My Take -- Dell To Acquire 3PAR

[One week after this post was written, HP has announced their competing bid for 3PAR.  Not entirely surprising, either.  Not clear who's going to end up the victor as of now]

Nothing like a little M&A action to spice up a Monday, no?

Today's news is rather straightforward -- Dell intends to purchase 3PAR.  Not entirely a surprise if you're a close industry-watcher like I am.

Some interesting commentary is starting to result (including this piece by Dave Vellante), so I thought I'd offer up some personal observations as well.

The IT Industry Is Changing ... Fast

Our IT industry is rapidly maturing and consolidating.  Behind the obligatory "cloud buzz" are strong themes around converged and virtualized infrastructure, next-generation operational models for IT, and relatively new consumption models based on service providers.

Interesting times, indeed.

Stand-alone technology companies face an uncertain future as a result.  To stay relevant, you either have to acquire more of the required stack, or form meaningful strategic alliances with others that complement your strengths.

For example, EMC has been pursuing both approaches for quite a while: we've built a considerable stack of our own, as well as invested heavily in a unique strategic alliance: the VCE Coalition.

IBM has been investing in a similar stack-building approach for quite some time.  More recently, HP (under Hurd) had also been building out their stack-oriented offerings as well.  And let's not forget Oracle/Sun, shall we?

Now, if you're Dell, what do you do?

Everyone Needs A Target Competitor

Most IT vendors need to have a bogeyman to chase -- an arch-competitor that focuses effort and passion in a very specific direction.

For Dell, that uber-competitor would likely be HP.  Dell and HP continue to compete fiercely for desktops.  Dell and HP continue to battle for server share.  And, one could argue that HP has done well for itself in both contests.

Indeed, one could look at some of the recent Dell acquisitions (e.g. Perot) and make a case that part of the deal rationale was to better compete against HP. 

The Dynamics Of Downmarket Storage

Both HP and Dell move a lot of gear "downmarket" -- targeting smaller IT shops that tend to value simplicity and convenience vs. strong technical, solution or services differentiation.  Different-sized IT shops tend to value different things.

And in these smaller IT organizations, you'll often notice that servers and storage tend to come from the same manufacturer.  They're positioned, sold and supported together as a complete package from a single vendor.  Sure, there's the occasional IT group that splits out server and storage as independent decisions, but the predominant buying mode here is "bundle".

HP moves a boatload lot of EVAs this way.  Rarely does anyone make a standalone decision to buy HP storage and use it with, say, IBM servers. 

Ditto the relationship between IBM servers and IBM storage -- it's extremely unusual to find IBM storage plugged into anything other than an IBM server.  And it looks like Sun storage is heading in much the same direction.

Was EquaLogic Enough For Dell To Compete?

Yes and no.  I think that -- over the years -- Dell has started to do OK with the EQL product.  It looks like they're starting to see some success in modest SAN opportunities where server and storage are sold together.

That being said, the EQL platform doesn't currently stand up well against larger storage arrays such as HP's EVA and IBM's DS8000 and more recently the XIV box.  Arguably, they needed something in the Dell-owned portfolio with a bit more heft.

No surprise, 3PAR has been in play for a while.  You can make a pretty short list of the likely suitors.  For example, it wouldn't surprise me to discover that HP was one of the bidders for 3PAR, forcing Dell's hand.

What About EMC?

We're fine, thanks ...

EMC has an incredibly broad storage offering which we've made available to Dell in various forms over the last several years.  Some of it was OEM, some of it was reseller, some of it was sold jointly. 

From EMC's and Dell's perspective, this has worked out quite well for the most part -- they've had access to arguably the broadest and most advanced storage portfolio in the industry, coupled with EMC's expertise to help them in their accounts.  And from EMC's perspective, we've had great access to Dell's customers. 

All good.

That being said, one can't argue with Dell's desire to invest in owning the IP and associated margins with selected product segments.  For example, Dell saw that iSCSI was becoming popular, so they invested in EQL.  At the same time, Dell continues to sell a considerable amount of ostensibly competing EMC-based iSCSI product.

