Microsoft's potential $1 billion to $3 billion investment in Dell as part of a private-equity-backed leveraged buyout could cause friction between the software giant and other PC vendors/PC OEMs and ultimately reduce competition in the market, according to an exclusive CRN survey of 194 solution providers.
The results from the survey, conducted last week, come amid reports that Dell is attempting to complete what could end up as a $20 billion leveraged buyout led by private equity firm Silver Lake with financing from Microsoft, other investors and a number of banks.
The CRN survey found that of the partners who see the Microsoft investment having a negative impact on their combined Dell-Microsoft sales, 75 percent believe the deal will cause "friction between Microsoft and other PC vendors." In addition, 71 percent fear the combination will create "an unhealthy alliance that reduces competition in the market." Finally, 54 percent believe the Microsoft investment could lead to more "confusion/frustration" in the market.
Michael Goldstein, president and CEO of LAN Infotech, a Dell partner based in Fort Lauderdale, Fla., said he was shocked by the possibility of the two industry giants -- Dell and Microsoft -- teaming up.
"Dell is one of the largest Microsoft software resellers in the world so Microsoft is effectively buying into what may be their best customer and creating what I look at as a small monopoly," he said. "You have the guys that make the software engine teaming with one of the dominant hardware suppliers. It's got to have an enormous impact on someone like HP and the other major PC OEMs."
Todd Swank, vice president of marketing at Nor-Tech, a Burnsville, Minn.-based system builder, said he sees the potential Microsoft investment in Dell as aimed at "keeping a good Microsoft partner focused on Microsoft" in an era in which the PC industry is in "shambles."
IT vendors really cannot survive with a focus strictly on the PC business, Swank said. "I see this as Microsoft trying to keep its desktop business going," he said. "Microsoft wants companies to push its client solutions." The deal could make Dell less likely to move to other platforms, specifically Android, Swank said.
Microsoft has a lot riding on the success of Windows 8 and its client systems business supported by OEM partners such as Dell. In its fiscal year ended June 20, 2012, Microsoft's Windows and Windows Live Division sales -- before Windows 8 -- dropped 3.5 percent to $18.37 billion compared with $19.03 billion in fiscal 2011.
In contrast, in the second fiscal quarter ended Dec. 31, Microsoft said the Windows Division posted a 24 percent increase from the year-ago quarter to $5.88 billion. Adjusting for recognition of previously deferred revenue from Windows 8 presales and the net deferral for a Windows Upgrade offer, Microsoft said Windows division non-GAAP sales increased 11 percent.
NEXT: Unfair Advantage?Top OEM executives and solution providers interviewed by CRN say they see a Microsoft investment, which could come with a seat on Dell's board of directors, giving Dell an unfair pricing and technology advantage, particularly in the intensely competitive consumer PC market.
Among the top Microsoft OEM PC partners likely to be negatively impacted by the Microsoft investment are HP, Samsung, Lenovo, Sony and Toshiba, according to PC OEM executives.
"It's a high-risk investment," said one top executive for a Microsoft OEM, who did not want to be identified. "It is going to be hard for Microsoft to manage its other OEM relationships. It is definitely going to negatively impact those relationships."
PC OEMs said the biggest potential impact will be in the consumer PC market, where winners and losers can be determined by even small Microsoft Windows 8 or Office pricing advantages.
Dell is already one of Microsoft's select Large Account Resellers -- a select group of partners that have volume software licensing advantages.
"It's a vicious market," said the Microsoft OEM partner of the consumer market where a Microsoft investment in Dell could shift the balance of power. "Windows 8 is a $100 product so it is 20 percent the cost of your cheap desktop system" with no special pricing unless you get "into stratospheric volumes."
Dell and Microsoft would not comment on the potential ramifications of the leveraged buyout.
The PC OEM executive said the Microsoft investment could have the biggest impact on top OEMs such as HP. "It's a real problem for them," he said. "The question is: Will Dell get better pricing in the consumer PC market from Microsoft? There is already no money to be made in that business. There wasn't any money to be made before. What happens now? It's a five-point [margin] business with high support costs which is why [former HP CEO] Leo [Apotheker] wanted to get rid of it in the first place."
