Techaisle Blog

On October 12 Dell took an enormous step along its new chosen path of reorienting away from a provider of low-cost PC and server hardware to a role as a more sophisticated supplier to businesses that view technology as a strategic asset rather than as a tactical necessity. Dell announced a “definitive agreement” to acquire EMC (including EMC’s ownership positions in VMware, RSA Security, Pivotal Software, Virtustream and other industry firms and joint ventures) for $67 billion – the largest-ever acquisition in the information technology industry. The deal was announced to analysts and media in a conference call that featured Dell Founder and CEO Michael Dell, EMC President/CEO/Chairman Joe Tucci and Silver Lake Partners Managing Partner and Managing Director Egon Durban, and included VMware CEO Pat Gelsinger, Dell CFO Thomas Sweet, and David Goulden, who acts as CEO for EMC’s Information Infrastructure business.

Two second Take

The acquisition greatly enhances Dell’s position in higher-margin, higher growth markets: storage is expanding faster than servers or PCs, and EMC is focused on the higher-margin software used for device management as opposed to the creation of physical devices themselves.

Revenue Synergies – the $67 billion question

While the call eschewed any commentary on staff redundancies between the two organizations, it focused its messaging on “revenue synergies that are three times larger than cost synergies,” a justification for the deal that comes primarily from new growth opportunities rather than from squeezing out costs through headcount reductions.

It can be assumed that most of this growth potential comes from expanded market rather than product positioning. In his remarks, Michael Dell noted that Dell/EMC (including VMware) have already established “leadership positions in storage, servers, virtualization and PCs,” and have strength in IT’s “most important growth vectors,” including software-defined data centers, hybrid cloud, converged infrastructure, mobility and security – and are “positioned as a leader in an amazing 22 Gartner Magic Quadrants.”

If Dell and EMC are already leaders in all of these large and/or expanding areas, then the question is where will further growth come from? It appears that the combined entity is banking on the benefits associated with increased customer account presence. In particular, Michael Dell noted that “as the data market moves to a compute-centric, converged model, Dell’s server franchise is a natural fit with EMC’s strength.” The theory appears to be that by combining EMC’s prowess at selling to enterprise accounts and Dell’s broader compute portfolio the company can increase share of wallet within major accounts; there is also some opportunity for using EMC to drive increased storage presence within Dell’s “growing commercial infrastructure franchise” in the SMB base, but this is likely to be a secondary consideration.

Security, Converged Infrastructure, Mobility, Big Data

Dell has been investing heavily in building a comprehensive security portfolio, assembling advanced threat identification services firm SecureWorks (acquired by Dell in 2011), firewall/unified threat management from vendor SonicWALL (acquired in 2012), backup software specialist AppAssure (2012) and identity monitoring and management software vendor Quest (also acquired in 2012), plus related capabilities sourced from thin client vendor Wyse (purchased by Dell in 2012) and from work done by Dell’s own engineering team. With the latest acquisition Dell adds encryption pioneer RSA Security (which became a division of EMC after being acquired in 2006) and enterprise mobility management supplier AirWatch (acquired by VMware in 2014), thus diversifying the portfolio even more. Dell has been positioning end-to-end security as a differentiating feature of its infrastructure portfolio for some time and with the acquisition Dell’s security story becomes even stronger, and even more distinct from the approaches of competitors like Lenovo, HP and Oracle.

Although it is tempting to look at a Dell/EMC/VMware combination as a means of consolidating a converged infrastructure offering capable of competing with the Cisco-led Vblock (Cisco, EMC, VMware) and FlexPod (Cisco, NetApp, VMware) offerings, it appears that Dell’s vision is broader and more strategic.

The acquisition also gives Dell a foothold into the big data deployment market opportunity where the enterprise spending is still hardware driven rather than software and analytics uptake.

And with AirWatch in the mix, Dell finally gets a mobility story in place beyond just the mobile devices.

