Dell and EMC -- The Aftermath

So much has been written about the tech industry's largest buyout -- a mind-numbing $67 billion.

It's been exactly one week since the announcement -- just enough time for me to get my thoughts in order. 19 years at EMC, two years at VMware -- yes, I'm entitled to an opinion or two.

As you might expect with a transaction of this magnitude and complexity, it's going to take some time. I figure 9-12 months to close, another 6-9 months of getting organized, so we'll be well into 2017 before we all know how it ends up. That's two years from now -- assuming that there aren't any significant legal challenges.

Here's the problem: a lot can happen in two years. Not good to be sitting on the sidelines, waiting for future clarity.

As with everyone who's been involved with EMC, VMware and all the other players, there are mixed emotions all around. Some of the articles got a few key points right, a few I thought were way off base.

And there was a whole lot of echo chamber.

Bottom line: although I wish all my ex-colleagues well, this event does not bode well for those employed by horizontal technology vendors.

Not them, not their customers and not their partners.

You Can't Fight Industry Physics

If you're in the hardware business, you know the drill. Every new product is bigger, faster and better than the one it replaces. You can't easily raise prices, so you end up delivering much more bang for the same buck, year after year.

Except there's a problem. Technology demand isn't keeping ahead of industry supply.

Every year we vendors get faster components, we learn how to assemble and deliver them more efficiently, etc. or our competitors will each our lunch. But not everyone needs hundreds of cores, terabytes of RAM and petabytes of capacity.

Speaking from my storage perspective, a decent entry-level array today does what a high-end array did just a handful of years ago, and for a fraction of the cost.  Ditto with servers, etc.

If your requirements aren't expanding, you can keep your kit around for a very long time. Three years used to be the norm, now it's more like five and sometimes seven. Very much unlike smartphones in that regard.

We IT vendors continue to pile ever-more features onto existing products; hoping to differentiate ourselves and claim a meager premium. But how many people are actually going to need (or use?) all those features?

Not enough.

So we see ASPs (average selling prices) inevitably drift downward over time.

Dell has built their business largely on the back of PCs and servers. EMC, storage arrays of all types. Neither can fight this form of gravity for long. As a result, both have invested in promising expansion businesses --- but it's nowhere near enough to offset the magnitude of the fundamentals at play here. With the exception of VMware, none have really turned into barn-burners.

And even VMware is not immune to these forces. After all, how many new CPU sockets need to be virtualized once you've virtualized almost all of them? The sockets themselves get bigger and faster every year. Not a pretty long-term picture if you're in the hardware business: physical or virtual.

On an optimistic note: Dell has figured out to move a lot of aggressively-priced tin. Not clear if they're actually making money at it, but they know the drill. The race to the bottom has been accelerated.

Yes, There Are Synergies On Paper

Dell wants to do better in the enterprise. I can vouch for the fact that EMC does enterprise quite well. EMC never really cracked the code on how to go downmarket; Dell certainly has. So, just looking at market coverage, there's a potential win here.

But it's not going to overcome gravity.

EMC could never really get close to a server vendor; preferring to be agnostic. Indeed, rampant server / OS / hypervisor diversity makes the EMC independent storage proposition all the more attractive. EMC did make a valiant try to get close to Cisco with servers (witness VCE), I believe the Dell tie-up will allow tighter integration between server and storage; especially important as hyperconverged solutions become more popular.

However, there's a downside: name a server/storage vendor that's successful outside their own base. Time's up: there aren't any. HP, IBM, Dell, Fujitsu, the old Sun, Dell ... they all sell servers and storage together.  Maybe this is good for NetApp and Hitachi and the rest of them? Apply traditional TAM (target available market) sizing, and a big piece of EMC's storage business goes away.

Coordinated M&A is another potential; both companies have demonstrated a flair for good acquisitions. And there are other synergies out there as well -- that is, before we get to "cost efficiencies", e.g. laying off scads of people.

Yes, It's About Cloud -- But Not Like You Think

So many industry writers pointed to Amazon's (and Microsoft's and Google's) success in the cloud as being the driving force behind this transaction. Not exactly so, in my book.

I'll give partial credit for Big Cloud aggravating the industry supply side of the equation. Lots of IT infrastructure now available as-a-service. But there's another side to this.

If any of these pundits were to spend time actually talking to enterprise IT folks, they'd realize that -- yes -- cloud matters, but not like they think.

No surprise, enterprise IT groups tend to focus on critical workloads. These important workloads aren't going to a commodity cloud anytime soon, and for good reasons. Instead, enterprise IT buyers want a convenient consumption option that's compatible with what they have on the floor: same tech, same operations, same data protection, same security, etc.

