Given that the phrase "our current economy" has such a negative connotation, EMC's third-quarter earnings report last week was downright upbeat.
EMC surpassed its own optimistic guidance for the fiscal quarter just ended by 4 percent. Wow. Other phrases like "increasing confidence among customer in spending their IT budgets" and "very weak first quarter progressing to more normal third and fourth quarters (of 2009)" were heard on the conference call with analysts. Cool. Happy days are here again for the storage industry, right? Well, it depends.
EMC is still regarded as a bellwether for the rest of the storage industry. Indeed, Information Storage as a line item in EMC's third-quarter 2009 financial report accounted for 65 percent of EMC's Information Infrastructure revenues. Upbeat forecasts are often extrapolated to other publicly and privately held storage companies. But EMC is changing. While it's still "where information lives," strategic initiatives include cloud computing, security, broader IT services, and of course, virtualization. It's a very different storage company than the rest of the pack in that all of these initiatives now contribute directly and indirectly to the growth of its Information Storage division. No other storage company operates under EMC's model.
Additionally, there are forces currently at work in the marketplace that tend to mitigate against either raw storage growth or profit margins. Data deduplication technologies are now in the mainstream of IT operational processes. Reducing physical storage requirements by a factor of 20:1 for a growing number of data types is increasingly commonplace, reducing the demand for raw physical storage. And while cloud storage is the latest craze, it's a tough place to generate profit dollars. Cloud storage buyers like commodity hardware, open-source software, and a DIY attitude.
I agree with EMC's executives, who are predicting that the storage industry can expect to see purchasing activity returning to somewhat normal levels in the coming quarter and extending into 2010. But I don't think we'll see a rising tide that automatically floats all boats. Rather, positioning and an ability to integrate with other things--platforms, applications, processes--will be key predictors of success.
Again, let's look at EMC. No doubt, VMware is now an indirect growth contributor to EMC's Information Storage division. The same is true for 3Par, Dell/EqualLogic, HP/LeftHand, and NetApp. It should by now be clear that integration with server virtualization is goodness if you're a storage vendor.
Positioning in the storage cloud is chic but risky at the moment. Nevertheless, if you as a storage vendor can survive the harsh profit environment, your reward will come in due course. Cloud service providers are getting away with the data center equivalent of murder right now. Security is all but nonexistent and incidents of data loss are increasing. Yet providers are still able to sign-up customers who ignore the fine print in the service agreement that absolves them of all liability. That will change. And when it does, the demand for infrastructure that supports a higher quality of service will rise.
Then there are the "stack" vendors--those who are now pursuing an end-to-end, application-to-disk and everything-in-between product integration strategy. These include IBM, HP, Oracle/Sun (yes the deal gets done), and Cisco/EMC. The move by enterprise IT to virtualization and by inference, the cloud, drives this integration. And one interesting and perhaps intended consequence is this: In the world of the integrated processing stack, all becomes visible. A vendor like Cisco supplying new data center network infrastructure to a customer (Data Center Ethernet for example) can also see and respond to needs for upgraded storage (from partner EMC), new server connection devices like NICs and HBAs, upgraded management software (again from partner EMC). Virtualization gives stack vendors a sales opportunity vantage point that plays directly to the integrated stack strategy. Should smaller point-product vendors be pursuing an integration strategy with them? You bet.
There once was a point in time when the storage industry stood proud, broad-shouldered, and fiercely independent. Remember when storage mavens scoffed at Scott McNealy's "storage is a mere feature of the server" pronouncement? Sorry, but those days are gone. Integrate and prosper.
Earlier this week, EMC revealed that it has attracted longtime Intel executive Pat Gelsinger to run its storage business.
Gelsinger is set to become president and chief operating officer of EMC's Information Infrastructure Products (virtually all in EMC's product group except VMware), including the Enterprise Storage Division, RSA Information Security, Content Management and Archiving, and Ionix IT Management. His direct reports will be Frank Hauck, who now leads ESD, Mark Lewis of CMA, Art Coviello of RSA, and Jay Mastaj of Ionix.
A Wall Street Journal blog post quotes Gelsinger as ultimately wanting to be Intel's president, but that wasn't something that was going to happen anytime soon. In that the move is effective immediately, Gelsinger will likely not be a keynote speaker at the Intel Developer Forum, as originally planned.
Pat Gelsinger
(Credit: Intel)Gelsinger is an interesting acquisition for EMC, as it diversifies its way toward encompassing more and more traditional IT infrastructure products and services, as well as IT virtualization and emerging cloud-computing models. His chip geek credentials are solid. He wrote the book on programming the 80386, and he designed the original 486 processor. At EMC, he will move to bring to market products based on a tighter integration between existing product lines, as well as those from VMware and some key partners (read Cisco Systems).
