How will Dell offset losing Intel's generosity?

By now, we should be enjoying a true commodity market in which the pricing trends of x86 CPUs track those of other PC components and semiconductors. Today, we're celebrating the $US500 PC, even though economic forces should have that price closer to $US200. With chip manufacturing capacity and yields being as high as they are, all but the most advanced x86 processors should be readily affordable. They should be as cheap as light bulbs. Well, designer store light bulbs.

I think the reason AMD and Intel CPUs are so expensive is that Intel has worked closely with OEMs to support prices and margins through incentives and discounts.

But as AMD and the attention drawn to Intel by the AMD versus Intel antitrust pushes along the PC market's slide toward commoditization, Intel will have to deal with customers on a simple and transparent tiered mark-up system -- like everyone else.

Dell sees this coming and has a plan. Is it switching to AMD? No, although I think that price support erosion may have Dell shopping for CPUs in ways that avoid secret handshakes. Rather, Dell's plan is to position itself more firmly within the services sector while avoiding derision along the lines of "McServices". Believe it or not, Dell claims that if it were to spin off its services business, it would be worth upwards of $4 billion. Dell is undoubtedly including contracted warranty and repair services, but the message is that Dell's wagon is not hitched to Intel.

Dell is also looking to its old friend Microsoft to make up the difference with the direct selling of turnkey solutions that provide customers with SQL Server 2005 or Exchange Server systems that come out of the box, ready to roll.

In hardware, Dell is looking forward to commoditization in what I believe will be the fastest growing segment of system sales starting in about 2008: large clusters. By then, a commodity system with two dual-core CPUs might cost about what the rack mount chassis costs today. Dell won't ever fall out of love with Intel, but in a fairly short time, Dell won't be needing Intel's handouts.

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