Dell EMC merger a victory for public cloud?

ANALYSIS

Ramdas S

BENGALURU, INDIA: As expected, Dell has formally announced a buyout of EMC. At $67 billion it’s still a fair price, but over the next 18 to 24 months, Dell will need to deliver.

Both Dell and EMC have confirmed that VMware will remain a public listed company, and EMC will merge with Dell which went private two years ago (about February 2013).

Together these companies are expected to clock revenues in excess of $80 billion during 2016. Now that the deal is technically through, (pending normal clearances from governments, the European Union, other statutory bodies and shareholders) it’s important to look through the crystal ball and see whether it’s still a win-win deal as I wrote in an earlier article.

So what’s the bargain?

You can essentially divide the business which Dell is acquiring into two parts.

The first is the infrastructure piece consisting of the enterprise storage software and hardware, RSA, and VCE. The latter is the cloud piece which is essentially VMware, Pivotal and Virtustream.

In terms of revenue splits, EMC storage revenues are estimated to be $16.5 billion, RSA at $1.08 billion and VCE at $ 300 million. VMware annual revenues stand at $6.5 billion and the company is valued at $34 billion while Pivotal valued at $10 billion, has clocked $230 million in revenues during the last 12 months.

Big bets:

The biggest bet is that the EMC management will hold the strings in this merger. Dell’s server and storage business will be integrated along with EMC’ infrastructure business and will be headquartered out of Hopkinton, Massachusetts where EMC is based.

This would create an Enterprise business which would have immediate annual revenues of over $30 billion including all revenues of EMC storage, VCE, Dell server and storage business.

Meanwhile, I expect the following changes to take place in the next 24 months, provided there are no unexpected hiccups.

•    An IPO by Pivotal. Cloud is winning big time, and Dell’s biggest bet is Pivotal, and the PC major would want to encash on all the hype around it, with an IPO.

•    Moderately massive blood bath once the merger happens which will see a lot of jobs across all major functions including R&D and sales. Dell-EMC will look at a combined savings of close to $1-1.5 billion through job cuts and operational efficiency. Though both Michael Dell and Joe Tucci mentioned that no job cuts would be direct result of a merger, the post-merger scenario will be different. India has huge R&D teams for both Dell and EMC, so impact on India could be high.

EMC anyway had announced job cut plans before the merger, so some of the job cuts may  not really be related to the merger.

•    RSA will remain independent for some time, and then at a later stage will be integrated as a part of Dell Software.

What Dell needs to figure out is a clear cut strategy by synergising Dell security products with those of RSA. If RSA does not fit the larger plans Dell may want to raise some cash disposing it off.

•    Dell may be able to revive VCE with its own servers and networking gear.

Though converged infrastructure market is not healthy, Dell-EMC should do better here. This is where Dell would have a very wide range of solutions starting with PowerEdge FX at the entry level. Cisco will not be kicked out of the plans as much of the reference architecture including VSPEX  has been designed around Cisco’s UCS offerings. And there are also customers with whom VCE is contractually obliged to support till 2020 and beyond.

•    There are several EMC product lines that would also fit into Dell’s server strategy such as DSSD which EMC acquired in 2014, is positioned to solve network latency issues.

DSSD also makes neat PCIe server flash cards which Dell can ship along with servers. Dell’s server strategy so far, was to emulate HP and improve upon its rival. What will be exciting now, will be how well Dell will use the new technologies to grow the server business.

•    Executive movement. It’s clear that Joe Tucci will retire once the merger is completed. Both EMC and Dell have very competent executive team. However post-merger there may not be place for everyone.

EMC had always run the different divisions as independent companies, but Dell has a fairly hierarchical approach.  If Dell indeed decides to execute the Enterprise agenda from Hopkinton chances are that future management will be largely from EMC stable rather than from Dell. There’s already a guessing game among top partners on who all will make it to final team post-merger.

Storage overlaps:

The likely outcome would be a storage portfolio which more or less sees most of EMC product lines retained with a few Dell storage products being carried over.

