Will Dell make it big with EMC?
Mumbai: Dell Technologies chairman and chief executive officer Michael Dell is determined to change the common perception of his company—that it’s a traditional maker of low-margin products like personal computers, servers and storage systems.
The view changed little even after Dell said in October 2015 that it will buy EMC Corp. Now that the merger of the two companies is complete, Dell’s strategy to alter this view is revolving around quickly rolling out new infrastructure products that have been jointly developed by Dell and EMC teams, cross-selling them to clients of both, strengthening existing partnerships with firms like SAP AG, Microsoft Corp. and Oracle Corp., and forging new ones even with competitors like Amazon Web Services Inc.
Dell executives say they are best suited to help clients go “digital” with the combined entity’s broad technology portfolio, which not only comprises computing products but also services and solutions in the areas of hybrid cloud, software-defined data centres and converged- and hyper-converged infrastructure (integration managed by software), platform-as-a-service, data analytics, mobility and cybersecurity.
This multipronged strategy was evident when Dell took the stage at the first-ever Dell-EMC World 2016 event in Austin, Texas, on 18 October, and gave an impassioned speech that had all the trappings of a successful road map for next-gen computing.
Beginning with a reiteration of the ‘Go Big or Go Home, Baby!’ slogan delivered at last year’s Dell event, he peppered this year’s speech with technology buzzwords like digital, the Internet of things (IoT), augmented reality (AR), virtual reality (VR), machine learning, deep learning and artificial intelligence (AI).
Alluding to Dell’s Digital Transformation Index , Dell underscored the presence of a “digital fear” among the 4,000 business leaders across 16 countries and 12 industries that were surveyed as part of a recent report. His pitch: “This (digital) future is coming very rapidly and the future does not care whether you are ready. But we do... (We are) the trusted provider of essential infrastructure for the next industrial revolution.”
Dell evidently believes in economies of scale, made evident by his ‘Go Big…’ slogan. The Dell-EMC merger, announced last October, was the largest deal in tech history, topping Avago Technologies Ltd’s $37 billion purchase of Broadcom Corp.
Dell Technologies is now a $74 billion company that comprises a PC business and affiliated businesses including virtualization (the partitioning of a physical server into smaller virtual servers in a bid to reduce costs) company VMware Inc., security firms RSA Security Llc and SecureWorks Inc., software and services (including cloud and Big Data analytics) company Pivotal Software Inc., and cloud management software firm Virtustream Inc. Dell’s eponymous combined business now comprises two segments—Dell EMC is the sub-brand for the company’s enterprise business, including products and solutions, and Dell is the sub-brand for the company’s client solutions for consumers, business and institutional customers.
Dell plans to go about the task of ramping up business growth also by touting that the combined company “stands as a market leader in many of the most important and high-growth areas of the information technology (IT) market, including positions as the ‘Leader’ in 20 Gartner Magic Quadrants and a portfolio of more than 20,000 patents and applications”.
Does the pecking order bear out Dell’s claim?
To be sure, the worldwide IT spending figure augurs well for technology companies like Dell Technologies, which figures in the top three in PCs, servers and storage.
Overall IT spending is forecast to reach $3.5 trillion in 2017, up 2.9% from estimated spending of $3.4 trillion this year, according to Gartner Inc. According to the research firm, software and IT services segments have been the bright spots. Software spending is projected to grow 6% in 2016 and another 7.2% in 2017 to total $357 billion, while IT services spending is forecast to grow 3.9% in 2016 to $900 billion and 4.8% in 2017 to $943 billion.
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The total worldwide enterprise storage systems factory revenue remained flat year-on-year at $8.8 billion during the second quarter of 2016, according to research firm International Data Corporation’s (IDC’s) Worldwide Quarterly Enterprise Storage Systems Tracker. EMC and HPE (Hewlett Packard Enterprise) accounted for 18.1% and 17.6% of spending, respectively, of the enterprise storage market (IDC declares a statistical tie when there is less than 1% difference in the revenue share of two or more vendors.). Dell held the next position with 11.5% share of revenue during the quarter. International Business Machines Corp. (IBM) and NetApp Inc. accounted for 6.8% and 6.7% of global spending, respectively.
Sales of server-based storage were up 9.8% during the quarter and accounted for almost $2.4 billion in revenue. External storage systems remained the largest market segment, but the $5.7 billion in sales represented flat year-on-year growth. However, according to Liz Conner, research manager of storage systems at IDC, “…spending on all flash-based storage deployments continues to grow and help drive the market”, following the decreasing cost of flash media, deployments and availability of flash-based storage products (a sharp focus area for the combined entity, Dell Technologies).
In the same period, worldwide server revenue declined 0.8% year-on-year, while shipments grew 2% from the second quarter of 2015, according to Gartner. Dell moved into the top spot in shipments, while HPE remained the worldwide leader in server revenue.