Move to cloud

Michael Dell believes that “the combined company is very well positioned to address the move to the cloud,” both by providing infrastructure to public cloud providers and private cloud operators and through VMware’s ability to enable hybrid cloud. But in his remarks, he went further, observing that “I think what you’re seeing with the Software Defined Data Center is an ability to take the benefits of the public cloud and bring them into an on-premise data center.” He considers the complexities associated with connecting compute, network and storage as a major demand driver for public cloud, and virtualization and converged infrastructure as a means of delivering greater simplicity in on-premise environments, allowing firms to focus on optimizing for “the application user, quality of service and security.”

But Michael Dell is not satisfied by simply focusing on leveling the terrain between cloud and on-premise infrastructure, his vision is to supply infrastructure across different environments (public clouds, SaaS, hyperclouds, private clouds), providing common, connected and secure platforms to customers of all sizes, wherever their IT workloads reside.

Financial challenges

A lot has been said and written about financial challenges but due to the enormity of the deal size it is worth another read, from our point-of-view. The cost of debt may have an impact on the overall cost of operating the newly-expanded Dell entity. Dell was thought to have about $12 billion in debt prior to this deal; clearly, this figure will increase substantially after the acquisition. Michael Dell did state that observers could expect “a significant deleveraging” resulting from cost savings, increased revenue and cash flow management improvements that come with being a private company, but $67 billion represents a very high hurdle for these activities. Obtaining the funds themselves is not an issue but it seems likely that the costs associated with debt service may affect product prices and margins, and it is difficult to boost either in many of Dell’s core hardware markets. It might well be that asset sales become important to enhancing corporate profitability by reducing the cost base of the company.

Should debt reduction become a priority, the newly-expanded Dell would have a few options, starting with VMware. Although there was no mention of selling VMware as part of this deal – indeed, VMware CEO Pat Gelsinger was described as having a “very bright future” in the new organization – EMC’s 80 percent stake in VMware is worth more than $26 billion at current valuations. It will be very tempting to convert this equity into reduced debt to help the competitiveness of future hardware products, though this would be at the cost of an ownership position that (as per the terms of the Dell deal) accounts for 40 percent of EMC’s overall value. There are other avenues Dell could pursue – for example, it could combine its in-house security assets with RSA, and perhaps AirWatch, to create a stand-alone security business that could be monetized via issuance of public market shares – but a VMware sale is clearly the most direct means of raising capital to reduce debt.

Go-to-market challenges

An often-overlooked ingredient in a merger is the extent to which go-to-market staff and strategies can be melded in a single organization. This will likely be a significant issue for the expanded company. Dell and EMC customer-facing staffs have very different skills and compensation levels and may not be neatly amalgamated into a single sales force. The channel strategies of the two firms are different as well. Because EMC has focused primarily on large deals within large accounts and Dell has been more SMB (and consumer) focused, it may be that the sales staff and channel strategies can be aligned by sector but that will not erase the GTM discrepancies.

EMC sales staff work large, high margin deals, and are among the best compensated reps in the industry; Dell certainly cannot afford to reduce EMC-classic rep compensation (which would trigger a mass exodus to competitive startups) or to pay EMC rates to Dell-classic sales staff (which would consume more than 100 percent of current margins). From a channel and alliance perspective, EMC is a strategic partner to its enterprise-level services and software partners; Dell is primarily a tactical resource for SMB-focused VARs and integrators. These approaches target different partners with different programs and are delivered in different ways. Again, it is possible to align strategies by market sector, but many partners are likely to try to “shop” across programs to “Frankenstein” together blends of services and compensation structures that optimize the supplier benefits that they derive from the new Dell, and some – notably, Cisco, which is an EMC ally via Vblock – will find a Dell partnership untenable.

Final Take

While there are reasons to admire Dell’s strategy, it is very rare to find successful examples of a merger yielding a combined market presence that eclipses the individual positions of the firms involved. However, these are still early days, and the hard decisions will not be made until mid-2016, but there are still many operational issues to be ironed out between now and then. Even though Dell is not a public company, it will need to explain its expectations of “revenue synergies” to customers, analysts and the press, and Silver Lake will likely need to do the same for its current and potential investors.

