Dell, EqualLogic and EMC

By now, you've probably not only seen the news, but you've also probably seen lots of commentary on Dell's recent acquisition.

I decided to wait a bit before posting my thoughts on this topic, just to allow for some contemplative reflection.

In many ways, Dell's move does not come as much of a surprise.  I think the impact of this move will have a more significant affect on Dell's well-known competitors far more than it could potentially impact EMC over the long run. 

So let the speculation begin!

Why I Think They Did It

I think this is more about servers, than storage.

If you're Dell, you're looking at HP and you're not liking what you see.

HP is making good progress with their desktop PC business, thank you.  And, if I read the numbers right, HP is also doing better in the server space where Dell has traditionally done well.

In the SMB (small to medium business), bundling is king.  Lots and lots of entry-level systems get sold that way, combining all the bits into a nice package.

HP has been successful with bundling their low-end MSA product with servers.  I don't think it's unfair to say that there's nothing too special about the MSA, but having the product as part of the bundle has worked well, and has provided HP with a "hey, it all comes from us" positioning that's important in many market segments.

Dell probably realized that the dynamics of entry-level storage in the SMB space were very different than in larger environments.  And I would expect that they felt that they needed to "own" a product in this space, rather than reselling or OEMing one.

And, let's face it, EqualLogic makes an decent iSCSI-based storage product that works well.

So, from Dell's perspective, I can potentially see the rationale. 

What This Means From EMC's Perspective

EMC sells a broad range of storage, virtualization and information management products through Dell.  When you look at the potential overlap between the EMC stuff Dell sells, and a future Dell/EqualLogic offering, it ends up being a fraction of a fraction of a fraction of the overall picture.

Sure, we'd love to have that business, but ...

But, even if some of this overlap gets fulfilled by Dell's offerings rather than the Dell/EMC offering, there's still plenty of good business between the two  companies -- something neither organization would want to walk away from anytime soon.

We've both renewed our agreement several times -- the current one runs to 2011.  We've built up many years of productive relationships between EMCers, Dell people and many, many customers.

Some characterizations I've seen that "this is the beginning of the end" are unrealistic.  Makes good  tabloid-style gossip, but I don't lend too much credence to this sort of thinking. 

What This Means From Dell's Perspective

Simply put, it's "Dude, You're In The R+D Business".

Dell famously prided itself that it had built the business around effective distribution.  It also was proud of the fact it didn't spend much on R+D.

Well, if you pay $1.4 billion for a smaller storage player, you are now a de-facto storage R+D player.  As well as in the storage customer support business.  And other expensive storage-related endeavors.

It's not clear to me what this means to their business model going forward.  And they're going to have to sell an awfully large number of these arrays to recoup their investment.

If the customer wants iSCSI and nothing else, I can see the EqualLogic product being attractive as part of PowerVault.  But if the customer might want a bit of flexibility (e.g. FC, NAS, etc.) that's not part of the EqualLogic offering.

Who Else Is Impacted?

Well, if I were one of the smaller storage startups (Compellent, LeftHand, 3PAR, etc.) I'd think the  temptation would be to look at the Dell deal and see all sorts of dollar signs ahead.

I think it's a safe bet that there were other bidders, given the (ahem) rather rich valuation.

Were they server companies?  Or were they storage companies?

Speculation is pretty evenly split.  Neither HP nor IBM have a good, entry-level iSCSI product.  But they don't seem to care much about storage, either, so the idea of one of these guys taking out a billion-dollar checkbook seems unlikely, at least to me.

However, if Dell does well with iSCSI storage, both these server players might be looking at stepping up their investment in this space.

Another persistent rumor is that NetApp was looking at them.  The logic behind this one is that NetApp is getting bludgeoned by that whole raft of "storage made simple" new entrants, (as well as folks such as EMC with the NS20) and wanted to make a pure play in a different part of the market.

