Why HP's Pain Is Dell's Gain

ROUND ROCK, Tex. ( TheStreet) -- Dell ( DELL) CEO Michael Dell, who kicks off the company's annual customer event on Wednesday, must be loving every second of the PC turmoil at rival HP ( HPQ).

The no.1 PC maker's potential Personal Systems Group spinoff has proved highly controversial, contributing to the ouster of former HP CEO Leo Apotheker. The question mark hanging over HP's PC business, however, spells good news for Dell.

"In the short term, Dell, Lenovo and others will benefit from the uncertainty HP clients feel," explained Jay Chou, an analyst at tech research firm IDC "Given Dell's repeated assertion of its commitment to PCs and its emphasis on business customers (remember Dell was the number one PC maker in the US not too long ago), Dell is the most likely one to benefit from HP's missteps."

Avid trash talker Michael Dell has already aimed some barbs at HP, clearly reveling in his rival's discomfort. "If HP spins off their PC business ... maybe they will call it Compaq?," Dell crowed when HP announced its shock restructuring, referring to the PC maker's tough $25 billion merger with Compaq.

In addition to exploiting HP's problems, Dell should also shrug off broader PC market weakness, according to IDC's Chou.

"We believe that while PCs have slowed down, we are by no means in a post-PC period," he wrote, in an email to TheStreet. "There is so much more to do in emerging markets (China is now the biggest PC market in the world) and Dell has done quite well in emerging markets."

Adrian O'Connell, a research director at Gartner, agrees that there are still plenty of PC dollars available. ""There's a lot of flak that the PC industry is taking and some of that is overdone," he told TheStreet. "We need to re-set what we think of the PC industry - yes, it's not the fastest-growing part of the market but it's still a growing market."

Dell has already noted softness in consumer PCs; although this has been offset by strength in enterprise, an area which looms large in the company's future.

The Round Rock, Texas-based company grew its enterprise solutions and services revenue 4% year-over-year during its recent second-quarter results, while consumer sales gained just 1%. Server and networking sales climbed 9% and Dell's storage business grew 15%.

Bill Kreher, an analyst at Technology Business Research (TBR) told TheStreet that Dell wants to emulate IBM ( IBM), Oracle ( ORCL) and HP ( HPQ), which are touting a mix of hardware and services to customers.

"It appears as if the company is trying to move towards a one-stop shop approach," he said. " But in order to achieve that, Dell would need to have a more meaningful presence in networking - and would probably benefit from an acquisition in storage as well."

Dell, however, recently grabbed privately-held Force10 Networks, the latest in a string of data center acquisitions. In 2008, the company spent $1.4 billion to acquire storage networker EqualLogic and clinched an $876 million purchase of Compellent earlier this year.

There has also been speculation that NetApp ( NTAP) would make an attractive acquisition target, although with a market cap of $14.1 billion, the storage maker would not come cheap.

IDC's Chou warns that, when it comes to selling a mix of hardware and services, Dell has a lot of ground to make up. "Many vendors are trying to take the IBM playbook, but you have to do things in a methodical way," he told TheStreet. "It's awfully tough, really, to be an all-in-one solutions company."

Dell, however, has already pushed into areas such as services and virtualization, recently teaming up with VMware ( VMW) to launch its first public cloud offering. The company also unveiled new EqualLogic storage products during the summer, continuing its shift away from OEM partner EMC ( EMC).

"Dell is not just a PC company anymore -- we have our strongest-ever portfolio of products and services," explained a Dell spokeswoman, in an email to TheStreet. "Dell has made a great deal of progress in the past 18 months and we're very pleased with our results -- clearly, we see an opportunity to drive the business around solutions and services and with a much higher ingredient of intellectual property."

Nonetheless, Gartner's O'Connell warns that Dell still needs to win hearts in minds.

"Do customers think of Dell as a company they can work with in the heart of their data centers? There are probably companies like IBM and Oracle that spring to mind first," he told TheStreet.

Dell's sales force needs to aim at a higher echelon within its customer base to sell more data center gear, he added.

"It's more about customer awareness and perception of Dell and what it can do," said O'Connell. "We have seen some improvement, but it's one of those things that doesn't happen in a week, or a month, or a quarter."

-- Written by James Rogers in New York.

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