While Gelsinger is a hard-driving executive, he reveals an actively spiritual side of himself in his book "The Juggling Act: Bringing Balance to your Faith, Family, and Work."
While the Gelsinger move seems to have attracted the most media attention, there's way more to this story. As part of the executive personnel announcement, Howard Elias was promoted to president and chief operating officer of information infrastructure and cloud services at EMC.
Previously, Elias was president of EMC Global Services and EMC's Ionix IT management group. He will now be responsible for all of EMC's service groups, including those attached to the products groups. Elias also gets to champion EMC's moves into cloud services.
For me, the hidden word here is "services." IBM spawned IGS. HP bought EDS. There's a void here that I think Elias has to fill. Can Elias give EMC a services powerhouse? Can he successfully blend the more traditional IT services with the newly emerging cloud-computing models? As I see it, those are Elias' challenges.
What's going on at the top? First, Tucci believes that the current executive management structure needs to be enhanced and expended, as it progresses from $14 billion in annual revenue to a $20 billion to $25 billion IT infrastructure company capable of competing with the likes of IBM and Hewlett-Packard. Hence the division of responsibility along the line of products vs. services.
The Wall Street Journal reports that Tucci has, with this new management structure, set up something of a three-way, three-year competition to become his successor, as Tucci also announced that he plans to remain president and CEO through 2012. Now in the running, according to the Journal report, are Gelsinger, Elias, and David Goulden, EMC's current executive vice president and chief financial officer.
Tucci is certainly laying his cards on the table for Wall Street to see, and Wall Street appears to like the move, pushing EMC shares upward over the last week. His latest moves help discourage rumors that EMC is in play as a takeover candidate.
The Data Domain thrill ride ended this week when EMC upped its offer for DDUP to $33 per share (a whopping $2.1 billion dollars, or 111 times Data Domain's earnings), after which NetApp bailed out and went home.
Then came another surprise. Broadcom dropped its hostile takeover bid for Emulex--a prize it had been chasing for months. Hostile is almost an understatement for Emulex's reaction to Broadcom's entreaties. Harsh words and lawsuits were flying back and forth. But that one ended too when Emulex's board of directors unanimously rejected Broadcom's sweetened bid of $11 per share. Not even close to what we're worth, said Emulex. For Broadcom, this rejection was the final act.
Think we're done now for 2009? I think not. Stay tuned, because the storage industry has become a cauldron of acquisition activity. Yes NetApp lost its bid for Data Domain, but is likely not out of the hunt, if it wants to try again--for instance, other dedupe technology sources include ExaGrid, FalconStor, Quantum, and Sepaton. Nor can we say that Broadcom has suddenly lost interest in getting to the Fibre Channel over Ethernet "Go" square sooner rather than later just because they were stiff-armed by Emulex. There are other FCoE processing stacks out there to be had--via an acquisition of QLogic, for example. In other words, those were just warm-up events.
Joe Tucci, chairman, president, and CEO of EMC, has proven over the years to be a master of the technology acquisition, so whatever he's watching, I'm watching. More than a year ago I was at an EMC World event at which Tucci spent some quiet time with a gathering of industry analysts like me. He can be surprisingly candid in these sessions. During this one he disclosed that he was closely watching four technology areas he thought would produce significant heat within the next few years: virtualization, data deduplication, solid-state disk, and cloud computing. Now it looks like he was right on all four out of four.
The first one, virtualization, was no real surprise. He'd already acquired VMware, by far the brightest star in the virtualization firmament, and he bought it for what now appears to be a $635 million song. So EMC now owns the big server virtualization franchise, but what about storage virtualization? EMC really doesn't have that square covered yet, and rivals like HDS, IBM, and NetApp are pecking away at EMC's potential clout in this space. Will Tucci turn up the heat on internal development, or get out the checkbook? Hard to say, but FalconStor for example is potentially available; it should be remembered that FalconStor was once a storage virtualization play before it found a secure niche in data deduplication.
Speaking of which, the second area, data deduplication, was a bit of a surprise in that dedupe feels more like a feature than a product. Furthermore, EMC makes big money on storage, and deduplication makes big storage smaller. Why would EMC want to go there? No matter. EMC is about to pay billions of dollars for a company that sells disk-based data protection appliances competitively against EMC. Dedupe is the prize inside because, as a feature, data duplication can go just about anywhere--it's applicable to primary, backup, and archive storage--and it actually induces buyers to take on more disk and less tape. Clearly, Tucci wants EMC to own the dedupe opportunity (and DDUP for that matter) wherever it goes. Competitors will take note and respond. Given the current economy, storage efficiency is now the rage, and M&A activity around dedupe is far from over.
