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Dell’s future PC business to focus on services

Dell Inspiron 2-in-1s
Services emerge as a key indicator of Dell’s future PC business, says Jack Narcotta, senior analyst at TBR.

New approaches to services will help Dell expand the profit potential of its PCs Dell’s stated intention to improve its 30 percent-plus service attach rates, which are among the highest in the PC industry, highlights its commitment to establishing its services business as a profit engine on par with its PC hardware business. Its PC hardware business is surging as sales of its premium PCs, particularly notebook PCs from its XPS family, remain brisk despite heightened competition from HP Inc., Lenovo, Asus and Acer.

Dell’s global rollouts of enhanced commercial and consumer PC services over the last year outlined the role services will play in Dell Technologies’ PC business. The importance of these assets to Dell’s Client Solutions business and direction of Dell’s post-PC hardware ambitions were solidified at Dell EMC World 2016. Services are exerting greater influence in PC markets, particularly in commercial and enterprise segments; hardware-centric sales models still exist but are becoming obsolete as the bulk of hardware differentiation among PC manufacturers shrinks.

Additionally, with PC price wars largely abated, Dell is turning its attention to maximizing profit per sale, abandoning the volume-centric sales strategies that propelled its growth in the past, as they are out of sync with the dynamics of the PC market in 2016. Services have long been a featured component of Dell’s PC value proposition, and implementing a service-led business model will transform routine, transactional hardware sales into opportunities for Dell and its partners to reap more profit per sale and will enable Dell and its partners to better adapt to changes in the global PC market.

After going private in October 2013, Dell initially leveraged its PC services and peripherals portfolios to stabilize the margins of Client Solutions, the company’s largest segment prior to the EMC acquisition and the primary barometer of the company’s overall financial health. Since then, the reboot of Dell’s consumer PC brand that began with the launch of the $1,000-plus XPS Ultrabook PC in 2012 has propelled Client Solutions upward through the market, bucking the challenges afflicting many competitors. According to Dell, the company has gained market www.tbri.com pg. 2 TBR share in the last 15 consecutive calendar quarters, and as of 2Q16, it was the revenue and profit leader among all Windows PC OEMs.

Higher revenue and profits despite lower units shipped signal Dell is maximizing profit per sale by excelling at capitalizing on the services opportunities attached to each PC sale. TBR estimates Dell’s unit shipments have fallen from a peak of nearly 12 million in 2Q14 to just over 11 million in 2Q16. While TBR believes Dell does not infer or intend to reduce its footprint in PCs, an icebreaker for Dell in enterprise markets and the first way in which many of its customers engage with the company, Client Solutions revenue and profit gains over the last two years have not been driven by increased unit shipments, highlighting the impact of services on Client Solutions’ revenue and profitability.

A greater focus on services does not imply Dell intends to alter fundamental aspects of its PC business model. During this transition from hardware-led to services-led sales, Dell and its partners will continue to pursue greater profits through the more traditional means of sales of premium PCs or peripherals, with the latter especially important for Dell as the company has typically shown considerable success attaching peripherals, especially lucrative 4K displays, to each PC sale. Streams of profits from market-leading peripheral attach rates are important, as peripheral sales typically deliver two to three times the profit of PC hardware for each dollar of revenue. Impact and opportunities Services aim to lift Dell’s PC value proposition beyond hardware Dell’s efforts to move services into a leading role will not only create supplemental revenue and profit streams but also boost customer loyalty, protect install bases and foster greater predictability in a global PC market, which TBR forecasts will remain largely flat through 2020 despite pockets of growth.

Dell, HP Inc. and Lenovo are well positioned to align their go-to-market strategies with this necessary shift, but TBR believes Dell has, to date, crafted and implemented the clearest, most concise strategy among the largest PC OEMs. OEMs such as Apple, Acer and Asus are leveraging sales of premium 2-in-1 and gaming PCs to protect their PC businesses — or in the case of Acer and Asus, their overall financial health — but their lack of a comprehensive roster of services to accompany device sales limits these vendors’ ability to adapt successfully. The services within Client Solutions are positioned as highly complementary pieces, if not outright primary components, of its PC value proposition, and Client Solutions remains mostly isolated from the changes being implemented in Dell’s former Enterprise Solutions Group by Howard Elias, previous leader of EMC’s Global Enterprise Services.

The new Dell EMC services group will comprise only two main components, support and consulting, enabling Dell to balance minimizing client disruption and pursuing more lucrative engagements in the channel. TBR believes the latter, particularly, has high priority in Client Solutions. In tandem with changes to Dell EMC’s service go-to-market strategy, Dell’s approach to the PC market, particularly commercial PCs deployed in environments in which Dell and EMC data center infrastructure is also present, is shifting to favor the channel.

TBR believes this will help Dell extend its reach into new markets, but a broader range of services offered by Dell (the OEM) and its partners will remove some of the burden on its PC hardware segment to generate revenue and profit. Dell is a leader in growing segments such as premium notebooks and gaming PCs, but growth will inevitably slow in those segments as more competitors enter those arenas, saturating the market with brands and devices.

Services’ channel revenue and profit potential provides a path for Dell to follow as growth in hardware segments slows through 2020. Dell will continue to supplement close-to-the-box services such as basic or extended warranty with bundled EMC-powered security assets and higher-functioning, more advanced predictive and proactive maintenance services. The company is moving familiar pieces around to create a new (for Dell) approach to the PC market that differentiates it from its largest competitors, HP Inc. and Lenovo, but also from Apple and, to a lesser degree, Microsoft. Dell intends to use services for greater collaboration with enterprises that ultimately fosters increased customer loyalty and a powerful weapon against competitors.

In Dell’s new approach, the stand-alone configuration, maintenance and asset management tools will dictate how Dell will ensure the stability of its PC business, cultivate channel revenue and profit growth, and future-proof its go-to-market strategy against changes in the PC hardware market.

Event overview

The three-day Dell EMC World 2016 customer and partner event showcased the benefits of scale and early product integration from the newly combined Dell EMC organization. It also provided hundreds of customers and industry analysts opportunities to receive updates from C-level and senior executives about Dell Technologies’ business, technology road maps and go-to-market strategies amid crowded and increasingly competitive data center and PC marketplaces. The underlying theme of the event was “let the transformation begin,” which speaks to Dell’s and EMC’s transformations — and combination into a single company — as well as how Dell Technologies will help support customers as they make the changes necessary in their IT infrastructures and business processes to adapt to potentially exponential increases in the volume of data generated by tens, if not hundreds, of billions of connected devices.

The first day of the event featured the executive team detailing Dell Technologies’ strategy and core beliefs as it seeks to become the essential end-to-end infrastructure provider, from PC and other connected device endpoints to the data center and into the cloud. Executives from Dell and EMC more often than not teamed to articulate the company’s strategy to extend the market-leading positions of Client Solutions and its infrastructure segments, strengthen its position in a variety of cloud markets, and leverage innovation and synergies across its entire portfolio. The second and third days were a mix of C-level and senior executive presentations; general working sessions for analysts, partners and customers; and smaller group sessions that served as forums to discuss various topics such as security, the emergence of “as a Service” data center and PC business models, and the Internet of Things.

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