Maybe yes, maybe no -- but I tend to think that NetApp has to do something pretty big, pretty soon to change the game.

Much was made in some of the press around "VMware affinity" for the EqualLogic product.  Now, being the skeptical type, I tried to track down some sort of fact-based nugget for this perception, and didn't find too much, other than the usual "simple, easy-to-use" thing.

I thought it strangely bizarre that somehow, parts of the investment community thought that the Dell / EqualLogic acquisition would represent a competitive threat to VMware. 

Kind of scary that people would come to that conclusion, isn't it?

The Big Picture

Storage is an increasingly important part of the landscape.  Dell understands this.  Right or wrong, they made a big bet to own a product in a small but fast-growing piece of the market -- and one that gets sold at the same time servers get sold. 

I think it's more about the servers than the storage, at least in this case.

If Dell executes well, I think the real impact will be with the server vendors who don't have a comparable offering, as well as continuing to squeeze the niche where NetApp plays.

One thing is for sure -- we'll probably see more consolidation in this market and lots of money changing hands. 

Comments

[Marc Farley]

Excellent post Chuck. I expect there will be some amount of consolidation too. Once these cycles start in this industry they tend to play out fairly quickly. One reason is that none of the smaller companies want to be left without a viable exit. Do you think this will become a buyers or sellers market?

[Steve]

The bigger question is why didn't EMC offer Dell part of the VMware IPO. And, is it too late for EMC convince Dell to back out of their purchase and re-write and extend their agreements with Dell.

[Chuck Hollis]

Hi Marc -- good to hear from you!

You're right about cycles and playing out quickly.

If I count up the potential buyers, and the potential sellers, I keep coming up with more sellers than buyers.

How do you see it?

[Chuck Hollis]

Hi Steve

I really don't know what the story is regarding VMware shares and Dell.

As far as trying to convince a company like Dell to rethink their acqusition, well, that's not the sort of thing that most companies would reconsider once they commit to a course of action.

Thanks for writing ...

[Steve]

Chuck - Thanks for taking the time to answer my question. - Steve

[Marc Farley]

Chuck, that's how I see it too - more sellers than buyers. To me the two big wild cards are the internal development efforts at EMC and NTAP. Not asking for a comment or response on that, I'm just thinking aloud (er, uh in type).

[David Cleminson]

Hi Chuck,

This is the first time I have read you blog. I find your discussion points very interesting.

There is a requierment for storage out there, this nobody can deny. We also know it is becomming instaible and will remain like that indeffinately (at least during our life times).
The challenge here is the fact that the majority of companies comming into the SAN (iscsi/FC) market have no Idea (or very little) as to how to guage or size the disk performance requierments.
Currently most of the organisations purchasing EMC (Not through Dell), IBM and HP have some in house experties or consultancy from an integration partner to do a requierments analysis to develop a solution for them. Dell’s methodology is to drop boxes in and run.
With this current trend more organisations will pruchase cheap shared storage systems, try run their production systems from these cheap and slow shared storage systems and wind up worse off than when they started.
They will have tons of storage which can not provide the performance resources requiered for their production systems to run.
Is this the next .com type bubble that will pop and leave a mess as to what went wrong…?

Reagrds

David Cleminson

[T]

Hey Chuck,

Good to see I'm not the only one left wondering WTF??? after reading comments regarding EqualLogic being involved in virtualization/VMWare. Dell had a pretty good relationship with VMWare since before EMC bought them. There was very little change in that relationship (for better or worse) attributed to the acquisition (VMWare and EMC). EMC is now leaving VMWare to develop on its own. Expect little change in the Dell/EMC relationship as well; it's always been tenuous, always will be, but it's good for both sides.

[Kevin]

Chuck, Great column. Just curious, do you think Mike Dell knew that the EQLX box could only speak in one protocol or do you think his engineers got so hyped up on ISCSI "roids" that they pushed him into an abyss riding the ISCSI train right into the "performance quagmire station"???

