Dell, (NASDAQ:DELL) is currently hosting the Dell World conference and in the keynote, Michael Dell stated that the company holds the No.1 spot in terms of market share for servers in North America and Asia and is just 64,000 servers away from the number one spot worldwide. The company may hold the top spot for number of units sold, but in Q3 2012, the company reported revenues of $2.3 billion in servers and networking, which is significantly lower than IBM with nearly $3.5 billion in revenues and HP with $3.3 billion in revenues. We examine its server business in detail below. 
Servers and Networking Business
The server business is a $50-$55 billion industry and is shrinking due to cloud based web services such as Amazon’s Amazon Web Services and Microsoft’s Cloud Azure. It is also fairly commoditized and we see a drop in server prices across the industry. We estimate that Dell will sell about 2.3 million servers this year at an average price of $3500 each and has a gross margin on 20% which is estimated to fall to about 18% by the end of our forecast period.
This being the case, we are likely to see Dell move to hosted services such as Amazon and the company has announced that it will support OpenStack, the open source cloud operating system. Dell will build its private and public cloud platforms on OpenStack and has released a technical preview of its private cloud, Dell Cloud Dedicated, with OpenStack. There are no details about this product, except that it will differ from AWS and others by being easier to use and will have more value-add than bare bones web services.
The worldwide public IT cloud services market is a $35 billion market, according to IDC and this includes all cloud based software and services, but the hosted web services space that Amazon currently dominates, is a $2 billion market and is growing rapidly. As companies skip setting up servers and instead rent space on Amazon Web Services and the like, to host applications and data, we can expect this business to eat into the $50-$55 billion server hardware business and we can expect it to grow significantly in the near future. The market is getting crowded with Google, Microsoft, EMC/VMware, HP, IBM and Dell showing interest in setting up public and private cloud infrastructure, and we will keep an eye on how Dell will differentiate its offering. With Dell focusing on services and not hardware, we can expect to see revenues from such hosted services soon.
We currently have a $12 Trefis price estimate for Dell, which is nearly 20% above the current market price.Notes: