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Dell, The Last Domino

A common question that I get is, "When will Dell start promoting desktop Linux computers?" As the largest seller of computers, Dell is significant (16.5% market share), but unfortunately the answer is "probably not for a long time." Given the economic dependencies of the Dell-Microsoft relationship, Dell risks impacting their profitability if they actively promote desktop Linux. While some within Dell see desktop Linux fast approaching and want to be a leader, the realities of their financial ties to Microsoft eventually rear up and short circuit any meaningful development. It reminds me of the hilarious subservient chicken web site.




"...the dominoes are falling, it's just a matter of which direction."
Dell will be difficult to get behind desktop Linux because of their longstanding, successful alliance with Microsoft. Two recent experiences illustrate the situation quite vividly. Dell recently invited two top executives from Linspire to give some presentations about desktop Linux. They wanted to know where it's at and where it's going. We confirmed meeting dates, attendees and flew our two executives to Austin. Higher up Dell executives found out about these meetings the day before and abruptly canceled them. In a second example, we announced that one of our partners, Questar was going to be selling Dell computers in Europe pre-installed with Linspire. European Dell personnel had been discussing both marketing and technical integration issues. Engineers in Ireland, working for Dell, had asked for our help in imaging hard disks for new machines. When US Dell executives heard about the European plan they immediately canceled the program.

To understand Dell's motivations you have to examine their economic ties to Microsoft, and understand that Microsoft routinely pressures partners not to support desktop Linux, since they recognize the desktop is the root of their monopoly. (Microsoft doesn't have a monopoly on servers, which is why they care less about Linux servers, from Dell or otherwise.) Microsoft works very hard to keep secretive their prices and in spite of having a multi-billion dollar relationship, Dell and Microsoft do not disclose any specifics in their respective SEC documents. Dell sold about 7 million PCs in their last quarter, with $799 million in profits. After being found guilty twice for anti-trust violations, Microsoft was ordered by the court to sell XP to the top 20 OEMs at the same price. To circumvent this requirement (which was included as part of the eventual settlement with the DOJ), Microsoft gives kickbacks to vendors based on the number of computers they sell. Estimates of these range from $2-$10 per computer. Dell also has a sweetheart deal on Microsoft Office licensing which gives them a competitive advantage over other OEMs, helping them win the pricing game. (The anti-trust ruling did not address Microsoft Office pricing.) On the majority of Dell web pages you'll see:

Dell recommends Microsoft® Windows® XP Professional

This is a requirement of the MDP (market development program), a Microsoft tactic used to control what web pages or computer advertisements look like. When you sum these amounts (MDP, per computer kickbacks and Microsoft Office pricing), it's obvious that a significant amount of Dell's profitability is tied to Microsoft's largess. It's impossible to know precisely how much, but if you do the math and assume that it's $30 per computer from those various sources, that would yield $200 million or more than 25% of Dell's profitability. It could be more or less than this number, but any way that you look at it, Dell is dependent on Microsoft for a massive chunk of their profits.

Michael Dell, the chairman and founder of Dell, is a brilliant guy. He and I have traded a couple of emails in the past and I even sent him a couple SIPphones when he asked to try them out. My admiration doesn't stop with Michael. He's clearly built a phenomenal organization from top to bottom. Very impressive indeed. But Dell's business prowess doesn't change the fact that Dell is a very low margin business beholden to Microsoft.

As Scott McNealy said, Dell is a grocery store for electronics. There's nothing wrong with that, but grocery stores have very low margins and can't risk upsetting their most critical supplier. Until desktop Linux grows in significance, until competitors undercut Dell's pricing by offering Linux, until revenues and profits are taken from Dell, Dell will not risk upsetting Microsoft and actively market desktop Linux. They may bury a product or two on their website, but they won't be a leader in desktop Linux. Dell is winning with the computer industry as it is now. Radical change comes from companies that are losing. Look for the charge to desktop Linux to come from companies chasing Dell and looking for a competitive advantage.
Fortunately, more than 83% of the computers sold worldwide today are from vendors who are looking for a competitive edge over Dell. So the dominoes are falling, it's just a matter of which direction.

-- Michael
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