Dell takes care of Wall Street, not customers with AMD move
Analysis Dell's decision yesterday to start shipping an AMD-based server sent a strong signal that investors and not customers come first for the company's current management team.
At face value, we'll grant you that such a statement seems odd. After all, it's the customers and not investors that will be buying Dell's new four-chip Opteron server at year's end.
Executives, however, really concerned about placating customers would have shipped Opteron-based systems long ago. Dell's server sales, which always grew at double-digit rates, dropped to 3 per cent growth during its first quarter when compared to the same period last year. When compared to Dell's fourth quarter, server sales actually fell 7 per cent.
Meanwhile, sales of Opteron chips have surged with AMD reporting triple-digit growth year-over-year. As the most successful Opteron server vendor, HP benefitted most from the strong performing chip. Another Dell rival Sun Microsystems has carved out close to a $500m a year Opteron server business. Even an Opteron-focused newbie like Rackable Systems that competes in Dell's low-cost core has seen its share price jump from $12 to $35 over the last year on the back of strong sales to the likes of Microsoft, Yahoo and Amazon.
It seems impossible to believe that Dell could claim it didn't hear demand for Opteron systems from its customers during the year, but that's what the company insisted.
Rather than picking up Opteron as it should have two years ago, Dell stuck with Intel during one of its darkest times. Dell charged that Intel's impressive product roadmap was the reason for this loyalty, but we've seen Intel rework this pristine roadmap again and again over the past two years, and there's still more work to be done before Intel has an architecture that can match AMD's from one-way boxes to eight-way boxes.
Dell, in fact, confirms that last point by choosing Opteron for higher-end servers.
That said, Intel does have a more impressive overall processor lineup coming out later this year. So why on earth, after missing the Opteron boat, would Dell decide to "listen to its customers" now, when it really doesn't have to?
There's no question that one of the main drivers behind the timing of Dell's Opteron decision was its flagging financial fortunes.
Leading up to yesterday's first quarter results, Dell had warned investors that its revenue figures would disappoint. That warning coupled with plummeting financial markets have crushed Dell's share price in recent weeks. Dell knew that it would make matters worse yesterday by showing the actual results to investors and announcing a broad plan to reinvigorate its business.
What better way to distract investors than by playing the AMD card?
Dell took the unusual step of announcing the new Opteron product line in its financial statement. Companies almost never reveal products in this manner with good reason. Data center managers don't spend as much time as Wall Street poring through a company's financial figures.
And Dell's move resulted in major financial movements. AMD's shares jumped 15 per cent in the after-hours markets, while Intel's dropped 5 per cent. Dell's shares, meanwhile, bumped up a little bit, despite it reporting a staggering 18 per cent drop in profits and despite analysts' fears that Dell's pledge to overhaul its products and support was all talk.
Dell's AMD ruse provided the desired effect. It attached the Dell name to "a winner," made it look like the company was listening to customers, made it seem like the beginning of a broad product revamp and also went some ways to convincing analysts that Dell has a concrete plan for change.
The problem with all this is that Dell is only going to ship a four-socket AMD box. Such midrange gear makes up the slowest selling part of the x86 server market. Historically, Dell has pared back efforts to play in this part of the server market, shouting that customers really care about one- and two-way boxes.
We doubt that Dell will sell a ton of four-socket boxes, although having such an Opteron system around gives it a nice edge over IBM, which is still paying off its X3 chipset commitment to Intel.
While practical, Dell's four-socket Opteron move does not indicate that it's listening to customers any more than it used to. Intel simply cannot match AMD at the four-socket level, and Dell had no choice but to pick up Opteron if it wants to sell any such systems. Dell was brought kicking and screaming to this scenario and decided to make the most of it by pleasing investors with a bit of eye candy.
Over the next year, you can expect HP's Opteron server business to grow. You'll watch Sun near the $1bn mark for its Opteron server business. And you'll see a host of start-ups and companies such as Rackable nibble away at Dell's volume sales with their Opteron systems. In addition, you'll see Dell unable to bid on a raft of enormous supercomputing deals that have come up and which often dictate Opteron as the preferred processor of choice. IBM, HP and Sun will make a big deal of their wins with these customers, and we'll have more on that next week.
Dell Chairman Michael Dell said yesterday that the Opteron systems "filled a hole" in the company's lineup. Well, it certainly wasn't a hole in customers' hearts. By going so shallow with its Opteron play, Dell has proven that its love for Intel remains more important than its love for customers.
Lucky for Dell and AMD, Wall Street doesn't care in the short-term how many actual Opteron servers Dell will sell. Investors like the fact that Dell has embraced the darling of the moment. They like the fact that Dell seems to be changing and trying to emerge from a protracted slump.
Dell's management had a pretty good hunch investors would buy this line. And, for that, they deserve some credit. ®