There are reasons to both admire and to question the Dell/EMC deal. The answer to the $67 billion question will be found in the opportunities for “revenue synergies” that extend well beyond today’s converged infrastructure SKUs, and into the cloud and the core operating models of customers ranging from EMC’s traditional public sector and large enterprise accounts to Dell’s SMB buyers. If Dell can extend its reach across the full spectrum of IT/business infrastructure, it may build a position as the behemoth HP believed it would become, before it was bifurcated into two distinct business units. If it does not, it may more closely resemble Oracle, trying to assemble a coherent vision from a series of mismatched pieces.

The real winner though is Silver Lake. It has positioned itself as a central force within the technology industry, an unusual position for a private equity firm, and may signal that excellence in financing is joining excellence in inventing technology and excellence in technology marketing as paths to the industry’s pinnacle.

Michael Dell is one of the very few CEOs I know that walks the hallways with almost no posse of overprotective PR and communications personnel. It was therefore no surprise that in my meeting with him he walked into the room unassumingly and on time to discuss his vision and focus on the Emerging Markets.

Much has been written about how happy and relaxed he looks after privatization. For me, however, the tell-tale signs of tranquility and a zip in his walk first appeared two years ago when he announced Dell’s intent to be an end-to-end solutions provider for businesses of all sizes. He had a roadmap to reach the flag at the end of a long, unpredictable race-track. And he knew that he was at the starting gate with the right set of acquisitions. He just had to make everyone believe in Dell.

Fast forward to present, privatization has emboldened Michael Dell and his entire leadership to take their message on the road that the new Dell is “100% customer focused, providing best value, ease of use & flexibility” aligned to the four tenets of Dell solutions – Transform, Connect, Inform, Protect.

Michael Dell is “Investing to Accelerate” around five key areas, one of which is the emerging markets, the topic of our meeting.

1. Invest to expand solution offerings (R&D plus M&A plus Venture Fund)

1. Enhance & Simplify customer experience

1. Increase pressure in emerging markets around the globe

1. Grow PCs, tablets and virtual computing services

1. Expand sales force and channel relationships to better serve and support customers

Dell as a company made several major announcements at its recently concluded Dell World 2013:

• Public cloud ecosystem partnerships with Google Cloud, CenturyLink, Microsoft Azure

• Dell Red Hat OpenStack partnership for co-engineered enterprise-grade OpenStack private cloud solutions

• Partnering with Dropbox to enable businesses and their employees work in a mobile work-environment while providing the security and manageability with Dell’s data protection solutions

• Dell FluidCache for  SAN storage delivering over 5 million IOPS in a converged infrastructure of storage, server and networking

• Revamped PartnerDirect program giving partners bigger profit opportunity than ever before – access to tens of thousands of Dell accounts

• US$300 million Strategic Innovation Venture Fund to help identify, fund and fuel visionary technologies that anticipate and address future IT needs

Not all of the above announcements are applicable to and can be used by businesses in the emerging markets immediately. Therefore, I began our conversation by asking him if there is a difference in his strategies for established and emerging markets and what top characteristics defined his emerging market strategy.  Michael Dell recognizes that in many emerging market countries, there are essentially two markets (upgrade in automated environments, greenfield in businesses that are not yet automated) and therefore he has to gear up to address their needs accordingly and investing in localization of products and services for the emerging market buyers.

Looking back at my discussion with Michael Dell, I see one strategy but three approaches that are critical to Dell’s growth in emerging markets.

PC Led Go-to-market Approach

Regain its hegemony in end-point devices (excluding smartphones): by building innovative end-user computing products at extremely competitive prices. In countries like China, India and Brazil. Dell is aggressively opening its own Dell stores for customers to experience the products first-hand. Michael Dell does not view todays IT landscape as a post-PC era. He reminds me that when the term was first coined in 1999, approximately 100 million PCs were sold, but in 2012 over 300 million were sold, defying the very notion of the PC fading from view. “It certainly is not a post-PC era”, he insists.