Neither Dell nor EMC really had this important strategic capability prior to the acquisition. I can only guess this will be a priority going forward, but it's going to take a lot of capital in addition to the $67 billion that's already spoken for.

Hard for me to see how this is going to get done in the next two years, given everything else that's going on.

Obligatory Oracle plug: one of the many things that attracted me to Oracle is that they already have a successful enterprise cloud portfolio aimed at this exact use case. It doesn't get the same headlines as the biggies, but it certainly is a force to be reckoned with in the enterprise IT world.

And The End Of The Federation

You've got to give Joe Tucci and the EMC leadership team their due in trying to make an avant-garde business model successful. In places, it was the right combination -- just not in enough places. On paper, it looked like it might have worked in time.

The reality is that it was *really* hard to get any meaningful coordination going across the different sub-companies. Each was focused on their own proprietary mission, first and foremost -- just as designed.

In my mind, you can't have it both ways. You either impose strong leadership focused on a singular mission (as Oracle has done), or you leave various business units to largely go their own way, as EMC has done.

In some ways, the market has spoken.

The Aftermath

My acquaintances at EMC and VMware realize they're in for a bumpy ride going forward, and more than a few are evaluating their options. Just as you'd expect. Unfortunately, EMC and VCE punishes people for working for them in the form of a very draconian non-compete.

What are these people supposed to do, sell real estate?

Many resellers and value-added partners have built their businesses on the EMC and its federation. They, too, are probably evaluating their options as we speak. From a customer point of view, I'm sure there's a bit of extra hesitation when making that next big purchase. I know I'd be hesitant as well.

One thing everyone craves is a degree of certainty about the future. Thankfully, I now work for a company that can offer that.

In related news: tech IPOs for on-premises equipment seem to have lost their lustre. Pure Storage didn't set the world on fire, and there's maybe a half-dozen similar small companies thinking about their future.

Over-supply hurts everyone: both established players and newer entrants.

The Oracle Perspective

It's pretty simple, really.

Applications and databases are the most critical part of the enterprise IT landscape. More often than not, they run on Oracle software. Oracle has created both a focused infrastructure portfolio as well as a compatible cloud consumption offer behind this unfairly strategic part of the IT landscape.

While it's true that Oracle software runs on almost anything, it's also true that it runs better, faster, cheaper and more securely on Oracle infrastructure solutions: be they on-premises, in the Oracle cloud, or both.

Good luck to both Dell and EMC.

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Comments

[Steve]

Hey Chuck, quick question - on your comment

"Unfortunately, EMC and VCE punishes people for working for them in the form of a very draconian non-compete."

Sure they chanced down Donatelli but why did they just let Jonathan Martin waltz over to Pure - VERY bizarre. Don't get me wrong, I love Jonathan and worked with him at Veritas - Just curious...

Thanks
Steve

[Chuck Hollis]

Hi Steve

Not every enforcement of the non-compete is public knowledge. I have no knowledge of Jonathan's specific situation.

And, yes, it's curious on multiple levels

-- Chuck

[Alon]

It's pretty simple Martin was employed in CA, Donatelli in MA

[Chuck Hollis]

... and that would explain things.

[Alon]

EMC stance may have helped its own cause, but overall its a bad practice that I believe should be not allowed in MA the same way that it is not allowed in CA. Free market should allow free competition. Good for the employees and good for the economy.

http://www.betaboston.com/news/2015/10/13/emcs-staunch-defense-of-employee-noncompetes-stunted-the-growth-of-startups/

[Michael Owen]

A few things that I think are missed in most of the articles I see on the merger. First is financial on that there is a $20M difference in Tucci's pay by selling to Dell instead of retiring at the end of the year. In addition the EMC federated model is Joe's life's work. Tough to let Elliot come in and sell it off for the pieces.

As a ten year EMC veteran I think the biggest hurdle that has to be overcome is the culture of the two companies. In this instance the Walmart of IT has bought the Neiman Marcus. EMC was made great by the people and they stayed there because they were very well compensated. Dell's goal is to drive the value sale out of every piece of infrastructure. They are a supply chain company and not a technology company. EMC is at the opposite end of the spectrum and customers bought it because of perceived value. My gut tells me that Dell will ride the maintenance and refresh stream into the ground just as they have with EqualLogic and Compellant. Either way EMC will become a footnote in IT history just like all of the companies they used as examples for the last 15 years.

[Chirs]

Hey Chuck, what is your take on the competition provided by Veritas- esp. now that its thrown Symantec's shackles?

[Chuck Hollis]

I do have to say, I've always liked the idea of a software-only storage / information mgmt company. Veritas was certainly a force to be reckoned with back in the day.

I'll certainly be tracking them going forward ...

-- Chuck