Zigging when others are zagging can be smart. Dell buying EMC to create a large computer company could be genius – or the last hurrah of a failing business model.
Dell’s perspective is simple: ≈50% of Dell’s revenue comes from PCs, a rapidly shrinking market. Dell needs to get into higher margin, non-shrinking markets if its investors are to make money on a future public offering.
EMC is a higher margin company. Tucci has made good bets with Pivotal and solid state storage. And VMware remains EMC’s jewel, comprising 70% of EMC’s market capitalization. But the problems start there.
Is VMware strategic?
VMware is a high-margin business that is still growing, but other than that, why own VMware? Its market position depends upon treating all resellers and OEMs, including Dell and EMC, equally, so what is the advantage to owning it?
It was Tucci’s best deal ever, spending $625 million for a company that’s grown to a $35B market cap, a 50x return. But that doesn’t explain why, under threat from Microsoft and Docker, it would benefit Dell to own it now, when its best years are behind it.
Costly leftovers
If VMware’s $35B is subtracted from Dell’s $67B offer, it means the rest of EMC is worth $32B, which is a hell of a premium over the EMC minus VMware ($15B) market cap – especially since about half of EMC’s storage business is in a long-term secular decline.
Dell’s strategy
Assuming Dell has a strategy it is that with software-defined-everything, Dell has the commodity hardware piece well in hand. But that is not the challenge large enterprise vendors face.
The challenge is becoming a systems vendor who enables enterprise IT to be competitive with cloud providers. Because if IT can’t be competitive with cloud services, they too will become a rapidly shrinking infrastructure provider – and buyer.
IBM thinks it can build a cloud business – as evidenced by their recent acquisition of Cleversafe – and given their technically challenged base they may succeed. Microsoft is well-positioned too, and if their consumer hardware business succeeds they may well move into higher end hardware. But HP has thrown in the towel on cloud and expect Oracle to do the same.
The question mark
So, will EMC help Dell make enterprise kit competitive with cloud? Timing is everything. If IT maintains a slow uptake of cloud technology, then EMC’s strategy of using VMAX and VNX as cash cows for cloud offerings makes sense.
But if cloud uptake accelerates, those cash cows could die of starvation, leaving Dell with expensive corpses.
The StorageMojo take
The new normal is already here – Amazon Web Services – with Google and Microsoft in the mix. Just as large, vertically integrated vendors disappeared in the 80s and 90s, we’re looking at the extinction of today’s large IT vendors, at least in their present forms.
We’ve moved to a services-based world. AWS is taking a page out of Microsoft’s playbook by encouraging a large ecosystem of supporting businesses. EMC’s core competency is flogging kit, not services.
Given that IBM and HP are both moving away from the traditional enterprise vendor model – focusing on services rather than hardware – Mr. Dell is either a brilliant contrarian or a damn fool. My bet is on the latter.
Joe Tucci wanted to sell EMC because he saw it heading for a cliff. He told a great story to Mr. Dell, but after the deal closes it is Dell, not Tucci, who will have to produce the show for a skeptical audience.
It won’t end well.
Courteous comments welcome, of course.
Not every app works in the cloud. There will continue to be a need for non cloud systems. There will also continue to be a need for private systems as well, cloud and not cloud.
VMware provides a stable alternative to physical systems that can provide HA with a little extra cost. Its ideal for giving small IT departments agility and can scale.
Its an expensive way to do cloud, but an inexpensive, reliable way to do traditional IT.
Tom, but what is the value of owning VMware? I don’t doubt that VMware offers useful products or that it will be in business for many years to come.
EMC made a lot of money owning it. It certainly is a going concern and profitable. But what is the benefit to company that owns it, other than the cash flow and profits?
Robin
The PC market is in it’s doldrums, but there is always another day. The reality is that the EMC Isilon platform, appliances made out of commodity hardware, is really the way that servers should get deployed outside public clouds. The trouble is that this will mostly be filled by commodity boxes at commodity prices — high margins will only be possible with high value.
For a long time the wisdom was you could not compete with Intel, but I think that rule has changed. Look at HP with the memristors, or IBM’s microchannel cooling system that let today’s 360 mainframes outclock Intel by a large margin. You could say that the PC market is not being eaten by tablets and laptops, but rather that the envy of tablets and laptops has pushed a false god of power efficiency and thus you can’t buy an x86. computer which is much faster than an Intel machine from 4 years ago.
A big company can better afford to pursue “moonshots”, and Dell will need to hit at least one to stay relevant.
I think Dell is trying to become the commodity “Cloud In a Container” vendor. They could be aiming to create a ready-to-use, everything included (servers, storage, virtualization stack, etc.) “Cloud Boxes” that could be cheaply delivered and operated by Cloud providers around the world (emerging market, perhaps?). Same as they delivered millions of commodity PC to consumers and businesses, then hundred of thousands of commodity servers (pizza boxes) to datacenters around the world. This ‘next step” of commodity could either amaze us all, or make for an expensive flop. I’m not sure which one it’ll be, to be honest. Either pure genius or multimillion dollar craziness.