Techaisle Take: It is certainly the right entry-point into most businesses. With global PC market slowdown, PC market penetration will continue to be driven by emerging market countries with new business formation and increase in PC to employee density. Our research shows that there are 1.26 billion addressable households in emerging markets but only one in four have a PC. Similarly, there are 44.7 million SMBs in emerging markets, but only two in five have a PC. Both of these figures indicate a huge opportunity for new PC sales as there are still 26.4 million SMBs and 994 million households that have yet to buy a PC – a huge gap indeed. Dell will need to exert more pressure than other PC OEMs in terms of customer pull: creating demand through marketing, and relying on its own stores and channel partners to close prospects after they are engaged.

Many of the emerging market countries are embracing mobility faster than established markets which create unique challenges for Dell to push its Tablets in the face of high adoption of Android and iOS devices. Market share of Android and iOS tablets vs. Win8 would seem stacked against Dell but one should not discount Dell’s expanded tablet portfolio including Android OS and Dell Chromebook plus well-received Win 8.1 tablets. Dell also has had emerging market success with Dell Wyse cloud clients and new opportunities with ultra-mobile cloud devices (Project Ophelia/Dell Wyse Cloud Connect) – all of which create customer entry points for Dell. Additionally, Dell’s mobility strategy extends beyond Dell-branded devices and includes software and services to ensure that any device is secure, manageable and reliable, part of the end-to-end solutions strategy.

Channel Partner Led Go-to-market Approach

Grow with channel partners:  Channel partners are the essential cogs of the IT landscape, especially for the SMBs that are so important to PC growth – and this is truer in the emerging market countries than established markets. Dell plans to continue to recruit channel partners that align with Dell’s value proposition and can add business value to a customer’s needs by giving the customers choice of best-of-breed solution components. The recent announcements of the revamped PartnerDirect program and the corresponding re-organization of its channel organization were made to address the changing needs of the channel partners across all geographies. Apart from growing the channel base, Dell is also planning to increase spending on sales/marketing within the emerging markets thereby creating enough pull in the marketplace to enable channel partners not only sell more but also sell more effectively within and across its channel friendly solutions - PowerEdge VRTX, Storage, Networking, Software, Thin Client, Workstations, and SecureWorks. However, not all solutions, especially, software solutions, can be sold without proper localization; Dell recognizes this, and is investing in R&D to make sure that products and solutions are enabled for the emerging market countries.

Techaisle Take: As per Techaisle research there are over 340,000 channel partners in emerging market countries. To support growth Dell has to have a rich landscape and integrated fabric of channel partners that are moving in unison with Dell as its trusted supplier. As Dell moves to create better alignment with the channel, it needs to be mindful of two interesting changes that are occurring within the emerging market channel partner community – members now refer to  themselves as solution providers, (not as VARs, SIs, or resellers), and they have started calling their customers “clients” much like a consulting organization would do. To be successful in emerging markets channels, Dell has to capitalize on these changes. It also has to quickly develop a timeline for the roll-out and implementation of its new PartnerDirect Programs and Incentives for countries outside of North America. Dell may not be able to make bold statements of how many accounts have been opened up (similar to the US) for collaborative sales efforts with channels but at a minimum it has still to identify named accounts that are being transitioned to channel-led, and a compensation accelerator to incent direct sales force to work with channel partners.

