Dell Branches Out 2

Menasha Corp., a holding company with subsidiaries that sold $1 billion worth of plastics and packaging materials last year, has been talking with Dell about storage during the past few months. "If Dell brings to the storage arena the same reliability and cost-of-ownership model that's favorable, hey, we're all for it," CIO Edward Wojciechowski says.

Dell acknowledges that high-end storage for companies that must connect Windows, Unix, and mainframe systems is better left to EMC, IBM, and Hitachi Data Systems, which sell complex systems for millions of dollars a pop. "We struggle because the vendors can't bring interoperability," says Chris Collins, manager of enterprise architecture at Ahold Inc., an international retail holding company with $56 billion in sales last year. Ahold maintains a storage infrastructure with high-end systems from EMC and IBM. To simplify things, Ahold wants to move to an all-IBM storage platform. There must be greater support by all companies for new interoperability standards, Collins says; no single vendor, not even Dell, can bring simplicity to situations where there's such a mix of systems and data, she notes.

Dell hasn't significantly altered the networking market yet. But it could by leveraging its high sales volume and low production costs to drive down networking infrastructure costs faster than might occur otherwise, says Mark Fabbi, VP and research director at Gartner. "Dell's real impact is in changing the economics and expectations of the market," Fabbi says. And because Dell's switches have more features than those from other low-cost vendors, customers get the price benefits of commoditization without much sacrifice.

"This is the beginning of us applying our model to the communications space," says Kim Crawford, VP and general manager of Dell networking. Dell's products are primarily low-end devices, though the company recently introduced two switches with enterprise-class features. Gartner's Fabbi predicts Dell initially will compete most aggressively with low-end switch vendors such as D-Link Systems, Linksys Group, and Netgear, which have products that tend to be inexpensive, with bare-bones functionality.

Printing company Communications Specialist Inc. is pleased with the eight 24-port managed Ethernet PowerConnect 3024 switches it bought from Dell a year ago, IT manager Gilbert Maldonado says. At about 40% less than comparable Cisco switches, "they're a little plainer than Cisco's in terms of not having the same bells and whistles, but Dell's product quality is just as good as Cisco's," Maldonado says.

The trade-off of a few features for a significantly lower price was worth it for Communications Specialist, and Dell seemed like a safer choice than other low-cost switch vendors. "There are other switch companies out there, but I just didn't feel comfortable putting my whole network on their equipment," Maldonado says.

If Dell continues upmarket, it will ultimately go head-to-head with networking powerhouse Cisco and its contemporaries. But Cisco says it isn't worried: It sees Dell's entry as favorable for the market because it will encourage more small companies to buy basic LAN switches, which they may later replace with more sophisticated switches from higher-end vendors as needs grow. "The opportunity is for the market to grow further," says Peter Alexander, VP of marketing for Cisco's commercial networking unit.

Eastman's Oliver isn't as bullish on Dell's prospects as a networking vendor as he is about its potential in other areas. "Dell is starting to get out of its areas of competency and will have a hard time competing in networking with Cisco," he says.

But Dell doesn't want to be underestimated. "We're highly committed to the networking business," Crawford says. Dell can earn significantly higher profit margins from networking products than it gets in its PC and server business, while still pricing its products well below those of established networking vendors, analyst Fabbi says. Typical gross margins for PCs are around 25%, but networking vendors have gross margins of 40% to 50% and even higher for more sophisticated equipment.

Communications Specialist's Maldonado says he hopes Dell's switching business is successful because the networking industry needs more competition. Statements like that indicate to Michael Dell that there's plenty of opportunity for his company to enter new areas. "We have 3% of the total IT market, pretty small," he says. "I haven't found any customers who don't like competition."

Photo of Michael Dell by Matthew Mahon
Photo of Russ Holt by Matthew Mahon