Having secured a leading position in healthcare services with the U.S. healthcare reform deal, the Round Rock, Texas-based PC maker Dell Inc. (DELL) recently announced its venture into the gaming industry. Dell partnered Palo Alto, Calif.-based OnLive Inc. to develop cloud-based gaming services.
 
Founded in 2009, OnLive Inc. became one of the pioneers of instant-play video gaming services.
 
The new cloud-based service deploys Dell’s GPU-powered server to offer customers on-demand games that can be played in real time through the server. It is expected that the online real time playing of games will eliminate the need for newer and more sophisticated PCs and game consoles such as Microsoft Corp’s (MSFT) Xbox, Sony Corp’s (SNE) Playstation or Nintendo’s Wii.
 
While the companies appear to be optimistic about the online real time game playing, only time will tell whether they actually deliver the required speed and consistency that could result in a satisfactory playing experience.
 
If successful, the cost effectiveness attached to the game service will attract other large players from the industry, which could bring additional technological partnerships.
 
But this is not good news for Microsoft or Sony, both of which recently showcased new 3D gaming devices. While Sony’s device uses a hand-held control, Microsoft’s device uses gestures. Both devices are currently expected to drive video game sales in the seasonally stronger second half of the year.
 
According to PriceWaterhouseCoopers, the overall spending on games may rise to $20.7 billion by 2014, from $15.1 billion in 2009. Dell could grow into one of the key beneficiaries of this spending, opening up a new growth opportunity.
 
Other initiatives include Dell’s focus on healthcare, where contract wins have been pretty consistent. Recently, Dell was selected by the U.S. government for setting up exchange programs aimed at setting up a health reform system.
 
Dell reported first-quarter revenues of $14.9 billion, up 21% year over year and almost flat compared to the previous quarter. Revenue growth was due to strength across all business segments, with highest growth in the Large Enterprise segment, which is again attributable to robust growth in server revenues.
 
Though the potential IT spending, market share gains in the healthcare industry and high growth forecast for the PC industry are positives for Dell, we remain concerned about the competition from Hewlett-Packard Co. (HPQ), Apple Inc. (AAPL), International Business Machines Corp. (IBM) and Microsoft Corp., as well as the company’s high debt level.
 
We maintain our short term Hold recommendation on Dell.
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