Solution & Services Led Go-to-market Approach

Provide end-to-end solutions for businesses of all sizes: No end-to-end solution portfolio is complete without software and applications. After a long slog, Dell software is finally coming together with its systems management offerings covering BI for IT, mobility management, data center management, cloud management as well as “connected security” that reduces the seams in a customer’s infrastructure. The software solutions are being complemented by Dell Services (which was given more visibility at Dell World than ever before, with keynote sessions led by services). Dell has achieved some great successes in countries like India within the healthcare segment, but it has still a lot to work on. In emerging markets as in North America, the mid-market segment is the primary target for Dell’s end-to-end solutions.  As Michael Dell said, “it is not easy to put feet on the ground effectively and uniformly across all countries”. He also said, “Many new change vectors are going on and Dell has the ability to understand where the puck is going”. Taken together, we at Techaisle view these statements as outlining an approach where Dell will commit resources selectively to high-growth segments within the emerging economies.

Techaisle Take: Dell is almost at the finish line with its converged solutions that include storage, security, servers and networking, the services needed to deliver end-user solutions that help businesses compute in environments with pervasive data access. Growth in sales of this type of sophisticated solutions in emerging markets cannot be cracked without the support of channel partners. Dell has to articulate a message that serves the needs of customers of hybrid solutions that combine server, storage and networking hardware with systems management and security software to seamlessly support application delivery, data protection and backup. By offering a wide range of product types, and focusing on making the selling motion as clean as possible, Dell can enable its partners to focus on customer requirements rather than product silos.

One early indication of the force of this direction is the fact that Dell has finally been able to put a stake into the ground with its cloud strategy. To put forth the point more forcefully Michael Dell said, “When you go with Cloud, go with Dell”. Dell’s mobility strategy has also started to take shape with aggressive roll-out of devices and its EMM (Enterprise Mobility Management) solution that includes both end-point and container management. Dell is still working on its Big Data/Analytics strategy. But more importantly, Dell clearly hits 7 out of Top 10 2014 SMB IT priorities and addresses 7 out of Top 10 2014 SMB IT Challenges. It is also in a strong position to speak to the Top 10 2014 SMB Business Issues.

Final Techaisle Take

Emerging markets are more complex than we usually imagine, having a mix of mature and very immature segments based on local infrastructure. For example, Tier 1 cities are akin to US as a country – they are advanced in their infrastructure development and employment and have a high GDP while Tier 4 cities are fast developing, less populated, in some cases even rural. When we analyze our SMB (a segment that Techaisle tracks globally) survey data across cities we see that SMBs in Tier 1 cities are the early adopters of cloud whereas Tier 3 and 4 cities although aware of cloud are constrained in their adoption by channel competency and vendor penetration. Reliable and high quality bandwidth is a critical factor in bringing the benefits of cloud to local business, one that underscores the importance of central government investment in telecommunications infrastructure and Internet access. Dell recognizes these challenges and short-comings, and the new Dell is primed to aggressively address the challenges.

There is yet no clear leader in the emerging markets in cloud, mobility and Big Data solutions. Specifically with respect to the SMB segment and the channel partners that serve it, the new IT solutions of cloud, mobility, social media, virtualization and analytics are rapidly moving SMBs from enablement to empowerment. Using technology, SMBs are reaching their full potential in the shortest period of time possible. The process of an SMB’s growth and steps to absorb IT are no longer steady and predictable as compared to five years ago. Understanding the drivers of SMB transformation and the relevance of cloud-based IT, and marketing to both customers and channels accordingly, will be critical steps in enabling Dell and its channel partners to achieve market success.

Over the last 2-3 years, Dell has heavily expanded and calibrated its enterprise solutions capabilities and more recently doubled down on further investment in its PCs and Tablet business. As the company has adjusted the levers of these key drivers for its business, it appears that these two critical areas for Dell are coming further into balance. Post-privatization Dell has begun the process of finding its feet on the ground and it knows where it wants to land. It will be a year before we will know if Dell has managed to land firmly or has caught the slippery slope.

In an interesting blog in the Diplomat today, Asia’s Real Challenge: China’s “Potemkin” Rise, the author makes several comments about the low quality of China's economic growth. We responded to this LinkedIn thread with our take on the technology market angle.

