Standards are the new game in town

10 May 2004

If you’re going to make an important announcement in New York, the Nasdaq building on Times Square is hard to beat but perhaps Yankee Stadium might have been more appropriate: Dell is moving into the big leagues.

The company, which for years chipped away at rivals by building PCs more efficiently and cheaper than anyone else, unveiled a new partnership with the business software giant SAP. Alongside earlier deals with EMC and Oracle, it’s part of a plan to turn Dell into a heavy hitter in the enterprise technology sector. Now it wants to make everyone play the game on its terms.

Dell and SAP’s worldwide partnership agreement is one they hope will lower the cost of running enterprise computer systems by using industry-standard hardware. Prior to the announcement, both companies had been working together to ensure that SAP’s software runs smoothly on Dell’s hardware. They already have 5,000 customers running SAP applications this way, including Texaco, Nestle, Seiko, Cadbury, Ericsson and ABB.

“Over the next few years we believe we can more than triple our share of the market for SAP installations, making it into a US$1bn market for Dell,” said company CEO Michael Dell.

There was, in truth, little in the way of substance around the deal’s finer points. Dell will be beefing up its services skill set in order to help customers with SAP implementations. However, it’s not clear, for example, if SAP’s sales force will be given incentives to push Dell hardware in preference to HP or IBM, both of whom are partners of the German software maker and rivals of Dell.

What unquestionably came across from Dell’s side of the table was that businesses are ready to turn their backs on high-cost proprietary hardware to run their important software applications. They are, we’re told, moving more and more to standards-based (read Windows or Linux on Intel) servers which are now well up to the job. Every senior Dell staffer in attendance was ‘on message’ and reiterated this point.

Michael Dell himself remarked that his company was the number one PC maker in the world’s three largest markets – USA, China and Japan. It has arrived at this place thanks to its “disruptive” business model that offers technology at a lower price than rivals. “We’re not far away from being number one worldwide in the server business,” he added for good measure.

“We think Unix will continue to lose market share and will be replaced by two- and four-way servers, based on processors manufactured at a rate of 170 million per year. That’s going to fuel our business.”

He couldn’t resist a dig at other manufacturers when asked about Dell’s spending on research and development (R&D) – a loaded question given that ‘industry standard’ basically means computing architecture developed not by Dell but by Intel. “One of the ways we’ve been able to grow is to scale our operating expenses. Our R&D is half a billion dollars but it’s not rising at the same rate as our growth. Companies that are investing in R&D at the same percentage rate as revenue growth? I would suggest they’re the ones that are failing.”

Less than 10 years ago Dell’s proposition would have been laughed at. Intel hardware was then seen as suitable for relatively menial tasks such as file sharing, but running mission-critical software required major-league systems. Now we find ourselves in a situation where IT budgets are tightened and getting more with less is the goal.

According to Dell, enterprise customers are “sick and tired” of being locked into using proprietary systems. Standards-based hardware, he said, is now capable of scaling up to meet demand. Software applications can have additional computing capacity allocated as required. “Because the servers are industry standard, this can be done in a much easier fashion than with proprietary systems.”

In this context the presence of SAP CEO Henning Kagermann in New York was seen as hugely important, an endorsement of Dell’s worldview. Kagermann’s speech was short but the fact that he was there at all was the vote of confidence Dell was seeking.

“There has been a remarkable shift in the enterprise market to standards-based hardware, including that of running mission-critical, complex applications,” said Dell. The same trend is visible from the software side of the fence, said Kagermann. “We don’t believe IT budgets will go up so we have to drive the total cost of ownership down.”

It remained merely for the analysts to pick away at the bones of the agreement. Thomas Meyer of IDC’s European Enterprise Server Solutions division suggested that Dell’s belief in big business’ willingness to embrace standards-based systems may be somewhat optimistic. “In the enterprise market, for customers to change, there has to be an incredible advantage to do so and the system has to have reliability and availability.”

As for boosting Dell’s profile in major accounts, he noted that Dell’s agreement with Oracle from last year has not translated into a massive increase in sales.

Meyer also took issue with Dell’s view that the cost of ownership is lower than with other platforms. “Hardware is a very small part of that cost and is declining. The software application licence is not the biggest part either, it’s the services around that.”

Eamonn Kennedy, a senior analyst with Ovum, added that whereas Dell’s message of building blocks of standard hardware was a straightforward one, implementing SAP was an altogether more complex process.

Still, perhaps detail is not really what this announcement was really all about – more a statement of intent. Meyer reckoned that the deal would benefit both parties, offering SAP the chance to crack the lucrative US market while boosting Dell’s status considerably in the enterprise sector. “It’s probably a good statement to put a little bit of fire under IBM and HP.” Or to put it another way, let the games begin.

By Gordon Smith