Solid-state disk was a big surprise at the time. SSD arrays once kicked around big data centers years ago, but never got a firm foothold. Moreover, in those bygone days of the early 1990s, EMC actually had an SSD array that it killed off when its Symmetrix disk array sales took off. Now solid state is back on EMC's radar screen because finally, and as a result of the ubiquity of NAND flash memory, it can be bought at a price point that compares favorably with rotating disk for applications that demand performance. Finally, SSD is hot. The companies potentially in play here are not the makers of NAND flash (like Intel and Samsung). The hot start-ups to watch are the developers of SSD controller technologies ( Fusion-io and WhipTail Technologies for example)--that is, the people who take the NAND flash and actually do something with it. The real work of managing NAND flash and presenting it as disk to an operating system gets done at the SSD controller level, and if Tucci is watching this space closely, he's not alone.
Seeing cloud storage on the list was once again a big surprise. That's another place the storage industry has once before gone and failed. We remember from the Web 1.0 era the meteoric rise and fall of many Internet-based storage service providers like Storage Networks and StorageWay. Even Enron had a horse in this race. But that, as it turns out, was cloud storage 1.0. Cloud storage 2.0 is big and growing, and again Tucci has proven himself to be on the mark. Indeed, EMC has already made an acquisition here--Mozy, once a cloud-based data backup service that now anchors EMC's Decho. EMC is also actively developing and marketing a cloud storage platform called Atmos, and has recently introduced Atmos onLine. Does EMC need more cloud storage? Only time will tell. And even if Tucci doesn't see a need, his competitors will. The potential cloud storage acquisition targets are many and varied, from cloud storage service plays like Nirvanix to cloud storage software plays like ParaScale.
With Broadcom's shadow away from its doorstep, Emulex now gets to prove that it really can spin FCoE chips into gold on its own. And while Data Domain didn't wind up with the suitor it wanted, Tucci is working hard at making DDUPers welcome in Hopkinton, Mass. Is that all for storage industry M&A activity this year? Not by a long shot.
Much drama has ensued since NetApp announced the intended acquisition of Data Domain on May 20 for the whopping sum of $1.5 billion.
EMC countered with a $30-per-share offer valued at $1.8 billion. NetApp then raised its offer to $30 a share, valued at $1.9 billion. Data Domain essentially said, "Thank you, EMC, but we like the new NetApp offer more than yours." EMC then claimed that it had been unfairly shut out of the bidding process and appealed directly to Data Domain employees.
NetApp countered with a claim that EMC's potential acquisition of Data Domain would fail a federal regulatory review, a claim that EMC has rebutted as it considers shoveling more cash into the fire to make its proposal more attractive.
To its suitors, Data Domain is now reportedly worth $1.9 billion. To give you some perspective on that figure, Oracle recently agreed to acquire Sun Microsystems for $7.4 billion. A $1.9 billion acquisition would mean that Data Domain is now worth about 24 percent of that number, yet its 2008 revenues of $274 million are a tiny fraction of the $13 billion Sun took in sales revenue during 2008. Here's another relevant data point: EMC acquired VMware for a mere $635 million.
Deduplication is the storage world's new killer app. It's the great shrinking machine. Think of the old Steve Martin "let's get small" routine. It shrinks big data down to a small fraction of its original size--way more than is possible with the more common data compression routines. Why is that process now worth billions of dollars?
Most IT shops are moving away from using tape as their primary backup media in favor of disks. Deduping makes this migration economically viable by greatly reducing the backup data footprint on disk arrays by factor of 20 to 1, on average. You can't do that with tape. Nor can you get the input/output performance of disks from tape.
But that's not all that deduping does. It can be run against primary data storage streams to reduce the data footprint within expensive primary storage arrays. NetApp, among other vendors, supports this. Running it here may amount to the functional equivalent of buying another array, given the capacity that's saved as a result. When IT budgets are constrained, and storage is one of your top budget priorities, that's a big deal.
One can also dedupe archival storage, making the disk a repository for archival data that may need fast accessibility on a periodic basis--like when your corporate attorney needs to find exculpatory e-mails from three years ago and needs them yesterday.
So now everyone has to dedupe. Every major storage vendor, from EMC to Hewlett-Packard to IBM, now offers at least one dedupe option of the many that are now available, including the in-line and post-process variants. IBM, for example, offers four options.
In spite all its high-profile competition, Data Domain has been the acknowledged leader in integrating deduplication into the backup process. It offers disk-based deduplicated storage arrays for heterogeneous backup environments, and it leads all contenders in this space, in terms of market share, by a wide margin.
Does a leading position in a killer app justify a $1.9 billion valuation for a relatively unknown company mining a niche storage opportunity? Stay tuned. The executives at EMC and NetApp hate to lose, and EMC may yet win the heart of the fair maid named Data Domain.
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