[Chuck Hollis]

Hi Kevin:

I wouldn't want to speculate on what Michael Dell knew, didn't know, or didn't fully understand.

To see some of the press, they went with "storage virtualization" to describe why Dell was so interested in EqualLogic, which -- as we both know -- is a completely separate topic, and -- of course -- the EqualLogic product doesn't even do.

Most of the industry people agree, though, this is a strange one, and we'll have to see how it plays out, won't we?

[Astley Gayle Jr.]

Hi Chuck,

After reading many varied comments from within the industry about Dell's purchase of EqualLogic, I'm convinced most pundits have missed the main driver behind this deal. In my humble view, this deal is less to do with servers or storage per-say and, more to do with Dell finding a vehicle that will generate double (or triple) digit growth over the next 8-10 years.

iSCSI SAN technology is rapidly approaching "mass-market" adoption. When that tipping-point is reached, I believe the global market for this type of offering will be measured in the 10s of billions (USD) annually. That's the size of the prize! The essential ingredients for success are arguably there:
> ease of deployment, use & management
> extremely affordable
> global distribution & support

[Chuck Hollis]

Hi Astley -- long time no see! Where have you been keeping yourself?

To your point, no one is surprised that Dell wants to sell lots of entry-level arrays -- that much is clear. And they're pretty good at it.

I think what surprised most people was Dell's departure from their traditional model of reselling or OEMing other equipment.

Not only did Dell pay a considerable sum for EqualLogic (a story in itself), but they're now committed to an entirely different business model for R+D, in-depth customer support, channel relationships and more.

If nothing else, it's a very bold move. Only time will tell if it works out as they had hoped.

Thanks for writing, stay in touch!

[Kelly]

Chuck,
I enjoyed this blog and agree with much of it but feel you may be mistaken in assuming there is little overlap in the EMC and Equallogic product lineup. If my sources are correct Dell is expecting this new product revenue to grow from 150 Mill last year to 600 Mill this year. The only way that will happen is if all of the Dell reps start selling it. And this will likely come at the expense of EMC. I would love to have been a fly on the wall when Joe Tucci called Michael Dell to discuss teh EQ deal :)

[Chuck Hollis]

Hi Kelly

Sure, there will be some impact, but to read some reports, you'd think it was the end of the world, or -- at least -- the end of the EMC/Dell relationship.

From my perspective, the primary product overlap between EMC and Dell/EQL is specifically the AX150, an entry-level iSCSI storage array we licensed to Dell and they mostly built themselves.

This business will most likely go to the EQL product in the near future. But, without disclosing too many corporate secrets, I think it's fair to say that it ain't likely to get them to $600m.

And there's a ton in the EMC portfolio (e.g. CLARiiON, Celerra, DMX, et. al.) that Dell sells today and they currently have no equivalent offering. And I don't think they're gonna be successful force-fitting these customers into an EQL.

Dell has always had their own entry-level external storage array in their lineup, and -- from that perspective -- it's just a new flavor.

But Dell paid a helluva lot of money for EQL, and -- as a result -- they're gonna try to sell it like crazy.

I think it'll take most of 2008 to see whether they'll be successful at it or not.

Thanks for writing!

[In the Mix]

Hi Chuck,

First time reader of your blog and enjoying the insightful commentary. My organization is currently looking at SAN products for a server virtulization project that will be running a couple of MS SQL apps and DR replication. We have been looking at a number of products, Dell/EMC,EQL and Pillar to name a few. Our requirements are such that iSCSI could be a fit but we are concerned about longer term performance objectives that may rule out a pure iSCSI solution. This lead us to EMC and Pillar. As a side note, during a conference call with Dell and EMC I specifically asked our Dell rep what the EQL acquisition meant for the Dell/EMC relationship. Well after a very uncomfortable pause he replied the EQL product line is targeted at the SMB market. I didn't respond but I couldn't help thinking to myself that this why EMC partnered with Dell in the first place, to get at the SMB market. In any case it made for a rare uncomfortable moment that I relish putting vendors in. Back to the issue at hand, we now face a decision between the Dell/EMC MS-20 product and the Pillar Axiom 500. We are impressed with the flexibility built into the EMC MS-20 product. However, we are also impressed by the application aware aspects and relative ease of installation and configuration of the Pillar system. I'm interested in knowing what you thoughts are on the direction of the higher end SAN market and how Pillar's claims that application aware SANS will lead the market.

