With its landmark $16 billion OEM deal with IBM, Dell Computer appears to be taking its first steps away from its image as a low-margin box supplier and positioning itself as an enterprise technology provider.
Dell's move mirrors recent decisions by its major competitors. Last year Compaq Computer purchased Digital Equipment, thereby gaining access to more sophisticated technology outside of the Wintel consortium. Additionally, during the past few years, IBM has placed less emphasis on systems sales and more on its burgeoning software, services, and OEM businesses.
"Everyone is trying to build a non-PC universe of revenue," said Bruce Stephen, group vice president of PC research at International Data, in Framingham, Mass. "The box business is becoming bloody and brutal. Everyone is trying to counteract the commodity nature of the PC box business."
The 7-year deal calls for Dell to purchase and integrate a wide variety of technologies including state-of-the-art chips, disk drives, and displays into its rapidly growing server and desktop systems. Some of these products -- particularly disk drives -- are well-suited to Gigabuys.com, Dell's online store that was launched last week.
The deal also calls for a broad patent cross-licensing between the two companies. IBM invests about $6 billion per year in its research efforts, while Dell spends a paltry 1.5% of its revenues on research and development.
The deal gives the impression that Dell bought the keys to the industry's largest research and development candy store, but leaves observers wondering what IBM gets besides cash. For IBM, with revenues of more than $80 billion per year, it is simply a customer win.
One major benefit to IBM would be access to Dell's technology that drives its proprietary build-to-order process. It was not clear, however, in responses from both IBM or Dell executives this week exactly what IBM would gain access to and how Big Blue might use it.
"There is some cross-licensing of patents including some about the build-to-order model, but there is a difference between trade secrets and patents," said T.R. Reid, a spokesman for Dell, in Round Rock, Texas. "It is beyond just another OEM contract -- it's pretty significant in scale."
Another aspect of the agreement calls for the two companies to collaborate on developing future product technologies, though neither company would elaborate.
"One example [of collaboration] might be if they need a sort of interconnect capability for a network enterprise solution and needed an adapter here or there, we would have the know-how to develop that technology," said David Ernsberger, group vice president of sales and marketing at IBM's Technology Group, in Somers, N.Y.
At first blush, the news is meeting with cautious approval from IT organisations.
"If Dell offered better LCDs, that would make a lot of sense. We would see the benefit right away, but we'd have to look at cost," said David Leibowitz, solutions development manager at Nine West Accessories, a shoe and accessories manufacturer, in New York.
However, Leibowitz added that there are limits to what his company would consider.
"You can make a Rolls Royce better but that doesn't mean we are going to buy it," Leibowitz said.
Another IT manager offered a similarly careful endorsement.
"In the basic terms of value-add, it would serve as an extra item to throw in the basket when considering bids," said George McQuillister, product manager for mobile computing at PG&E, in San Francisco.
Competitors of both companies downplayed the significance of the announcement.
"There is nothing exclusive about it," said Alan Hodel, a Compaq spokesman, in Houston, Texas. "Quite frankly, if I were IBM I would have a big smile on my face. But Compaq has worked closely with IBM for a number of years and we are already the largest buyer of IBM disk drives."
A kid in a candy store
With its newfound access to IBM's extensive patent portfolio, Dell can sink its teeth into a bevy of new technologies.
* IBM MicroDrive: A 2.5-inch hard drive that holds as much as 340MB, due later this year
* Silicon-on-Insulator: Technology that cuts down on harmful electrical effects that rob processors of performance
* Copper chips: Copper extensions to aluminum chips that can speed processing power by 30%or more
* Displays: High-resolution LCD technology, code-named Monet, that provides 150 pixels per inch, equivalent to CRT Super XGA quality; LCDs with 200 pixels per inch due in early 1999