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Dell blames 'uncertain adoption' of Windows 8 for some of its financial woes

Dell blames 'uncertain adoption' of Windows 8 for some of its financial woes

Paints a gloomy picture of the PC business, emphasizes Windows 8 troubles and a decrease in Windows 7 sales

Dell blamed Microsoft's Windows 8 as one of several causes for its grim financial future, according to a filing with securities regulators.

"The difficult environment faced by the Company as a result of its underperformance relative to a number of its competitors [includes] ... the uncertain adoption of the Windows 8 operating system," Dell said in a lengthy proxy statement filed Friday with the U.S Securities and Exchange Commission (SEC).

The proxy statement laid out Dell's case for shareholders accepting a $24.4 billion offer, led by its founder and CEO, Michael Dell, to take the PC maker private. Michael Dell has joined with private-equity firm Silver Lake Partners to buy the company, with Silver Lake in turn tapping Microsoft for a $2 billion contribution.

Michael Dell's proposal has been threatened by recent counter-offers from private-equity fund manager Blackstone and a group coordinated by investor Carl Icahn.

In the proxy, Dell also blamed other factors for its troubled PC business, including "unexpected slowdowns in enterprise Windows 7 upgrades," as well as a lengthening PC replacement cycle and a rush to the bottom toward lower-margin systems. The Round Rock, Texas company also cited the widely-reported shift in consumer dollars from PCs to tablets and smartphones.

Dell acknowledged that it's not playing in the hottest technology markets, admitting that it sells only "limited quantities" of tablets and doesn't manufacture smartphones.

While the blame placed on Windows 8 was not a surprise -- reports of sluggish sales have dogged the operating system since its launch in October -- Dell's naming Windows 7 was.

What's striking is that Dell is better known for selling PCs to enterprises than to consumers. Slowing sales of Windows 7 machines at Dell may indicate that corporations have largely completed their migrations from Windows XP.

If accurate and an industry-wide trend, Microsoft could face even tougher times ahead. The company has regularly touted Windows 7 penetration in the enterprise -- in January, Peter Klein, Microsoft's CFO, said 60% of the world's enterprise desktops were running Windows 7 -- and asserted that sales of the popular OS would continue.

"I expect to see sort of a steady drumbeat between now and end-of-life for XP support in April 2014 for [Windows 7 migrations] to continue," Klein said during the January earnings call with Wall Street. "I would expect to see that continue over the next year, year-and-a-quarter."

Still, the onus on Windows 8 was notable coming from Dell, a long-time partner of Microsoft. But it jibes with other analysis and data, ranging from allegations that Windows 8 failed to deliver the sales "pop" that new editions traditionally provide, to a lethargic usage increase that has been slower than that of Windows Vista, the 2007 edition that has been labeled one of Microsoft's rare flops.

Dell remains a major PC maker -- the world's third largest, according to IDC, with a 10.6% share of the market in 2012's fourth quarter. And its personal computer and associated products and services, what the proxy dubbed the "end-user computing" (EUC) business, account for 65% of company revenue. Michael Dell, however, wants to push a strategy to de-emphasize the EUC business and transition to a model reliant on higher-margin services to enterprises.

Michael Dell and his investors argued that the business model switch would not be possible if the company remained public and had to face the wrath and impatience of shareholders each quarter.

Of course, it was in the company's interest to paint the worst-possible picture of its troubles to convince shareholders to accept the takeover plan proposed by Michael Dell, Silver Lake, Microsoft and others.

The proxy also detailed how Microsoft became an investor in Michael Dell's privatization offer.

On Dec. 10, 2012, Silver Lake asked for permission to discuss the transaction with Microsoft, and later in the day said it would bow out unless it was allowed to talk to the Redmond, Wash. developer about investing in the buyout. The next day, Silver Lake was given approval.

Microsoft signed a confidentiality agreement on Dec. 23, 2012. By Jan. 15, 2013, Microsoft's board had given the go-ahead to invest $2 billion.

Silver Lake and Microsoft have history. In 2011, the private equity firm brokered the sale of Skype to Microsoft for $8.5 billion. Silver Lake had acquired a 39% stake in the video calling and Internet chat company from eBay two years earlier for about $1 billion, and tripled its money when it sold to Microsoft.

Also in 2011, Silver Lake made an ultimately failed bid for Yahoo that reportedly included Microsoft as one of several partners.

The proxy statement shed no new light on conditions, if any exist, that accompany Microsoft's $2 billion investment. Previously, some analysts said that it was likely a "gentleman's agreement" between Dell and Microsoft existed, under which the former would not only continue to sell PCs -- contrary to Michael Dell's vision of shifting away from personal computers -- but would step up its use of Microsoft's products, and perhaps even promise not to dabble in alternative operating systems, such as Google's Chrome OS.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is

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Tags Microsoftoperating systemsDellsoftwareWindowsBlackstone

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