Why Dell will have to take the AMD route

ONE OF THE MOST talked about 'almosts' in computing is the Dell/AMD hookup. This last time though, I thought, and still do think it is for real. The reason is economics and some more unsavory uses of marketing, in this case by HP and presumably Sun.

What happens is that when you put out a bit for a bunch of servers, you tend to submit RFQs to a handful of approved vendors, the Tier 1's and possibly a few trusted others. Usually you get bids in with the lowest price a Vendor can make money at, and the best bid wins.

Now, if there are other things at play, you can get loss leaders like the 2 for 1 sales at a supermarket on Coke. If Dell thinks it will let HP in to a big account, they might suck down a few dollars profit, or even swing things to a loss to fend off a serious effort by the other side. HP will do the same to Dell, and that is how the game is played.

Intel also throws their hat in the ring with 'marketing' dollars. If you want to know more about this, read up on the AMD suit, and follow a lot of the links provided. The short answer is this, if you are going up against a competitor and hit a sufficient number of trigger conditions, you might be bidding against systems with CPUs that cost the manufacturer $0. This is especially common in Itanic vs Power, and IBM plays a similar game by making up for free servers with services.

So, how does HP compete? Easy, with AMD. If they are bidding against Dell, they lead off with Opterons and point out price/performance versus just price. AMD wins this one handily in the 4P space, and by large margins in 2P, but not as decisively. So, this means that Dell has to discount a lot, sometimes up to 50% to be competitive. (As a hint to all Dell buyers, get an HP Opteron bid and show it to your sales person even if you have no intention of buying HP, it will lower your bill).

So, Dell cuts profits to hang on to clients, and they can also go running to Intel asking for handouts to keep AMD out. Anecdotally, the evidence I hear says this is pretty common, and Intel is more than willing to fund such 'advertising co-op ventures'.

The problems is, when the price/performance gets so out of whack that the subsidy would end up being more than the value of the CPUs in the system. What do you do? If you are Dell and Intel, do you lose accounts or send out servers with $100 bills stapled to the boxes? If you add in power, it only gets worse for Dell.

If this was a temporary thing, you could grin and bear it, ride it out for a couple of quarters. The problems is that in 2S(ocket) systems, relief won't be here for another three quarters. For 4S, you are looking at 2H/07, which is a long way away. If AMD does quad cores in mid-06, it only pushes parity out by quite a bit more. Considering that Dell is aware of these timelines, keenly aware, I would suspect they know exactly how much money they will have to ship out to keep customers.

Now, it was a tenable situation until Intel again failed to execute with Whitefield and CSI. At best, this pushed parity out 2Q, maybe a bit more, meaning the bleeding continues for a while longer on 4S. The more the competition learns about the soft spots at Dell, the more they will be exploited, and the more costly it will be to Dell and Intel to defend their turf. Hint: HP knows.

I don't think Dell and Intel want to play this game for that long, and the hits Dell took after missing numbers for second quarter, neither do their stockholders. Given what lead times are for a change of this magnitude, the change has to be close if not already in the bag. Given the sensitivity of the matter, I think if word leaks, Dell will have ditches already dug to put in as many bodies as necessary.

So, what it comes down to is cold hard cash. The reasons are known, the solutions are known, but the political will is not. Common sense says that it will not carry on for much longer, if Dell shows a third disappointing quarter, heads will probably roll. I don't think they will let that happen. µ