HP would not comment on how a Microsoft investment in Dell would impact its PC OEM relationship with Microsoft.
The potential investment in Dell, PC OEM and solution provider executives say, comes after Microsoft has already damaged once-tight PC OEM relationships by deciding to compete head to head with its partners in the booming tablet market. The potential Microsoft investment in Dell comes with the software giant selling its own hardware, the Surface tablet.
That move sent ripples through the Microsoft PC OEM partner network and even among the solution provider partners that carry those products.
The strategy shift has put Microsoft into competition with the PC partners that it once teamed tightly with to build a onetime operating system and productivity software suite monopoly. That monopoly has been battered by tablets and smartphones from the likes of Apple and even Samsung, which is using the Android operating system on its popular smartphone and tablet products.
Samsung, for its part, recently nixed plans to make tablets based on Microsoft's Windows RT operating system in the U.S., a major setback for Microsoft's proclamation that it will leave no stone unturned in its innovation battle against Apple.
NEXT: Anxious PartnersLAN InfoTech's Goldstein said he is even concerned the deal could negatively impact his own Dell PC sales since he must compete with pricing from the Dell.com website. "My number one competitor is Dell.com," he said. "This could give Dell.com an unfair competitive advantage to get a much better margin and knock me out of the water as a Dell partner."
Goldstein sees the potential for Microsoft to combine with Dell to build its own systems, providing an integrated hardware/software experience similar to the model that IBM used when it dominated the market with its mainframe computers.
"It could be Microsoft wants to emulate the old IBM mainframe model where IBM controlled all of the hardware and software and as a result charged higher prices for those systems," said Goldstein. In that case, he said, Microsoft may leverage some of Dell's hardware system capabilities to build its own integrated hardware/software Microsoft-branded systems.
Microsoft partners have "reason to be anxious" with a Microsoft investment in Dell, but that is the price of playing in the "post-PC world we live in," said Martin Wolf, president and founder of Martin Wolf M&A Global Advisors, an international investment advisory firm based in San Ramon, Calif., that specializes in solution provider deals, in an email exchange with CRN.
"Brilliant," Wolf said of the potential deal. "Offensive and defensive at the same time."
With a whopping $68 billion in cash, Microsoft's investment in Dell would be a minor investment with the potential for enormous strategic benefits, according to solution providers and OEMs. Besides a tight alliance that could help Microsoft build its own systems, the Dell investment could also give Microsoft big advantages in the enterprise market, said one PC OEM, who did not want to be identified.
"Dell is a huge Red Hat shop," said the PC OEM executive. "Dell has special Red Hat OEM status. This Microsoft investment could potentially change or derail Dell's focus on Red Hat, which is one of Microsoft's primary competitors. Dell Red Hat licensing and support subscriptions are typically 30 [percent] to 50 percent less than the average Red Hat partner. That makes it very hard to compete against Dell in that Red Hat market. What is going to happen to that Red Hat relationship?"
The PC OEM executive said the Dell-Microsoft relationship is just another sign of the end of the Wintel era. "This Microsoft investment in Dell looks a lot like Intel's decision to get out of the PC motherboard business in three years," said the executive. "The PC desktop is clearly a shrinking market. Microsoft is overhauling their licensing model for Windows 8 smartphones and tablets. So Microsoft probably doesn't perceive this as a high-risk investment."
Microsoft CEO Steve Ballmer acknowledged as much in an annual letter to shareholders last year that noted that Microsoft is placing a greater emphasis on hardware devices in what he called a "fundamental shift" for the company.
Ballmer said the "full value" of Microsoft's software "will be seen and felt in how people use devices and services at work and in their personal lives. This is a significant shift, both in what we do and how we see ourselves -- as a devices and services company. It impacts how we run the company, how we develop new experiences, and how we take products to market for both consumers and businesses."
For system builders, the move away from the PC business and up the stack to focus on storage and servers has been going on for a few years already, Nor-Tech's Swank said.
"But Microsoft has its back against the wall in different ways," he said. "And for Microsoft, $3 billion is a drop in the bucket."
Additional reporting by Robert Wright, Scott Campbell and Joseph F. Kovar.