The real question for Dell is: Quo Vadis?

For me, the acquisition of Perot Systems provides no answer real to that question.

Dell has gone from an irresistible force to illogical object in record time. The IT market can be so cruel.

The Dramatic Rise: Dell created a manufacturing culture that almost rivaled Toyota. It squeezed cost out of the manufacturing process in a dramatic way and pushed down the price of PCs and servers accordingly. It was perhaps the first company to use the web as its primary sales channel and in doing so it captured a very large slice of the corporate PC and server market – and also won a healthy slice of  the consumer PC market. For a while it controlled the price of PCs and low-end servers and was a truly tough competitor.

The Hiatus: Odd though it may seem, Dell saturated its market. Just as only a certain percentage of the market for books migrated to the web, only so much of the market for computers migrated there. Indeed from about 2002 onwards Apple demonstrated (despite the scoffing of skeptics) that the consumer market for PCs is best addressed by having a retail chain. In recent times we have begun to observe another phenomenon. The commodity Intel server market is itself under pressure. Here’s why:

• As regards servers, the SMB market is now drifting towards the cloud.
• It is beginning to become apparent that larger servers deliver bettwer value. So there is now a downward pressure on the commodity server market.

If you’re wondering why Dell’s stock price has headed so far south, that’s why. HP’s stock price looks a bit sick for the same reason, but note that the purchase of EDS (a much larger operation than Perot Systems) has done much to bolster HP’s health.

Ultimately Dell had to decide whether it was a consumer company or a corporate provider and it has come down on the side of the corporate market. That’s the only thing I can deduce from its surprise purchase of Perot.

Why the server market will only get harder.

I read the tea leaves for the server market in Say Goodbye To The Server Market but as I glance through it I realise that I left one company out of the picture; Cisco. The server market has collapsed by 30 percent and, imho, it’s gone forever. That 30 percent isn’t coming back when the economy revives. It’s all about virtualization and in that game I see IBM as a strong player and I see Cisco (with its impressive Nexus virtualize-your-network-in-one-fell-swoop switch) as a possible contender (starting from nowhere). I see HP as reasonably strong except in the Unix market (given recent performance). I see Dell, Sun and Fujitsu as armies in retreat.

There are too many server companies. The industry could lose 2 and it still might have too many. It’s rough out there – high water everywhere.

In simple terms, the low end of the market will gradually evaporate into the cloud and the upper end of the market will not be a place where the impressive manufacturing skill of Dell is going to be important.

The Services Market

The acquisition of Perot Systems is the biggest acquisition Dell has done. It is paying a premium at 1.6 x revenue (HP only paid .6 x revenue for the moribund EDS) and it has no real services operation (whereas HP had actually been growing its services arm quite respectably for several years before it swallowed EDS).

None of that bodes well for Dell, but that’s no reason to dismiss it. It might pull a rabbit out of the hat. However I think Dell is now drinking in “The Last Chance Saloon”, if this doesn’t work, my guess is that it will follow Wang, Digital and Compaq into the setting Sun.