There are some categories where EMC products have a distinct advantage over Dell’s product lines, while in a few the gap is hardly visible. Take for example in de-duplication, where Data Domain overpowers Dell’s Ocarina.

Similarly in large enterprise tape and back-up solutions there are no real alternatives from Dell compared to EMC’s Avamar and Data Domain. Dell does not have own Object storage line, and EMC has Atmos.

Similarly EMC’s Isilon solutions for scale-out NAS and big data outscore whatever  Dell has promoted so far.

But Dell does have a number of back-up products such as AppAssure, NetVault back-up and vRange which makes it an excellent choice especially for the SME segment. Here again, EMC offers a wider choice with Networker, Spanning, Mozy, and SourceOne. It will not be an easy decision to decide which all products to retain on the software front.

EMC has its own product line which is all market leaders such as ScaleIO and ViPR for software-defined storage(SDS) market which has been competing with Dell who has aligned with Nexenta.

It should be an easy decision to go with EMC’s VMAX line over Dell’s NADA for the enterprise SAN market. But it will be harder choice to come up with the right portfolio in the entry level and mid-market SAN which will be a large market. Equallogic has an excellent iSSCI offering, Data Domain’s Fiber Channel and unified storage offerings are not inferior to VMAX or VNXe. At the entry level SAN market, Dell PowerVault should be retained as EMC was never focused there. Dell still is a very significant player in the SME segment where these products make sense.

In the virtual SAN market, ScaleIO and ScaleIO Node should co-exist with Dell’s EVO post-merger to address opportunities in virtual SAN. In the hyper converged storage market, EMC has Scale IO, and would be preferred over Dell’s partnership with Nutanix which has resulted in the platform XC.

Competitors and partners:

Dell has a number of partners like Scality, Nexenta and Nutanix who should be concerned. Future of these partnerships will be a question mark because EMC has own product-lines that take them head on.

Cisco would be deeply concerned. This deal would obviously get Cisco closer to NetApp and put in more focus on the Flexpod alignment between these two vendors. Cisco might consider acquiring NetApp or at least one of the All Flash Array vendors sooner than later. Cisco would lose some amount of business to Dell servers and Force 10 networking line in some VCE deals.

IBM has stopped competing with Dell on servers following its exit from x86 server market. It will find a far more aggressive competitor in combined Dell-EMC than EMC as a standalone company. But of all major competitors IBM is least likely to be hit by this deal as Big Blue is more focused on its software, services and the cloud.

By November 1, 2015, HP Enterprise will be an independent company, and HP will shop around to build a strong portfolio and may pick up one of the new generation Flash start-ups. HP and Dell have been rivals for many years, and Dell has been wooing HP partners since revamping their channel strategy. A combined Dell-EMC will be a bigger threat for HP Enterprise. But at $ 60 billion HP Enterprise will still be twice the size of Dell Enterprise.

NetApp would be a potential acquisition candidate. Survival as a standalone storage player and the pressure to keep growing the revenues in a market being cannibalized by cloud storage vendors would be a challenge. Another reason to be worried is the growth of server side flash and the sudden reappearance of direct attached storage solutions again powered by faster flash drives. Without having a server product line how can NetApp continue staying independent and growing.

The move is exciting for smaller hybrid and AFA vendors such as Pure Storage, SolidFire, Diablo,Violin Memory, Titri among others. They are all likely to potential candidates for  acquisition.

The cloud world:

Meanwhile, Amazon, Google, Rackspace and Microsoft and a host of cloud players will be using the opportunity to tell Dell-EMC customers and enterprises across the globe to abandon investment in on-premises and jump onto cloud wagon.

The merger is an indication that public cloud has finally arrived even for the enterprise. To a large extent if these vendors did not exist enterprise storage market might still have been growing at healthy double digits since data growth is still exponential. And EMC may still have remained an independent entity.

The article is authored by Ramdas S, CEO, Netzary, and opinions expressed are personal