Dell garnered 19.3% of the market and moved into the No. 1 position in worldwide server shipments due primarily to growth resulting from programmes it has in place in the Asia-Pacific region, most notably in China. HPE continued to lead the x86 server (Intel-based server) market in revenue with 26% of the market. IBM secured the third position with 9.1% of the market, but experienced the largest decline among the top five vendors, according to the Gartner report.
Notwithstanding the scepticism over the merger, there is certainly some merit in Dell’s claim over the economies of scale that this merger can achieve even as there remain formidable challenges that continue to keep some analysts and clients sceptical. The challenges include concerns over the sum paid for the acquisition, integration challenges, some overlap in products and technologies between Dell and EMC, leadership issues in the combined entity, and partnership conflicts since some Dell partners compete with EMC and VMware.
“Michael has an opportunity to redefine computing if he reinvests on innovation and can pare back the debt,” said R ‘Ray’ Wang, principal analyst, founder and chairman of Silicon Valley-based Constellation Research Inc. He, however, pointed out that customers and partners remain sceptical, wondering “if this is an exercise to sell off the parts of the acquisition to pay down debt and save Dell, or a strategic play to own the cloud and the future of the data centre”.
“Shedding the enterprise software assets leads us to believe that this may not be an innovation play yet but a move to sell off assets to save Dell. The experience at HP Enterprise is what customers are scared of. They don’t want to see their favourite vendors exit the market where massive investments have been made. The challenge is having two legacy players come together for innovation. The math in the accounting makes it hard to believe what innovations will come about. Dell did attempt to address this road map at Dell World but most of our clients remain sceptical,” said Wang.
Dell is also a contrarian when it comes to defying certain technology trends. For instance, Dell became a private company on 5 February 2013, in a deal led by Silver Lake that was valued at $24.9 billion—the biggest leveraged buyout since the financial crisis—even as other tech firms seek stock market listings. Second, he believes in mergers and acquisitions even as competing companies like Hewlett Packard have split their businesses. Third, while the world is betting on smartphones, his company no longer makes them.
“I don’t think the world needs another smartphone company,” says Dell. “A smartphone is just another node,” explains Dell, adding that “all the information you get on a smartphone comes from a data centre. And what you upload, goes back to the data centre”.
This, for Dell, is a business opportunity since his company provides servers that are used by data centres.
Wang agrees that the smartphone market is “a bad one to be in and is not worth it when you don’t own the OS (operating system)”.
However, the fact is that even as Dell remains optimistic over the future of the PC (desktops and laptops), worldwide PC shipments totalled 68.9 million units in the third quarter of 2016, a 5.7% decline from the third quarter of 2015, according to the preliminary findings of Gartner. This was the eighth consecutive quarter of decline in PC shipments—the longest streak in the history of the PC industry.
Lenovo Corp. continued to be the worldwide market leader based on preliminary PC shipments, but HP Inc. is nearly tied for this top spot. Segment-wise, Dell claims his company is No. 1 in PCs in terms of revenue but Dell ranked third in terms of shipments with a share of 13.5% in the third quarter of 2016. (All these rankings could change when final shipment results are published by Gartner.) Dell is insistent that revenue is more important than shipments.
Banking on innovation
“We have been growing (the PC business) for 15 quarters. We want to be profitable so that we can reinvest in innovation,” he says. Part of his company’s “innovation” is around the “PC computing system”, as Jeff Clarke, vice- chairman of operations and president of client solutions, puts it. “There is much innovation in the PC computing system... like the computer becoming personal and new experiences with AR/VR that provide users with new ways to interact,” explains Clarke.
In a 7 September blog, Clarke also points out that “…beyond the device, workforce transformation requires a cloud-based infrastructure to support people’s new behaviors, new devices and new expectations”, which EMC can provide. He also underscored the importance of Airwatch (now a Dell company) as an “EMM (enterprise mobility management) solution for managing phones and tablets”.
“And with cloud client-computing VDI (virtual desktop infrastructure solutions) from VMWare, we are the only true end-to-end VDI provider in the industry, from planning to deployment, data center to the endpoint, on- and off-premise. Bottom line: Combining EMC’s cloud capabilities with our award-winning PCs, we have just created a very powerful solution,” wrote Clarke.
For instance, the Dell-EMC product collaboration has resulted in products like VxRail—a hyper-converged infrastructure solution from VMware that includes fifth generation Intel Xeon processors and Dell’s PowerEdge servers. As opposed to a converged infrastructure model (also known as hardware-defined) where the server, networking and storage can be separated if needed, in a hyper-converged infrastructure (referred to as software-defined) the components are integrated and hence cannot be split.
