Dell's Intel intentions

Exclusive relationship may be about to end, says Tom Yager

By now, we should be enjoying a true commodity market in which the pricing trends of x86 CPUs track those of other PC components and semiconductors. Today, we're celebrating the US$500 (NZ$720) PC, even though economic forces should have that price closer to US$200. With chip manufacturing capacity and yields being as high as they are, all but the most advanced x86 processors should be readily affordable. They should be as cheap as light bulbs. Well, designer store light bulbs.

I think the reason AMD and Intel CPUs are so expensive is that Intel has worked closely with OEMs to support prices and margins through incentives and discounts.

Dell, Intel's sole remaining loyalist in the first tier, is not only hedging its bets against the collapse of Intel's price supports; it appears to be backing away from the table. Dell has perfected the art of the volume PC and its growth bears that out.

But as AMD and the AMD v Intel antitrust lawsuit hasten the PC market's slide toward commoditisation, Intel will have to deal with customers on a simple and transparent tiered mark-up system — just like everyone else. When an OEM is given disproportionately favourable pricing, the whole system of price supports will collapse. Intel may well have an interest in dismantling that system, lest a jury in its antitrust case see it in that light.

Dell presumably benefits most from Intel's generous incentives and their disappearance would hurt in a big way. Dell sees this coming and has a plan. Is it switching to AMD? No, although I think price support erosion may have Dell shopping for CPUs in ways that avoid secret handshakes. Rather, Dell's plan is to position itself more firmly within the services sector while avoiding derision along the lines of "McServices." Believe it or not, Dell claims that if it were to spin off its services business, it would be worth upwards of $US4 billion. Dell is undoubtedly including contracted warranty and repair services, but the message is that Dell's wagon is not hitched to Intel.

Dell is also looking to its old friend Microsoft to make up the difference, with the direct selling of turnkey solutions that provide customers with SQL Server 2005 or Exchange Server systems that come out of the box, ready to roll. Dell's manufacturing is cleverly optimised for custom software loads, so if a customer wants his Dell to arrive with Windows 2003 Server 64-bit Edition, Virtual Server 2005 and SQL Server 2005 loaded and licensed, not only can it be done, but it can be done with Microsoft's certification.

In hardware, Dell is looking forward to commoditisation in what I believe will be the fastest growing segment of system sales starting in about 2008: large clusters. By then, a commodity system with two dual-core CPUs might cost about what the rack mount chassis costs today. Just as important, I think, is Dell's recognition that sales of single-unit PC servers won't make money in the commodity age. But the sale of a 1,024-processor cluster (along with the services to put it together, Microsoft- or Red Hat-certified software loads and management tools, and operational support) will make the loss of Intel's incentives irrelevant. Dell won't ever fall out of love with Intel, but in a fairly short time, Dell won't be needing Intel's handouts.

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