Dell Admits Server Death In Going Private

| About: Dell Inc. (DELL)

The great untold truth of the cloud computing era is that it kills the idea of the "big server."

Back in the old client-server days, you needed very powerful servers to handle enterprise workloads. While workloads were split by application - database servers, web servers, network servers - each server had to do all of a job. So there was a premium on power.

With cloud computing, servers are replaced by racks of commodity hardware. The jobs once done by one machine are parceled out to many, transparently. As enterprises have virtualized their data centers over the last decade to achieve these savings, they've slowed, then stopped their purchase of the more powerful servers.

Thus, cloud computing has killed the cash cows of Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ). All the moves by Oracle (NASDAQ:ORCL) to call its server racks "clouds" are meant to cover up the truth of this move. The big server is dead.

And that's why Dell wants to go private. It's not just because private owners can squeeze out costs and pull out profits in ways a public company simply can't, if it's to maintain the stock price. It's also because Dell badly needs a way out of the big server trap, and it can't explain that roadmap to public investors any more.

That road map has two parts:

  1. Build clouds - Dell is building a network of cloud computing centers which it is offering to big clients that want to build "hybrid clouds" - keeping key corporate assets in private clouds while pushing bulk workloads to some public cloud entity. It is hoping that its present enterprise software offerings will keep these clients on board long enough to ramp up this expenditure, and that it can then move them into an environment that will be compatible with what the clients themselves are building.

  2. Super-Thin clients - Ars Technica recently profiled what Dell calls Project Ophelia, a USB stick with software that will turn any TV-type monitor into a personal cloud-linked desktop.

The two strategies are linked, of course. Dell is getting killed in the PC marketplace in ways even HP isn't. Its cloud efforts are indeed a "hail Mary" pass, aimed at transforming it into an essential enterprise partner and exiting the consumer business entirely.

Behind the scenes, of course, Dell is going to be jettisoning most of its operations, and that's also not something you want to be explaining in the public press. The PC business, as well as the server business, is going away, to be replaced by simple phones, USB sticks and expensive clouds in many locations around the world, running enterprise-class software programs acquired by former Computer Associates executive John Swainson over the last few years.

There will be no auction to buy into this transformation. This is a long-shot effort at survival. The idea that Dell is going to ever rise above whatever the offering price becomes is ludicrous. You can either take today's $12.77 or wait against an offer of $13, maybe $14.

Personally I'd rather take the $12.77.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.