Dell Technology – a common hymn book for a big choir

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Dell Technology held the first ever ‘Dell EMC World’ event in Austin just 6 weeks since the merger of the 2 companies was confirmed (held up this time by the Chinese, as opposed to the European legislators). It was a great opportunity for customers, execs and other analysts to kick the tyres of the new company. As before at Dell World we had excellent access to Michael Dell, who spoke in the main tent and answered questions from the 300 analysts and press present in our separate meeting. You’ll want to learn more about the potential of this. As always I’m quoting research estimates from ITCandor research throughout this article.

Meet the new organisation

Denali Holdings – the company set up by Michael Dell, MSD Partners and Silverlake Partners for Dell as a private company – announced its intent to acquire EMC in October 2016. Denali Holdings then became Dell Technologies to integrate Dell Inc. and EMC following its acquisition. Therefore Dell Inc. and EMC were technically ‘combined’ by their parent company, rather than the latter being acquired by the former. Within the new organisation there are 3 directly managed units, which are:

  • Dell (Client Solutions Group) – supplier of PCs and peripherals
  • Dell EMC Infrastructure Solutions Group – supplier of servers, networking, storage systems and software, Converged Infrastructure (CI), Hyperconverged Infrastructure (HCI); it also includes:
    • RSA – computer and network security provider acquired by EMC in 2006 for $2.1b and
    • Virtustream – supplier of mission critical performance-optimised IaaS and cloud services to enterprise customers.
  • Dell EMC Global Services

There are also 3 ‘Strategically Aligned’ businesses, which are:

  • Pivotal – supplier of Cloud Foundry PaaS cloud services
  • SecureWorks – supplier of cyber security services
  • VMware – supplier of infrastructure and virtualisation software and services – arguably the IT industry’s most important ecosystem

So far Dell Technologies has offloaded two businesses – Perot Systems to NTT for $3.1b and much of its software businesses to Francisco Partners and Elliott Management for a rumoured $2b; it’s possible that it may also offload one or other of its Strategically Aligned businesses – SecureWorks, for instance, launched an IPO in April which may have led to full independence if it had raised more.

Market and competitive positioning

newdevWhile this may be the largest ever acquisition in the IT market, the combined company would only have been the fifth largest supplier in the year to the end of June 2016 (see Figure, where I’ve added Dell, EMC and VMware, as well as HP Enterprise and Inc. together into respective lines). Apple and Samsung were by far the largest, driven on by their smart phone, tablet and PC businesses. Dell Technology’s strongest full-range competitors are:

  • HP (including both ‘Enterprise’ and ‘Inc.’), which has been getting more focused by splitting itself in 2; HPE bought SGI, but offloaded most software to Micro Focus and its – one-time EDS – outsourcing/managed services to CSC; HP Inc. has recently acquired Samsung’s printer business. On its own HP Enterprise’s revenues were $50b in the year to the end of June – smaller than the combination of Dell, EMC and VMware;
  • IBM, which has offloaded its System x (x86) server business and Technology chip fabrication operations to Lenovo and Global Foundries respectively, while purchasing SoftLayer and many specialist analytics software companies to reinvent itself as a cloud services supplier.

There was very little overlap in customers: EMC was much more successful with enterprise customers and higher priced storage, while Dell was successful in selling to consumers, government, SMB and midrange customers. This historical positioning is being retained in the new organisation, with the ‘Dell’ salesforce aimed at commercial – and ‘Dell EMC’ at enterprise – customers. The company will use this dual targeting in larger countries (of which there are 10 in EMEA), while it will operate with just the ‘Dell’ commercial salesforce structure in smaller ones. I’ve spoken with both EMEA leaders Adrian McDonald (Dell EMC enterprise) and Aongus Hegarty (Dell commercial), who are both confident and relaxed about making the changes needed to achieve success in their region – a process which is already well underway and which will be completed by the beginning of the company’s new financial year on February 1st 2017.

EMC had a slightly higher proportion of its business in international (non-US) markets, while Dell was been more successful in smaller countries, due mainly to a wider product portfolio which includes PCs and other consumer IT products. There are major advantages to both sides of the house in bringing Dell servers to EMC’s enterprise customers and utilising the company’s extensive supply chain resources to bring EMC storage products to new midmarket and SMB customers… and into smaller countries.

In the overall IT market, measured in revenues, Dell was in 7th, EMC in 26th and VMware in 49th positions before Dell Technologies was created. The new company has IaaS and PaaS services with lots of potential for growth, although it isn’t ‘betting the house’ in the way that IBM and Oracle are on cloud computing. Closely behind Dell Technologies are Microsoft and Cisco.

