Michael Dell on Alienware, growth, and AMD
Dell bought Alienware. Alienware uses AMD. Will Dell itself follow?
SONOMA, CALIF. (FORTUNE) - In an exclusive interview, Dell Chairman and founder Michael Dell says he's excited about the company's acquisition this week of gaming-PC specialist Alienware, but that Dell still expects "the vast majority of our growth to be organic." His remarks also continue in intriguing ways the company's longtime dance with chipmaker AMD.
Dell (Research) is the only major PC company that has not used AMD microprocessors, and the fact that Alienware uses a lot of them was one of the reasons I was eager to talk to its chairman following the deal.
Alienware has been an industry leader in performance partly because of its use of AMD, whose chips have been giving fits to industry leader Intel. Alienware sells systems that use Intel chips as well.
I pressed Dell in the interview on whether with Alienware in the fold, the company might be more inclined to use AMD chips in other parts of its product line.
He wouldn't answer directly but several times pointedly repeated the phrase "We don't have an exclusive relationship with Intel." We talked by phone from Japan, where Dell was traveling.
For instance, I asked him, why not use AMD in Dell's own high-end XPS brand for gamers and PC enthusiasts. "Sure, we've thought about it," he conceded, adding provocatively, "We don't have any new products to announce today."
Dell notes that XPS is a much larger business than Alienware, and that it will continue operating as a separate business. (The company doesn't break out the numbers.)
Dell has not done many acquisitions, and Alienware is the largest thus far measured by revenues, the chairman said. But he said the purchase price (which the company has not revealed) was "less than one day's sales" for Dell.
Press reports this week put Alienware's revenues at $177 million last year. "It's about the same sized company Dell was in 1988, and it shares a common direct model, which is very rare," said Dell. He says one reason buying Alienware makes sense is that Dell can use its purchasing power, economies of scale and sophisticated logistics to lower Alienware's operating costs.
AMD remains ahead of Intel on many measures of chip speed, and perhaps even more significantly on other aspects of chip performance like energy requirements and the closely-related generation of heat.
AMD has been benefiting from some gutsy decisions it made years ago about the fundamental design of its microprocessors -- that they would process data in chunks of 64 bits at a time instead of 32, and include more than one processing "core." Those are the chips it is selling today.
AMD also chose to integrate something called the memory controller onto the chip itself. Intel didn't do that, which has turned out to be a big impediment in its efforts to catch up with the company that had previously been not much more than a thorn it its side.
Intel has subsequently begun selling x86 chips that are 64 bit, and that use multiple cores. But so far, most of them are neither as fast nor as cool-running as AMD's. Recent product announcements for upcoming chips make it appear Intel is getting closer, however.
Says Dell: "Intel [recently] showed a bunch of new parts. They're making good progress, but that only means there will be better competition between the two leading processor suppliers, which is good for their customers." I would not call that a ringing endorsement of Intel from its biggest customer.
Heat and energy matter in powerful computers. One of the ways Alienware became hot in the gaming market has been by making PCs that are literally cooler in their electronics. That gives the company more flexibility in product design, and means fewer noisy fans are required to keep the PCs functioning.
Heat matters even more in the sprawling server farms that are becoming the core infrastructure of the Internet, and servers are where the big margins are made in the PC industry. AMD has made surprising inroads into the server business. It provided the processors in 12.7 percent of x86 servers shipped worldwide in the fourth quarter of 2005, up from about 5 percent a year earlier, according to technology research firm Gartner.
Dell risks serious market share losses if it can't sell servers with the power and coolness of those from Hewlett-Packard, Sun and many others that are increasingly using AMD.
I pressed Dell repeatedly about whether he was concerned about the server competition, given his company's reliance on Intel. "We think we have the right products planned for the future that will keep us competitive," he said cryptically, adding with a chuckle, "That doesn't tell you much."
Fast Forward is a weekly column by FORTUNE senior editor David Kirkpatrick.