Microsoft's $2 billion loan to Dell, the world's third-largest seller of personal computers, was a signal that the personal computer, Microsoft's Windows, or both, are at growing risk of irrelevance, analysts said Tuesday.
The loan was part of a $24.4 billion move driven by Dell CEO Michael Dell to take the firm he founded private, where it will not have to face the wrath and impatience of shareholders each quarter.
In lieu of details from Dell or Microsoft, analysts speculated that the latter's loan came with strings -- one pegged them as a "gentleman's agreement" -- that could make other OEMs (original equipment manufacturers) even more nervous about Microsoft's strategic decisions and cause them to wonder if Dell would be given "most favored nation" status.
But while they disagreed on the whys of Microsoft's motivation for parting with $2 billion, they all noted it came at a tumultuous point for the computer industry.
"Along with lackluster sales of Windows 8, we view the transaction as another sign of the fading importance of the PC industry," said Brian Marshall, a Wall Street analyst with the ISI Group, in an email Tuesday.
The PC industry has been in a slump, caused by a myriad of factors but led by a shift in tastes for tablets and smartphones. In turn, that's triggered lower sales of Microsoft's Windows as its share of the operating system market for all "computing" or "connected" devices -- both terms have been bandied -- has plummeted.
"This deal was unprecedented," said Allan Krans, an analyst with Technology Business Research, in a Tuesday interview. "But the shift in PC buying [to other devices] is also unprecedented. After a couple of decades of growth, computing is changing. It's not just about the PC any more."
Some theorized that Microsoft's money came with a clear understanding between the two companies, that Dell would not only stay in the PC business but would also not test the waters with machines powered by rival operating systems. No 1. PC OEM Hewlett-Packard (HP), for instance, just introduced a laptop running Google's Chrome OS, following in the footsteps of Lenovo and Acer, the No. 2 and No. 4 PC makers, respectively.
"I think there's a 'gentleman's agreement' that gives incentives to Dell to use more Microsoft products," said Patrick Moorhead of Moor Insights & Strategy.
Such an agreement could have been driven by Microsoft's fear that a privatized Dell would abandon the traditional PC market, said Moorhead, who speculated that Microsoft would rather have numerous strong OEM partners rather than just one or two.
But it's as much Microsoft's relevance that's at stake, Moorhead argued. "Microsoft is having relevance problems in the personal computer, tablet and phone markets," he said, repeating assertions he has made in the past that Microsoft's Windows 8 and Windows RT have failed to excite computer and tablet buyers.
As with its deal with Nokia, Microsoft may expect its $2 billion to buy a lead partner in Dell, an OEM that would make more effort than others to come up with hardware that struts Windows 8 or a follow-up Windows 9.
But will that work now? Some think it's already too late.
"I've been saying for years that the PC business has been in decline," said Michael Cherry, analyst with Directions on Microsoft. "I realized that when people started looking at the PC like they looked at a TV set. The picture may be small or the colors may be off, but they don't buy a new TV until the old one conks out. They think about the PC that way now. They know what they have is old and slow. But when they ask themselves, 'Where do I want to spend my consumer electronics budget?' there are more compelling things to buy than a PC."
Truth be told, Dell had long ago de-emphasized the PC part of its business, even though Michael Dell famously started out selling PCs from his college dorm room. Once the world's leading seller of personal computers -- it held that spot from 2001 through 2006 -- Dell last quarter shipped 9.5 million PCs, according to IDC estimates. That represented 11% of the global market, keeping Dell in third place, where it's been since 2011, and more than 4 million units behind HP and Lenovo, the quarter's top two OEMs.
"This speaks to how much the OEMs' relationship with Microsoft has changed," said Krans of the Microsoft loan. "You can't operate a stand-alone PC business any more because computing is changing."
And the loan may not prove to be the firebreak against change that Microsoft wants it to be. "As a private company, we believe Dell could become even more comfortable ceding low-end PC market share to Asian competitors," said Marshall of the ISI Group.
As if Microsoft doesn't face enough problems, on Tuesday reports surfaced that HP's board was considering breaking up the corporation, in some ways a repeat of an aborted plan two years ago to spin off or sell its PC business.
For its part, Dell said only that Microsoft would not be involved in its operations. "Microsoft is making a loan that allows Dell to independently execute its long-term strategy," Dell said in a filing Tuesday with the U.S. Securities & Exchange Commission (SEC). "This is a loan and [Microsoft] will not have a direct role in day-to-day operations of Dell."
Dell will reveal more about the deal -- "the material terms," according to yesterday's 8-K filing with the SEC -- in a follow-on document to the regulatory agency. Maybe that will clarify things.
Because everything else in the computer business, it seems, is muddled.
"The top tier of OEMs is in a period of realignment," said Krans. "They're in flux and need a lot of help. And Microsoft has the deepest pockets of anyone in the ecosystem, and they needed to take more of a leadership role. Someone needed to come in and make sure that there's stability there."
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, or subscribe to Gregg's RSS feed . His e-mail address is email@example.com.
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