[Chuck Hollis]

Hi Don -- thanks for the comments and questions.

First, it's no surprise the Dell rep was uncomfortable with the question. It's an uncomfortable topic for them these days.

With so many larger, viable storage companies in the marketplace, I'd stay clear of the smaller players such as Pillar et. al. simply because you don't know where they're going to be a year from now.

I consider their 'application-optimized storage' pitch almost complete techno-nonsense. But everyone (especially smaller vendors that aren't profitable yet) need a story to tell, and that's theirs ...

If you're interested in higher-end SAN equipment, the more successful players are EMC, IBM, HP, Sun and HDS. HDS products is available re-badged through Sun and HP.

I have my parochial opinions of who does best in this space, but there's no need to look any farther than this group, IMHO.

Cheers!

[Berad]

Chuck:

I can understand where you are coming from in directing the large enterprise to the historic big boys of SAN equipment.

However, I am not so sure that you should dismiss Pillar by stating their 'application-optimized storage' pitch almost complete techno-nonsense'.

I know folks running Pillar who have 80% usable disk space. I don't know anyone running EMC, HDS, IBM or SUN who would claim more than 50% on a good day. Simplified performance based lun provisioning does not bite either.

Does this mean Pillar is a threat in displacing the big boys out of the enterprise market right now? Probably not, but I do see them popping up as a disruptive force in the mid market.

[Chuck Hollis]

Hi Berad -- a few thoughts.

First, if Pillar has something to say, they better figure out how to get better at saying it. From where I sit, they've become largely irrelvant in the discussion.

Second, utilization is more often an artifact of how a platform is used, rather than the platform itself. There are EMC customers who are running very high utilization rates (90%+), and -- of course -- ones with lower ones.

Sure, I'll make exceptions for platforms (e.g. ONTAP) that demand large "reserves" be set-aside, but for most normal block-oriented stuff, it's more about people and process than platform.

And, I'd respectfully suggest you need to get out more often ;-)

[Dan]

Great post Chuck. Im in the middle of researching my final 2 SAN candidates, EMC NS20 or EQL PS5000E. This post really gives me a lot of insight into Dells EQL marketing. I found the PS5000E to be significantly more expensive than EMC AX4-5 and equivalent to the EMC NS20 pricing.

My question is, is anyone else noticing that the EQL line is priced too high. And could it be that Dell is looking to make up some of that 1.4 billion? I certainly find that Dell is trying to push the EQL much more than EMC offerings.

Thanks, Dan.

[Jeff Nay]

I agree with Dan, the prices of the EQL line are ridiculously high. As are the EMC and the HP MSA line.
I can purchase 5 Dell Power Edge Servers with high end multi quad core processors 16Gigs of memory and 1T 15K HD, with Perc raid controller, remote access card , for the price of 1 EQL Disk Sub-System.
I don't know but there might be a problem here.
This is a disk sub-system that we are talking about, although they are all very nice, it is still not worth more than the processing power of all of my Dell Power Edge servers put together.

Come on Dell, EMC and you to HP with your MSA line, this technology needs to be available to everyone at a fair price.
If you see "Call for price" then you know that it is overpriced.

[John Easterly]

Looks like this acquisition has been very lucrative for Dell Inc, Michael was dead on here.

One comment that I thought was interesting was in regards to EqualLogic not doing storage virtualization, which is completely inaccurate. Storage virtualization is the core of this product.