An Excerpt:

"But the real story is not about PCs, it is about the billions of Smartphones and Tablet devices that will overwhelm the PC Market worldwide in very short order. The Global installed base of of Smartphones and Tablets will overtake that of PCs this year and grow by multiples over the next few years. Function-specific devices like digital cameras, MP3 players and GPS Devices and now the venerable PC, will all have been eclipsed by the new mobile devices. Lenovo and Huawei are both in the Smartphone business and are in the top five in China - Samsung is the leader. China has leapfrogged in some technologies, such as in the adoption of landline telephones, which peaked globally in 2002, The bottom line on innovation in my opinion is covered in the summary of the following blog post from last year concerning Internet adoption in China." http://techaisle.com/blog/2012/09/the-internet-in-china-will-it-follow-korea/

 

[caption id="attachment_2732" align="aligncenter" width="600"] Source: Economist

In a very interesting move, Apple announced that they would invest in returning some production to the US. At first blush, this seems like a bold tactic  which will certainly improve Apple’s brand reputation in the wake of long-standing criticism for moving skilled manufacturing jobs to China, where worker pay and conditions are bad enough to drive some to suicide. And as the number one technology company in the world it is also heartening to see some jobs come back home, but there are a few caveats:

The Apple MacBook is the top of the line notebook with a premium price point, out of reach for most small businesses unless there is strong justification, such as for professional designers and developers who need to pay double that of a similarly equipped Wintel device to do their work effectively. That share of the market has always been small relative to Wintel machines, both desktop and notebook. Apple manufactured Macs in the US until the mid-nineties, after most competitors had moved production offshore. The caveats include 1) whether this experiment will grow to the more strategic iPhone and iPad product lines, and obviously, 2) whether Apple can turn a profit that makes the decision stick after the first $100M is spent.

Apple cites the inability to find the level of skills and manufacturing equipment in the US to be able to turn out production rapidly and with high quality. No doubt Foxxconn, Apple’s Chinese production partner, who already operates some plants in the US, will be looking to expand operations here. They had issues ramping up production to meet demand for the new iPhone and there were hiccups, followed by reports of Foxxconn negotiating multi-billion dollar deals in Brazil, to manufacture there. Regardless of how that materializes, today’s announcement will dampen some criticism that would accompany the final press releases from Sao Paolo.

Enter the Dragon

Another reason this makes sense to us is that China’s technology vendors are on the rise – no surprise there. But consider that within 7 years of buying the ThinkPad brand and manufacturing rights, Lenovo has become the #1 PC vendor in the world in unit shipments, (#1 by Gartner, #2 by IDC) squeezing 10% out of the global share in a stagnant market in the last few years alone while jumping to 30% share in China, 3X the nearest competitor.  It was also announced today by Reuters that Apple fell to #6 in the Chinese smartphone market, which is growing in leaps and bounds to 60M units per quarter, with intense domestic competition and Samsung leading the pack. Lenovo is number 2 in the smartphone market as well as having the overwhelming first place position in PCs mentioned earlier, #5 smartphone seller Huawei, is gobbling up global market share in the telecom equipment market at an alarming rate.

We have written several times about the rising competition from China in the hardware manufacturing end of the IT market, and of its’ growing importance as the second largest PC, and largest Smartphone market in the world, with a billion users and 60 million units sold per quarter. As shared with our readers in a September article about Internet adoption and managed economies, China and Korea have many similarities that make for a reasonable scenario of things to come. Take it from someone who lived 15 years in Asia and has been watching Korea for 30 – the voracious appetite for material wealth, pragmatic style of government and East Asian capitalism will leave no stone unturned. Take Samsung for example: between 1990 and now they have become the number one maker of TVs in the world, starting from scratch and displacing the Japanese faster than they displaced American manufacturers, #1 in memory chips and some other semiconductors, #1 in Smartphone handsets (almost double Apple in unit shipments), a global leadership position in screen technology, squeezing Sharp, Toshiba and others for the keys to the future standard, and a global frontrunner in CE and white goods. These guys are US Steel in their heyday. And they are a major supplier to Apple for the most important products. And the legal battles are not over yet, according to this CNET News video. They have Foxxconn on the left and Samsung on the right. With friends like these who needs enemies?



