Personal computers, storage and servers. Is there nothing that won't bow before the Great Commoditizer,

Dell Computer

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? Dell doesn't think so, but the company still faces a serious struggle to make inroads in the market for high-end enterprise hardware.

Dell's management sounded the theme of inexorable commoditization over and over at the company's analyst meeting held Thursday at the Pierre Hotel in Manhattan. The message isn't new to Wall Street, which has long viewed Dell as the ultimate PC company, driving down prices and gaining market share while keeping profit margins fat. That's what happened in the last decade, and the secret has been Dell's business model: The unadulterated devotion to direct sales, coupled with a talent for maintaining extremely low levels of inventory, allows the company to control costs as it slashes prices. And when component costs decline, Dell can move prices lower in lockstep, minimizing the damage to profit margins that companies like

Compaq

(CPQ)

and

Hewlett-Packard

(HWP)

can't avoid.

Investors have fallen in love with that old story this year. As the price of dynamic random access memory, or DRAM memory, has plunged over the last several months, Dell has set the standard for slashing prices, and has been stealing market share in a tough environment. For that, its stock has been richly rewarded, rising about 50% in 2001. It's hard to find a portfolio manager who doesn't think that Dell is an unstoppable force in the PC market, from Portland, Maine to Portland, Ore.

The Low End

But can Dell do the same to the market for storage and application servers?

Yes -- up to a point. To a certain extent, in the case of servers, it already has. From a dead stop just a few years ago, Dell has built a booming business in low-end rack servers using

Intel

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processors and running the

Windows

platform. The company is progressing more slowly in storage -- its 1999 purchase of storage company

ConvergeNet

has yet to yield any products -- but many observers think that it's just a matter of time before Dell is able to start convincing customers to attach its

PowerVault

storage servers to

PowerEdge

application servers, especially in a time when chief information officers are more concerned about how much they spend on tech infrastructure.

"The storage area is tougher to commoditize than the others," says

TheStreet Recommends

Lehman Brothers

analyst Dan Niles. "But with Dell three or four years ago with servers, you had the same thing. People said, 'Servers are a lot different than the desktop. There's more software and services, you can't possibly commoditize that.' And obviously Dell has commoditized the heck out of that business." (Lehman hasn't done recent underwriting for Dell.)

This hardly means that Dell will be putting

Sun

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and

EMC

(EMC)

out of business anytime soon. The company points out that unlike many of its competitors, it never attacks a market it can't make money in. But in terms of servers, Dell has yet to prove that it can gain traction above the very low-end, and thus least profitable, part of the market. As

J.P. Morgan

analyst Walter Winnitzki pointed out in a research note following Thursday's analyst meeting, so far, Dell is growing sales at three times the market rate and holds a 20% share of the market for servers with one or two processors. But in the market for servers with four to eight processors, Dell is merely growing at the same rate as the overall market, with a 14% share. (J.P. Morgan hasn't done recent underwriting for Dell.)

The High End

As for the high-end market, where servers are loaded with 64 processors and thus require more complicated software, Dell just isn't there at all. It's on its way, with plans to release a 32-processor PowerEdge server this summer in a joint venture with

Unisys

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. But in general, Dell's ability to commoditize the high-end markets for storage and servers will be largely contingent upon the progress Intel and

Microsoft

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make in matching the high-performance processors and operating systems that currently make products made by companies like Sun,

IBM

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and EMC much more viable for customers who need power.

Unfortunately, there's no telling how long it will take Intel and Microsoft to close that performance gap. A bet on Dell's success in the increasingly crowded enterprise hardware market is at least a two- or three-year bet. And with the stock trading at more then 30 times the projected earnings for fiscal 2002, that bet is not without a good deal of risk. (Dell's fiscal year ends on Feb. 2.) Remember that Dell neglected to give investors any guidance on where the business is heading when it said Wednesday night that it would meet Wall Street's already reduced estimates for its current quarter.

And remember that amid all this uncertainty, things aren't exactly going perfectly in Dell's core PC business, either. The current strategy is causing profitability to take a much bigger hit than it has in past periods of slack demand. Analysts expect the company to show nearly no earnings growth this year. Dell says that that bottom-line weakness is the cost of gaining new market share. But skeptics worry about where it all ends. Gross margins have already fallen 3 full percentage points at Dell. And there's still no end in sight to the current price war, which is largely happening on Dell's terms.

In the meantime, all hail the Great Commoditizer.

(See

Ian McDonald's

story on how fund managers are viewing Dell.)