The other part of “innovation” revolves around Dell’s belief that IoT is “fundamentally changing businesses”. Explaining his rationale for why “we created Dell Technologies”, Dell says the planet is becoming “more intelligent and more connected by the minute, and ultimately will become intertwined with a vast Internet of Things, paving the way for our customers to do incredible things”.
Dell elaborated in his speech that “as the cost of making something intelligent approaches zero dollars, intelligence is being embedded into every aspect of our physical world. We have about 8 billion connected devices on the planet, and 15 years from now there will be 200 billion or more, and all these sensors and nodes in those devices will provide access to a host of new digital applications, creating massive new sources of information.” Using this information to provide better insights and build a better world may be the biggest opportunity in history, he said.
Using the premise that “everything improves about 10x every five years”, Dell in his speech also envisioned a future with smart cities, driverless cars and nanobots that cure cancer and repair cell damage. He added that “overnight shipping will seem like snail mail compared to the instant gratification of drone delivery... AR and VR will redefine work, learning and play... machine learning, deep learning, AI and unsupervised learning to all this data will unleash a torrent of innovation and progress and solve some of the world’s greatest challenges”.
Towards this end, Dell and EMC have made a cumulative research and development (R&D) investment of $12.7 billion over the past three years and plan to invest $4.5 billion in R&D this year, “which is multiple times what the competition is investing”, Dell said.
Dell, for instance, has invested in six worldwide global command centres where technicians constantly monitor events like flight delays, traffic jams, weather conditions, earthquakes or even unsettling events like riots that might impact the company’s ability to handle a support call. The technicians track live tweets, live broadcasts of news and weather, and map the location using geographical information systems and Google Earth—all in a single window using a customized interface. India (Bengaluru) does not have a global command centre but has a social media listening command centre.
In June, Dell’s Extreme Scale Infrastructure group unveiled Triton—a liquid cooling technology that scores over traditional air-cooled solutions for data centres. It designed this water-based system to cool server chips (developed with Intel Corp.) in eBay.com’s data centres.
In an 18 October note, Mike Krell, lead IoT analyst at Moor Insights and Strategy, agreed that Dell Technologies was “uniquely positioned to help customers solve their IoT puzzle”. Dell, Krell wrote, combines experience and credibility with specific vertical market enterprises, “a curated partner ecosystem with deep vertical knowledge, the industry’s broadest offering of IoT-focused infrastructure, and an ability to provide a world-class customer experience to help customers solve specific IoT problems—today”.
But will ‘Go Big…’ work for Dell?
Dell’s growth strategy also revolves around acquisitions, which Dell says will “continue”. Ever since Michael Dell returned to the company as its chief executive in 2007, the company has spent as much as $15 billion on more than 30 acquisitions prior to the $67 billion EMC purchase. These included EqualLogic ($1.4 billion; storage area networks, where EMC dominates), Perot Systems ($3.9 billion; IT services), SecureWorks ($612 million; security services, where EMC’s RSA division has a big presence), Force10 ($700 million; data centre Ethernet switches) and Quest Software ($2.4 billion; system management and security software), among others.
However, not all of those acquisitions have done well for Dell, including some with a significant presence in the Indian market (security provider SonicWALL, for instance). According to a 20 June report on TechCrunch, while Dell had reportedly paid $3.6 billion for Quest Software and SonicWALL, it was only able to recoup around $2 billion for the duo when it sold them to private equity firm Francisco Partners and hedge fund Elliott Management. Dell also had to sell Perot Systems to Japan’s NTT Data Corp. for $3.1 billion in March.
Nevertheless, analysts like Ashish Nadkarni, program director for IDC’s worldwide infrastructure practice, believe that “having a bigger, more full-service portfolio allows the combined company (Dell Technologies) to address a wide range of use cases in a very holistic fashion”. In a 16 April note, he pointed out that these solutions could be diverse and even emerging, like IoT and real-time analytics. “Dell and EMC can likewise take advantage of synergies when it comes to joint go-to-market efforts around compute, storage, and networking solutions,” wrote Nadkarni.
He also believes that since Dell Technologies is a privately-held company, it will be able to offer the “flexibility of interesting product road maps and solutions as well as additional purchasing options, like subscription-based offerings, free from the 90-day shot clock pressures typically exerted on public companies”.
On his part, Dell is clear that his company needs to “savour customer relationships”. He concludes: “There are many customers who do not want to change, and we don’t want to change them. There are plenty of opportunities for cross-selling. When we looked at the top 5,000 Dell customers and the top 5,000 EMC customers, we found only 1,000 common ones. So there are enormous opportunities to cross-sell among the portfolio. Customers are excited about that too—they actually like the fact that we are bringing everything together with these engineered and integrated solutions. That’s what we are focused on.”