CNET on Samsung Apple Lawsuit.

Strategically Apple’s move is understandable, at least from the outside looking in. Steve Jobs’ genius for aesthetic design, usability and commitment to quality helped create the PC revolution, arguably the single most important technological advance aside from the Internet since the Industrial Revolution. It also got him ousted from Apple as decisions about long term architecture were made. Although Apple always had (and still has) a very loyal following in the computing arena, they did not gain more than 10-12% market share from 1980 to 2000. This meant that Apple had to drive enough margin to support R&D for operating systems, a proprietary microprocessor, end user applications and non-standard chassis and other components.  By contrast, the rest of the PC market leveraged standards and Scale Economies as investments were diffused in the market. The Microsoft standard OS and a maturing suite of interoperable applications were the lynchpin of the ecosystem and resulted in hundreds of companies joining the competitive fray. White box and private label manufacturers sprang up everywhere, eventually producing branded competitors like Dell and Compaq who were selling practically as fast as they could produce. By 1996 Apple was being counted out by many analysts as an also-ran. Eventually in 1997, Jobs was brought back in to save the company, which was considered a very risky personal move at the time.

In his second stint as CEO, Jobs turned Apple around and helped solve a problem that almost put the recording industry into insolvency; how to make money in the music business when new technologies allowed free files to be distributed at will and pirated on a global scale. Apple introduced iTunes in conjunction with EMI, and solved the Digital Rights Management issue. Under Jobs they had to kowtow to Redmond and adopt compatible MS Office Application Suites, which were not interoperable to that point – no swapping files between Apple and Microsoft users, and move to an Intel architecture. Despite several earlier failures, such as the Newton, Apple achieved a breakout hit with the iPod, and iTunes began printing money. Next came the iPhone, which almost immediately become the third largest handset brand in the market, followed by iPad in 2010, and several versions of iPhones. The products have produced a ravenous worldwide customer base and made Apple the most valuable (tech) company in history with a half-trillion dollar war chest.

The point is that Apple’s meteoric rise is more a function of the transition to CE and Smartphones than its’ leadership in computing and now they are in a bind; they are stretching their existing supply chain, they rely on advanced manufacturing resources and skilled labor that have been developed offshore, their largest potential market (China) is controlled by arch-rival Samsung, with whom they are in a nasty legal battle and depend on for key components. Prepare to Repel Boarders.

Next Chapter in the Bits vs. Atoms Saga

Apple’s success with iTunes came as a result of a property of the Internet that is now at the root of their problem: value moves at the speed of light when it can be digitized, and even when that value is in the form of an optimized supply chain, there are physical limits imposed by materials and the movement of products that ultimately make manufacturing a challenging business. On one hand you have companies like Apple, who source, manufacture, sell and distribute 125 million smartphones, along with millions of other devices. On the other hand there are companies like Google, whose value can be delivered over a network, relying on increasingly large server farms and unfettered access to electricity, but with much less need for operational infrastructure. Cisco and Oracle are another example although not as stark. Huawei is exerting substantial pressure on US firms as a global competitor and causing Congressional sabre rattling, as we noted here.  Telecom equipment has been a hardware-oriented business but is less at risk because of innovation toward software and network integration – moving toward bits and away from atoms, demonstrated by Cisco's recent alliance with Citrix. Earlier we discussed Lenovo, which has overtaken first Dell and now HP and is the global leader in PC unit shipments.

As noted, we think moving some manufacturing back to the US will bring some benefits, not least of which is the PR value of bringing some jobs back home. It is slightly diluted by the fact that production of the most important product lines will not be possible for some time to come and does not decrease reliance on Foxxconn or really help with the Samsung conundrum. However if the experiment succeeds and a profitable advanced manufacturing sector can be developed and others follow suit it will be a very good thing for all of us in the technology industry.