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Why Dell should quit the PC business

News Analysis

(MoneyWatch) Dell's latest earnings illustrate why the company is moving to exit the public market -- and may need to beat a retreat out of the personal computer business.

The computer market is shrinking fast, raising pressure on PC vendors like Dell to move further into selling servers, networking and cloud services and out of the deeply commoditized PC industry. 

Global shipments of PCs in 2012 were down by about 3.2 percent compared to 2011. But the news is worse than it sounds. Shipments in the fourth quarter, typically a hot time for computer sales, were down 6.4 percent.

Dell's quarter, which ended in January, reflects that decline. Its desktop PC sales fell 14 percent year-over-year. Third-party software and peripherals? Down 11 percent. Services decreased 3 percent, while storage sales were off by 13 percent. However, sales of servers and networking gear grew 18 percent over the year-ago period. Given how badly Dell has lagged in mobile products, pointing out the 25 percent sales drop almost seems pointless. There just isn't a lot that Dell has and that buyers seem to want.

Where should it go from here? Say that you're the CEO for a moment. The only sign of growth is in servers, which are strictly business-oriented sales. Storage, services and software are all aligned with corporate sales. Desktop PCs? Not going away, but not growing given the growing number of people who are finding that smartphones and tablets can provide most of their computing needs. And growth is the name of the game in satisfying Wall Street.

What makes strategic sense for Dell is what IBM did years ago: Get out of the commodity PC business and focus on servers, software, and services that companies might want to buy. But there's a problem. Walking away from PC sales means snubbing billions of dollars in revenue. Even if that fixation is ultimately unhealthy, investors proved the danger when Hewlett-Packard (HPQ) originally announced that the company would consider shedding the PC business. That largely cost former CEO Leo Apotheker his job, as HP's board wanted someone to blame for the idea, even though the board would have had to agree with the shift.

Dell could face a similar investor revolt if it sought to get out of PCs. That is likely a major reason why Michael Dell and private equity firm Silver Lake are seeking to take the company private with financing from Microsoft (MSFT). Get away from having to satisfy shareholders over each decision and you can make the hard calls you think are necessary to make the company work when times change.

Image courtesy of Dell