Overlapping or complimentary businesses?

server-storageThere is little overlap between the 2 sets of customers, but there is some in products. In particular:

  • Dell was in second place in the $76b server market in the year to the end of June (see Figure) with a single ‘PowerEdge’ brand. Although not among the top 7 server suppliers, EMC has been successful in supplying its VCE Vblock Converged Infrastructure and VxRail (for VMware users) and VxRack (users of other hypervisors) Hyper-Converged Infrastructure (HCI) solutions for some time. Cisco provides UCS servers for Vblock’s however, for VxRail and VxRack there is much more opportunity to leverage PowerEdge servers for EMC’s HCI solutions. We may also see Dell’s Active System Manager slowly replace Cisco’s UCS Director orchestration software on CI systems – a process which could be accelerated should Cisco decide to co-operate less with the new organisation. In the HCI market the new company claims to have provided around half of all the Nutanix platforms sold to date, while it claims to have installed a total of 3,800 VxRack™ and VxRail™ nodes to date.
  • EMC has been the long-time leader of the $31b storage systems market; the addition of Dell’s 5th position storage business would have given the new company a market share of 28.4% in the year to the end of June (see Figure). Merging the product lines here will be made easier for the partnership the 2 had in supplying Dell: EMC NAS products in the past; these accounted for roughly 50% of Dell’s storage revenues at the time the agreement ended early due to Dell’s decision to build its own IP through acquiring EqualLogic, Compellent and others. The new company has broken out 4 ‘core’ storage product lines – Dell SC, EMC Unity, which replaced its successful VNX products by adding a new file system, XtremIO and VMAX. Isilon and Data Domain will be classed as ‘emerging products’, while others (Dell EMC Storage PS Series – EqualLogic – for instance) may slowly become obsolete. There are a number of other resources, such as EMC’s ViPR SDS software, which will help build sales.

vmThere are some major differences in terms of the customer types and vertical markets the 2 companies have sold to (see Figure). In particular:

  • In comparison with the overall market the new company will be weak in the consumer space,
  • Dell was stronger in Government and Health, while
  • EMC was stronger in manufacturing, Retail/Wholesale, Business Services and Finance.

Once the 2 companies finally came together a few weeks ago they discovered that there is only a 40% overlap amongst their top accounts and just 60% in the next tier down – giving them a tremendous cross-selling opportunity in future.

You can’t make an omelette without breaking eggs

Of course the new company succeeded in hitting the ground running at Dell EMC World and the initial response from customers and analysts has been almost entirely positive. I have a few of my own concerns. In particular that:

  • Despite a major internal survey which demonstrated almost identical business values among the company’s 140k employees, there’s bound to be significant disruption as the 2 teams join together;
  • There were different management models – EMC’s was more hierarchical and Dell’s more customer-focused; one style needs to predominate in coming years;
  • Existing Dell and EMC customers have significantly different contracts; it will take many years to merge them, even if the new company will be more efficient if and when it can;
  • Harmonising the 2 channel strategies is bound to lead to some disruption and
  • One and one equals less than 2 when it comes to market shares of combining companies – in my experience there is always an initial reduction;
  • Dell Technologies owners now have an even larger debt to pay off and, despite reassurances from CFO Tom Sweet, these transactions are largely hidden by its private company status.

To my relief as a researcher the new company will post financial results each quarter because of its stake in VMWare – something Michael referred to as ‘publicly quoted but privately run’. The benefits of privatisation are in avoiding the close, quarterly scrutiny of the stock market, which often lead suppliers to make short-term (and sometimes knee-jerk) changes to their operations and strategies.

Despite some misgivings overall I’m very positive about the future for Dell Technologies especially in:

  • The IT Services area, where Pro Support One will bring higher level services to Dell’s customers and Dell’s automated processes will bring more efficiency to EMC’s
  • Cross-selling storage to server customers and visa versa.
  • The deeper involvement it has in IaaS and PaaS cloud services through the addition of Virtustream and Pivotal and
  • Better-defined security offerings through the corporate association with RSA and SecureWorks.

The lack of overlap in customer segments and product lines will make things easier before February 1st when the company expects the major Go-To-Market (GTM) integration work to be complete. Perhaps I’m overly sensitive to the internal staff issues such big changes make, but you can’t make omelettes without breaking eggs. Let’s see how the other vendors (especially HP, Cisco and Huawei) react.

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