "mega-manufacturing pact" is that the
deal comes with no guarantees. That's not surprising when you
consider that IBM's component business did just $6.6 billion in
revenues this year, and that Dell's total revenues for 1998 were
$18.2 billion. In other words, if everything goes as planned for
Dell over the next few years--i.e., if it grows at its expected 30
percent annual clip--and if IBM's production capacity in the
component business expands as planned, then by the year 2004 Dell
should be buying a few billion dollars worth of disk drives, network
adapter cards, and computer chips from IBM. But if things don't go
as planned, then it won't.
Not surprisingly, the deal is back-loaded, which is why even those
analysts who praised the arrangement noted that it won't have any
material impact on IBM's revenues for at least the first two years.
Along the same lines, some of Dell's key suppliers--like disk-drive
makers Seagate and Maxtor--said that the deal wouldn't have a real
impact on their bottom lines. Now, these suppliers may be trying to
put the best face on this new turn of events--okay, they are trying
to put the best face on it--but according to the numbers, their
blitheness seems warranted, at least for the next couple of years.
Even if the deal doesn't tell us anything concrete about the
relationship between IBM and Dell over the next seven years, it does
signal some interesting changes in the internal workings of both
companies. IBM, for instance, is devoting more attention and more
resources to its component-manufacturing business, which started
only in 1993 but has been growing at a 40 percent annual clip since
then. And when you consider that IBM's PC sales actually fell 1.5
percent in the most recent quarter, the deal (particularly given the
loudness with which Big Blue has trumpeted it) is a not-so-subtle
wakeup call to the PC side of the company. After all, when the guys
down the hall are bragging about selling $16 billion worth of
goods--at a discount--to one of your major competitors, it probably
makes you wonder what your future with the company looks like.
For Dell, meanwhile, the arrangement is a sign of its new focus on
higher-end storage system and server markets. Dell is, and will
remain, primarily a PC maker (albeit one that does most of its
business with corporate customers), but in the next few years its
product mix is going to change significantly, and the pact with IBM
gives it access to the kind of R&D that it will need to make that
new product mix work.
In the end, then, what's most interesting about this deal is not so
much the deal itself as the publicity that attended it. In choosing
to market the arrangement the way they did, Dell and IBM testified
both to the continued health of their businesses--which had come
under fire in recent weeks--and to the new directions in which those
businesses might go. "Agreement" as advertisement: Perhaps we've
witnessed the creation of a new sales tool.
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