Where to now for Dell, Apple and the rest?

INNOVATION TALK:In the face of Apple's declining fortunes, a rival technology chief executive was asked at a tech conference what he would do to fix the company whose best days, nearly everyone agrees, are behind it.

“What would I do?” the tech titan said to the large audience. “I’d shut it down and give the money back to the shareholders.”

Lest you think this is a bit of an overreaction to Apple’s sharp share price fall, there are two things worth noting – one, the rival wasn’t Google’s Larry Page or Samsung’s Kwon Oh Hyun. Famously, it was none other than Michael Dell. Secondly, Dell didn’t, in fact, utter these words recently – he said them back in 1997.

Dell’s infamous advice to Apple is rather apposite given the fact that last week, he gave the money back to the shareholders and took the company private with a leveraged buyout in an attempt to save his ailing company, whose best days most definitely are behind it.

In fairness, Dell doesn’t intend to shut his eponymous company down, but rather to refocus it away from the prying eyes of shareholders and Wall Street, following the IBM model and concentrating instead on high-value enterprise and consulting sectors.

But that anecdote about Dell’s condescending advice to Steve Jobs doesn’t just provide an opportunity to laugh at his enormous hubris, but also hints at just how shortsighted his vision was – he built a world-class supply chain that gave his company a real edge in the personal computer business, but that was the only thing of note he has ever created.

Dell seemed to assume that was enough, as if the evolution of the computer had reached its endpoint and selling Wintel boxes was going to be the perpetual order of things, but the subsequent 15 years have seen the computer industry’s fundamental principles challenged and overthrown.

Back in 1997, the computer business was a model of horizontal integration – Microsoft provided the operating system and Intel provided the silicon chips that powered computers built by the likes of HP, Gateway and, of course, Dell. Owning the whole enchilada, as Jobs was determined to do when he returned to Apple that year, was seen as eccentric at best, downright suicidal at worst.

As it happened, staying vertically integrated was exactly the approach that allowed Apple to revolutionise mobile computing, and reap monster profits as it became, for a while, the largest company in the world by market cap.

In the meantime, Dell’s supply-chain advantage evaporated as it outsourced manufacturing to the likes of Asus, one of the low-cost Asian firms who soon swallowed Dell’s end of the PC market.

So now Michael Dell is reduced to eating the bitterest of humble pies, raising $24.4 billion to bring his company private.

But some of those billions have come from a potentially unhelpful source – Microsoft. As the ever-insightful former Apple executive Jean-Louis Gassée points out, Steve Ballmer has bought “better vertical integration without having to pay the full price for ownership . . .This is completely at odds with the buyout’s supposed intent: getting out of the PC clone race to the bottom.”

Endgame

Here we see the last vestiges of the once-vaunted horizontally integrated computer business spluttering to some sort of endgame – all the PC companies were effectively serfs in Microsoft’s kingdom, and now they’re all desperately trying to find a way out through some form of vertical integration, aka independence, while Microsoft tries to keep them indentured.

The lesson is not lost on those companies competing in the post-PC world of mobile computing – Apple has perfected the art of vertical integration and as a result is eating up the vast majority of mobile profits through the iPhone and iPad, while everyone else is left strategising about how to follow suit.

Most obviously, Google bought Motorola, a madcap $12 billion move for patents, yes, but also vertical agility – it remains to be seen how effectively that will ever work. Microsoft’s approach with its own Surface tablet has not been immediately successful, but the fact it was willing to try in the first place shows how far things have changed.

It will also be fascinating to see how Samsung forges an independent, vertical path – it currently extracts the lion’s share of Android profits these days but crucially lacks real software pedigree of its own, making it the company most at risk of Dell’s fate in the smartphone business.

The Korean giant is making lots of noise about experiments with the Bada and Tizen smartphone operating systems, but Android is so huge now it’s difficult to see how either could gain traction.

There are no guarantees, of course – if your product is mediocre, no amount of verticality can help you, as RIM and Nokia have painfully discovered.

But the larger lesson is that fundamentals change – this year’s gospel can become next year’s superstition, eventually becoming full-blown fallacy sometime in the next decade.