Battlelines Drawn in the SMB Market part 2: Dell vs HP and Lenovo

Ed note: This is the second part of an analysis of the impact of the multiple announcements by major vendors in the firsdt week of February. The first part of this analysis is here.

IBM’s entry into the SMB market was the first announcement to rock the SMB market on February 5. The second was Michael Dell’s formal announcement that he has the pieces in place to take his company private, presumably so he can pilot it through a major business transition without making his strategy public in the financial markets. This was expected but is a matter of concern for stakeholders nonetheless. Taking the company private leaves customers wondering exactly what is going on behind those closed doors. What exactly does ” major transition” mean? Will the company that emerges still support the core technologies, and particularly end-user hardware, that its customers need?

Dell’s i86/Microsoft Windows-based desktop products, the core of its business, are being challenged by Android and iOS mobile devices, but most of the market shrinkage is in the consumer market. Every office desktop still has a laptop on it, and that situation is unlikely to change drastically. The main threat there is from VDI, and whether that will materialize remains to be seen.

The desktop market overall, however, is a non-growth market with little room for technical differentiation, so unless either HP or Lenovo drops out, Dell needs to look elsewhere for corporate growth. That means software and services, the same transition that IBM went through in the start of the century. IBM did not abandon hardware — it is still one of the largest computer manufacturers out there. Dell is not likely to abandon its laptop computer business, either.

The surprise was HP’s announcement that it was going to go after Dell’s hardware customers while Dell is “distracted” by the transition. The real question here is how serious that announcement is. HP is not IBM. It is much more a collection of semi-independent pieces than a unified company going in a single direction. Not long ago it was publicly seeking a buyer for its PC division, and while that was under a former CEO, HP’s level of commitment to the PC market remains unclear.

So one important question is just now much is HP corporate willing to invest in this offensive against Dell? Is this just the PC division on its own? If so, it probably doesn’t have a great deal of free cash to invest. If HP is willing to use money from its highly profitable server division to fight this market battle, then this is an entirely different situation. But given that that server division is the main source of both growth and profits for HP, whereas PCs are a commodity, no growth business with razor-thin profits, it will be hard to convince HP corporate to invest heavily in a fight with Dell.

The other major question is Lenovo. The Chinese company is not showing its cards yet, but it is both the best capitalized all PC company and the most aggressive in the industry. Its strategy in a sentence is to be the last PC company standing.

Dell is a solid, profitable company. But anyone who watched Oracle dismember Peoplesoft a decade ago knows what can happen when a large company goes after a much smaller one. Peoplesoft started as a solid, profitable, well managed company with a very loyal customer base. Three years later it was in pieces. If HP and Lenovo decide that Dell is vulnerable and are willing to spend two or three years in a concerted attack, Dell is in trouble. Going private ties up a lot of Dell’s capital and cuts it off from the largest source of new outside money. That could be enough in a highly competitive, mature market for the wolves to attack.

Clearly Dell’s situation is in flux, and that will make its customers nervous and more likely to hedge their bets. The issue here is not laptops but rather servers and storage, a market that Dell is only starting to crack where HP is a dominant player, and where the vendor and technology you use makes a difference. If HP is committed to an attack on Dell, that is where it will attack first.

IBM also has a part to play in this drama, particularly after the PowerPC 7+ announcements that clearly signaled its interest in the SMB market. And IBM has big pockets. If it sees Dell falter, it may well meet HP head on in the competition for Dell’s server market share, and it is likely to be interested in Dell’s software division, which has several innovative products, as well.

Whether any of this will happen remains to be seen. And Michael Dell may surprise the circling sharks and attack first. HP’s desktop division is certainly vulnerable. HP actually has two major non-growth divisions in shrinking verticals — IT people tend to forget that it is also one of the major manufacturers of large production printing systems, the kind that are used to print books and magazines. That market is in a huge transition, and while the weak man in that industry is Kodak, HP corporate must be thinking about whether to unload one or both of those divisions.

HP, as SiliconAngle founder John Furrier has argued in the past, needs to keep its PC division, because that is its connection with the consumer market and to an extent with SMBs. But to do that it needs to make a major commitment to mobile computing, both in terms of tablets, which are clearly replacing laptops in the consumer market and augmenting them in the office, and in a mobile management system for BYOB environments. And while that commitment might include Windows 8 Pro, it should not end there. HP needs an Android tablet backed by a full support infrastructure both for the consumer market and the large number of companies that have chosen a BYOD strategy over buying tablets for employees. Few consumers are going to buy heavy, expensive Win 8 Pro tablets, and given the prevalence of BYOD in companies of all sizes, Win 8 tablets are unlikely to dominate there, either. If HP’s PC division wants to attack Dell and grow its business overall, its best strategy is to focus on mobility rather than scraping over the shrinking PC market.

At this point really only one thing is clear. This year is going to be exciting, for SMBs in particular. So buckle up an hold on, the roller coaster is leaving the station.