At the end of the day, Dell is very responsive to customer requirements.

Moving up from entry-level to mid-tier storage arrays is logical, so 3PAR becomes interesting.  This product will potentially be competing with our bigger FC-based mid-sized CLARiiONs -- but more likely will be going head-to-head with EVA, DS8000, XIV and the like.

Dell -- unlike HP, IBM and Oracle -- can now offer customers an interesting and unique storage choice: here's the storage product that Dell owns, and here are the products from our partner, EMC.  That's pretty much what happened after the EQL acquisition, and there's no reason to expect it to be different going forward.

And – make no mistake -- there are a lot of joint Dell/EMC customers out there -- something like 24,000 or so, as I understand.  If these folks are happy with what they've already got, they're quite likely to stay with something that's working.

Filling out the picture, there's still a lot of the EMC storage portfolio that moves through Dell for which there is no real internal Dell alternative: the Celerra unified platform, DataDomain and Avamar for backup, even enterprise-class object storage solutions like Centera and Atmos.  And, yes, even Symmetrix VMAX.

And that's before you get into the rest of the extended EMC portfolio: management, security, services, etc. 

Lots Of Hard Work Ahead For Dell

It's one thing to buy lots of interesting bits of technology.  It's another thing entirely to assemble them into a cohesive and rationalized portfolio.  Trust me on this one -- it's not as easy as it looks.

And, when you frame the issue around Dell's strategic challenge in building an integrated, next-generation fully virtualized and cloud-enabled stack and associated ecosystem, there's a long and uncertain road ahead.

The Bottom Line

Dell is doing what it needs to do to compete going forward.  The real story (for me, anyway) is more about the consolidation of the IT industry, and how Dell appears to be investing to square off against a reinvigorated HP. 

I'm sure we could all handicap Dell's latest M&A move -- did they pick the right technology, can they make it work for them, can it compete, etc. -- but I'm sure we'll see a lot more decent-sized IT industry M&A going forward.  From a customer perspective, Dell and EMC continue to work together pretty much as before -- no real new dynamic at a macro level.

One thing is for certain -- it's going to continue to get more and more interesting ...

Comments

[marc farley]

Good post Chuck. There is no doubt that the industry is changing and this move by Dell clearly demonstrates that. Overall it means there will be fewer competitors figuring out how to partner and compete. Those that walk that fine line the best are likely to have the most success. Dell's position is to be open and to try to work with everybody (although the HP/Dell rivalry is bitter at times) and I believe they will figure it out, just as they did following the EqualLogic acquisition.

[Chuck Hollis]

Hi Marc

I enjoyed your post as well on the topic, and -- yes -- you're the guy that's been hit by lightning three times. Must be your magnetic personality?

Like I said, this story is more about what's happening in the industry as it consolidates. And, yes, Dell will likely find a way to make this all work.

Best of luck going forward, Marc. Let me know if you end up at another company -- good basis to buy stock!

-- Chuck

[Chance Bolt]

Hey Chuck,

What gives? 3PAR just gives Dell a mid-range platform to battle HP? Dell has no alternative to VMAX?

EMC has been dueling with 3PAR for high-end (DMX/VMAX) customer deployments for years. I know. And in your own blogs too:
http://thestorageanarchist.typepad.com/weblog/2009/08/2018-perspectives-on-compellent-3par-and-others.html

Maybe EMC's collective head is in the sand, but I doubt it. With Dell betting $1B on 3PAR's high-end storage platorm, more likely you'd rather not have Sym customers wonder why.

Please give us some credit.

- Chance Bolt

[Chuck Hollis]

Hey Chance.

Wishful thinking on your part doesn't change facts. Few people would confuse a 3Par with a VMAX, present company excepted. How about some thoughtful opinions, rather than a random competitive rant?

Much of the analyst opinion was the same: 3Par couldn't find a way to grow outside of its niche, and couldn't turn a consistent profit. They did well to get the price that they did.

