November 9, 2015
The acquisition of EMC by Dell has is generating an immense amount of hype and prose, much of it looking forward at how the merged entity will try and compete in cloud, integrate and rationalize its new product line, and how Dell will pay for it (see Forrester report “Quick Take: Dell Buys EMC, Creating a New Legacy Vendor”). Interestingly not a lot has been written about the changes in the fundamental competitive faceoff between Dell and HP, both newly transformed by divestiture and by acquisition.
Yesterday the competition was straightforward and relatively easy to characterize. HP is the dominant enterprise server vendor, Dell a strong challenger, both with PCs and both with some storage IP that was good but in no sense dominant. Both have competent data center practices and embryonic cloud strategies which were still works in process. Post transformation we have a totally different picture with two very transformed companies:
- A slimmer HP. HP is smaller (although $50B is not in any sense a small company), and bereft of its historical profit engine, the margins on its printer supplies. Free to focus on its core mandate of enterprise systems, software and services, HP Enterprise is positioning itself as a giant startup, focused and agile. Color me slightly skeptical but willing to believe that it can’t be any less agile than its precursor at twice the size. Certainly along with the margin contribution they lose the option to fight about budget allocations between enterprise and print/PC priorities.
- Dell becomes a giant. Dell has meanwhile acquired the largest player in the storage industry, complete with a declining core legacy business and a smaller portfolio of rapidly growing products in security, flash and object storage. Dell will also own VMware, the glue for most enterprise virtualization environments and the perennial cloud aspirant. Dell will now be substantially larger than HP, rivaling IBM in size, albeit with a very different portfolio.
The competitive dynamics between the two companies will take years to fully evolve, but I think a couple of key factors will be significant as they maneuver:
- It may turn into a battle of financial endurance and R&D investment. Both companies may be limited by R&D investments. While I have to believe that HP’s new management worked this out ahead of time, it is hard to see where HP is going to generate the margins to apply to the R&D it needs to prosper, especially without the cushion from the previous HP Inc. consumables business. My suspicion is that HPE will have to make a continuous set of compromises such as its decision to abandon its attempt to become a public cloud provider. HP’s historical R&D was in the range of 3% of revenue (PC and other high-volume device companies typically have lower R&D than large systems companies), and it will have to realign its investments as it enters this new arena. Dell has had historically low R&D as well, although its finances have been opaque since its privatization, and it will take on a large additional debt burden to finance this acquisition. EMC has been operating with R&D in the range of 14% recently.
- Dell will enjoy an immense tactical advantage from its ownership of EMC. Previously, neither company was really a major force in the storage industry outside their own installed bases. Both sold respectable volumes of storage attached to their own installed base, but neither had much success in selling outside that base. EMC totally changes this dynamic, since EMC appears to be the most commonly installed external storage in HP’s enterprise customer base, with its predominance increasing with customer size. Dell now has a strong connection with the most important segment of HP’s installed server base – the large enterprise customers who continue to buy HP’s highest-margin servers. This does not guarantee they will move immediately from HP to Dell, but it does mean that Dell has access and opportunity to bundle at either a technical or commercial level, and storage purchasers have both money and influence.
Both companies are struggling to find the right cloud strategy. HP appears to be retreating into an enterprise private cloud centered approach, and Dell’s cloud initiatives are also a work in progress under a largely new management team brought in, many from HP.
Dell and Clouds
My colleague Lauren Nelson observed that there are a number of interesting synergies for Dell in its pursuit of cloud business at multiple levels in the deal. On the public cloud side vCloud Air and Virtustream overlap in some ways, and one of the first announcements from the federation was that they are joining these groups together. Dell also has its cloud management solution, Dell Cloud Manager that sells on top of converged systems, with hosted private cloud, or as a standalone solution.
Taken as a whole, while the existence of so many moving parts implies a complex balancing act to get them together in an optimal form, the new merged entity is in a stronger position to address a range of private and public cloud opportunities than it was before. If asked, I would tell them to tread lightly before attempting to compete in the public cloud arena without some significant and currently TBD differentiation.
Ramifications for Customers
Customers basically need to exercise common sense and not leap to any major decisions. While we cannot predict exact moves, we can help with some general guidelines:
- No sudden changes in products. Dell will not radically alter EMC’s current product lines with the exception of possible divestiture of some of its assets (security and part or all of VMware are discussed as candidates). As a result, nobody needs to be concerned that their core enterprise products will become unavailable. Look for continued investment by EMC in unified management and software-defined storage.
- VMware will not become a “Dell proprietary thing”. It would be the height of idiocy for Dell’s management to even consider diluting VMware’s vendor-neutral positioning, so no need to even worry about this for at least the next several years.
- Expect major churn in various converged infrastructure partnerships as Dell inserts (or attempts to insert) its server IP into VCE, VSPEX, and every other EMC converged or bundled partnership over time. If Dell is even half-way adroit in exploiting this new synergy there will be a full-court press to get all channels of the merged company to carry both product sets.
- Expect aggressive bundling of Dell servers with EMC storage over time. This will result in fabulous opportunities for medium to large purchasers to exploit a life and death competitive dynamic between Dell and HP.
When all is said and done, the acquisition of EMC by Dell will trigger a new wave of innovation and aggressive competition in the core infrastructure segment, and that is a rising tide that will lift a lot of boats.