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Stealth: Dell's other server business

OEM sales beat hyperscale boxes

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How could server and PC maker Dell see its revenue decline less than those of its rivals in x64 servers in the third quarter?

While Dell is not talking specifics, the company has a number of stealth server units that could be smoothing over some of the rough spots and that it's worth looking at.

As El Reg reported Monday, Gartner says that server sales in the third quarter were down 15.5 per cent to $10.7bn and shipments fell even more dramatically, by 17.1 per cent to 1.92 million units.

Dell, though, only shrunk by 5.5 per cent in the quarter in terms to sales, to $1.42bn, with shipments off 12.6 percent, to 437,447 units.

Dell doesn't break out sales in its Data Center Solutions or its OEM Solutions Group separately, but the latter is probably helping the company keep an even keel amid the economic storm. While the DSC unit, which was formed in the spring of 2006 to do custom server and storage products for hyperscale data centers - think Yahoo, Amazon and Microsoft - has made some big numbers in the past two years, some of the big hyperscale projects have pulled back since the economic downturn.

Rich Froehlich, vice president of Dell's OEM Solutions Group, isn't being particularly precise about how his unit is doing, but he isn't shy about its contribution to the Dell financial cause.

"We're probably one of the biggest, if not the biggest, OEMs in the world," Froehlich boasts, adding that the DCS unit has been more visible because of the large number of servers it can pump out after closing a big hyperscale deal in a quarter or making a design win. "But we have been around longer, and have 1,300 OEM customers in over 40 countries."

In terms of revenues, OEM Solutions Group is twice the size of DCS, according to Froehlich, although neither unit will say just how much revenues we are talking about.

The OEM Solutions Group makes custom servers and PCs on behalf of other companies, which sell medical equipment, kiosks, embedded controllers, and various kinds of server appliances. Dell breaks this OEM business into two addressable markets. The server appliance business generates around $3bn annually, and Dell has a decent piece of the action pushing appliances that use software from and bear the labels of Google, Symantec, McAfee, and many others.

High fragmentation

The embedded server and PC business, which Froehlich characterized as "highly fragmented" is everything but appliances. That includes the computers embedded into products such as MRI scanners, surveillance systems, baggage scanning systems, digital signs, and a zillion kinds of kiosks. This embedded market accounts for about $30bn in IT-related sales per year worldwide, according to Froehlich.

"We'd like to have more of this business," Froehlich says, adding that Super Micro, the increasingly vocal motherboard and server maker, is one of Dell's main competitors in the embedded and appliance markets. "We're the only tier one supplier with an OEM business that is global."

And that's one reason that Froehlich believe that Dell can double the revenue stream from its OEM business in the next two to three years.

Dell's OEM business leverages the work of the 6,000 engineers that Dell has working on PC, server, and storage designs, with its own engineers making tweaks for very precise uses. So there is the CR100 entry server for embedding into various devices, or the DC-powered version of the R710 rack server aimed at telecommunications companies and service providers.

Or, there's the T5500 long-life workstations, which have a guaranteed three to five year product life cycle and extended support beyond that. This coming January, Dell OEM Solutions Group will launch the Optiplex XE, a long-life, OEM PC that has special venting that allows it to be put into kiosks or military equipment.

Incidentally, Dell designs all of its own motherboards, but farms out the manufacturing of the boards to third parties - who Froehlich would not name. Its own factories do final assembly for PCs and servers while notebooks are designed by Dell and manufacturing done by other OEMs in Asia.

Dell's OEM Solutions Group can tap the manufacturing capacity that its six factories - on in its Austin, Texas, stomping grounds and five others in Poland, Brazil, India, China, and Malaysia - to deliver finished goods to the OEM customer or directly to customers of the OEM.

That's how the Google search appliance deal works, according to Froehlich. Dell won the Google search appliance away from a white-box competitor - rumor has it that it was Super Micro - three years ago. The OEM unit takes a customized PowerEdge server, adds custom cards and Google's proprietary software. "Google doesn't want to be in the hardware business at all, and we ship the product directly to the customer," he says.

The irony, of course, is that when it comes to its search and Web 2.0 application infrastructure, Google is in the hardware business, making its own servers, and has rebuffed Dell and other server makers despite their energy-efficient designs.

Go figure. Google is so much smarter than the rest of us that it doesn't have to make sense so long as it is making money.

Bootnote

You can see our profile of the Dell DCS unit here; take a gander at the custom servers here and here, and the DCS containerized data centers here. ®

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