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.
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.
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.