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Dell Founder Keeps Server Prices Low, Winning Sales (Update2)
Round Rock, Texas, May 15 (Bloomberg) -- Dell Computer Corp. Chief Executive Officer Michael Dell's pitch that his low-cost server machines can do the same work for corporations as more expensive computers has won over Oracle Corp. CEO Larry Ellison.
Dell servers run the payroll, customer service, marketing and Web site of Oracle, the world's biggest maker of database software. Ellison touted Dell servers in a February message on Dell's Web site, where he said buying a server system can save customers as much as $14.6 million over a comparable International Business Machines Corp. mainframe.
``The fact that Oracle has had excellent results has to make everyone stop and think this is a potentially viable solution in tough times,'' said Brett Crawford, an analyst at Mesirow Financial Inc., which manages $5.5 billion and owns 338,880 shares of Round Rock, Texas-based Dell.
Dell, the world's No. 2 maker of personal computers and servers, later today will report an 18 percent increase in first- quarter sales and a rise in profit to 23 cents a share, according to a survey of analysts by Thomson Financial. Servers, which Dell began selling in 1996, are helping make up for slow growth in PCs and accounted for about 19 percent of revenue in the 12 months ended in January.
Sales in Dell's enterprise division, of which servers are the largest part, rose 19 percent to $6.9 billion last year. Servers are fast computers used for running Web sites, handling e-mail and processing bank and stock transactions.
Windows, Linux
Dell keeps server prices low partly by using Microsoft Corp.'s Windows and the Linux operating system, which are cheaper than Unix software. In computer jargon, Windows and Linux machines are standards while Unix-based systems are proprietary.
``Standards-based operating systems are taking over and rapidly replacing proprietary operating systems,'' Michael Dell said in an April speech as he and Ellison announced an expansion of an agreement to sell Oracle software on Dell servers. Dell declined to comment for this article, spokesman Mike Maher said.
Dell shares are rising as it lures buyers from such rivals as market leader Hewlett-Packard Co., Sun Microsystems Inc. and IBM. Dell, the best-performing stock on the Nasdaq Stock Market in the 1990s, has risen 22 percent this year. The stock gained 15 cents to $32.40 at 11:30 a.m., the highest price since November 2000.
Michael Dell's compensation declined 45 percent to $8.76 million in the fiscal year ended in January, according to Dell's proxy statement, when Dell shares dropped 11 percent.
``Dell's strategy is to get into the enterprise and move up,'' said Pat Becker Jr., who helps manage $1.5 billion at Becker Capital Management. ``They are having success doing that.''
Becker said he doesn't own Dell stock because the company is overvalued with a price-to-earnings ratio of about 40, more than double that of competitors such as Hewlett-Packard. ``Dell's a great company, but that premium is too rich for our blood.''
Market Share
Dell's server market share, by shipments, rose to 20 percent in the first quarter from 18 percent a year earlier, research firm Dataquest said. Hewlett-Packard's share slipped to 29 percent from 31 percent. PC shipments rose 2.7 percent last year while server shipments increased 4.2 percent, according to Dataquest.
Dell's strategy has its skeptics. Dell's servers may be more expensive then rival systems in large groups of more than 500 servers because the company lacks software to automatically manage the machines, said Forester Research Inc. analyst Frank Gillett.
Customers still want some types of Unix systems and Dell doesn't sell them while Hewlett-Packard does, said Howard Elias, senior vice president of business management and operations for Hewlett-Packard's server business.
Nervous User
John Beaird, the information technology manager for the Clark County district attorney's office in Las Vegas, said newly installed Dell servers have higher rates of failure because components are made by different companies. He doubts that Dell servers will take the place of more expensive computers.
``That makes me nervous,'' Beaird said. ``I have a hard time recommending it.''
Ellison is convinced.
``If we need more capacity in our data center, we just plug in another Dell machine,'' Ellison said at the April event. ``In a couple of years, Linux and Dell will be the dominant combination in the enterprise.''
Oracle spokeswoman Carol Sato declined to specify how much money the company has saved by using Dell servers. Ellison said in the February article on Dell's Web site that an IBM mainframe may cost $15 million and a Unix system $4 million, while an equivalent server system using Linux is about $400,000.
In his April presentation with Dell, Ellison said Oracle first used Dell servers in its demonstration center, where Oracle salespeople show clients how its software works.
``Our own sales force said, `This is crazy, I cannot believe Larry wants me to run my demo on one of these cheap computers,''' Ellison said. The sales force eventually was convinced, he said.
``By using a grid of Dell machines, we're able to get dramatically better reliability results,'' Ellison said.
Last Updated: May 15, 2003 11:38 EDT |