As far as giving you credit, that has to earned. Given your comment, it's not going well for you ...

Chuck

[Chance Bolt]

Chuck,

Thank you for the response. Sorry to challenge you like that, but I needed your persuasive best to help me defend our VMAX decision to the bosses -- those Dell guys are gonna be all over them.

If you can point to those analyst options, that would be great. Gartner especially would be valuable.

Many Thanks,
Chance

[Chuck Hollis]

Hi Chance

OK, now I think I know where you're coming from.

A few things to help you?

The best analysts don't post their stuff publicly, you usually have to pay for their opinions. I would suggest Ben Woo from IDC, Dave Vellante from Wikibon and Steve Duplessie from ESG. Reaction was remarkably consistent -- nothing changes very much.

3PAR had maxed out at about $200m revenue and a handful of customers, and nothing was changing much. $200m might sound like a large number, but in the IT hardware biz, it's almost a rounding error. Not bad tech for a company their size, but hardly revolutionary.

Historically, Dell has taken a l-o-n-g time to digest their acquisitions and make a go of them -- that is, if they're going to. For example, EQL took a very long time between acquisition announce and creating a reasonable offer in the market -- but they eventually got there. Maybe Dell will come calling to talk about their new acquisition sometime during 2011, maybe not.

As storage environments become bigger, the context around the product becomes more important: integration with management tools, security, backup, operating systems, hypervisors and applications for example. High quality services before, during and after the implementation. When you're talking VMAX, you're not just buying a box -- even though it's a pretty differentiated box. None of this has been particularly a strong suit for either 3Par or Dell in the past.

Going deeper, if you're forced into a feature-by-feature comparison vs. price, you'll find that we're pretty good at making our case against them and similar competitors that are far smaller in just about every aspect. Usually it doesn't get to that, though.

My apologies for pegging you as just another random competitive sniper. You're right, eventually Dell will come calling -- and we'll make sure you're prepared.

Thanks again!

-- Chuck

[Greg Roody]

Come on guys, when has this industry NOT been interesting to watch? 3PAR is just the latest example of the consolidations, mergers, and crash-n-burns that has been going on for what seems forever (I have a lot of gray hair, much of it from EMC ;) ).

Dell will do just fine. 3PAR has done well (congrats guys). EMC, HP, Oracle, HDS and IBM will just keep on doing what they do. The world of IT or Storage won't change over this, at least not this year.

I liked the way Steve Duplessie put it. A shift in aggravation, but not new aggravation. And yes, I did paraphrase it to keep the color polite. ;)

[Bob D]

Could another storage startup see any significant measure of success in this matured industry? Or is that era over?

The last two years have seen a huge consolidation for our industry.

I can think of only two independent storage vendors that I see actively selling to the enterprise here in S.Cal, Compellent and to a lesser degree Pillar. The sales reps at EMC and Netapp don't see them as a big threat.

[Chuck Hollis]

Bob D

"Could another storage startup see success ...?"

Hard to eliminate the possibility entirely, but also very hard to come up with a scenario where this could happen.

Usually, the motivating factor is (a) some sort of disruptive technology, and (b) established players asleep at the wheel.

Even if (a) happens, (b) has to happen as well. For an interesting thought exercise, consider the potential answers to this question for technologies such as servers and networks in addition to storage.

Thanks!

-- Chuck

[David S]

Dear Chuck,

credit has to be earned I fully agree with you on that, but I believe Dell has already earned that.

I do believe that Dell and EMC have around 24.000 mutual customers, Dell does about 25-30% of your midrange revenue on clarion and celerra through the OEM channel.

Looking at gartners magic quadrant for midrange we see EMC in the top right followed by Netapp and then Dell.

Your statements that we operate within the smaller customer regions where customers value ease of use and simplicity over technologically strong solutions kind of undermine your own portfolio... because that's what Dell is selling in that space.

In all honesty I hope that our relationship will last for a good time to come and we can keep our focus on our mutual competitors rather than belittle eachother.

Kind regards,

David