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By | Wireless Watch 19th October 2015 09:26

Dell-EMC deal could be a game-changer for mobile networks, too

Ericsson and Huawei better watch their backs

EMC/Dell deal As carriers race towards virtualisation, software-defined networking and increasingly complex back office IT platforms, they will increasingly bump into suppliers from the data centre world.

IBM, Hewlett-Packard, Oracle and others are already very familiar to them, but now there will be a new powerhouse, if Dell’s record-breaking $67bn takeover of storage supplier EMC goes through.

The deal will give Dell an end-to-end play for cloud and telco providers, as well as enterprises, encompassing servers, storage and virtualisation, and it will pose a very interesting alternative for mobile network operators to set against the claims of Ericsson and Huawei, as well as the IT giants.

This is at a time when the infrastructure space is ripe for the kind of disruption Dell brought, long ago, to PCs. Then, it took advantage of a shift towards commoditisation and lower cost equipment, disintermediated the resellers, and lured users by basically customizing cheap but reliable kit. Its model changed a lot since, and it moved – not always successfully – into larger computers and storage.

But the instincts which Michael Dell brought to the PC world would be relevant again at a time of transition towards commoditised hardware and endless flexibility in the software layers. Economies of scale to drive down equipment costs, coupled with end-to-end integration and customization from a menu of options, and with virtualisation frameworks – that list would tick the boxes for many operators as well as many enterprises.

Dell, which is privately owned, has agreed a cash and stock transaction valued at about $67bn to buy EMC, with financial backing from its owners – founder Michael Dell, his MSD Partners investment vehicle, and hi-tech private equity giant Silver Lake Partners. Additional financing will come from Singapore state-owned investment company Temasek Holdings, plus debt, the VMware tracking stock and cash on hand.

If it passes regulatory scrutiny, this deal would create a top three player and the largest privately controlled integrated technology company in the world, with its stated targets being the global cloud and carrier markets, the virtualisation of IT, and the infrastructure which will support the internet of things (IoT).

The future of VMware

There had been talk, amid the speculation that a deal was in the offing, that EMC’s majority-owned VMware virtualisation unit would be spun out. But that would have seen the loss of a crown jewel, and the risk of turning a full IT platform provider into a box shifter. In fact, VMware will remain inside Dell/EMC, though it will remain a publicly traded company even when its parent becomes part of privately held Dell.

VMware and Dell both emphasised, on the former’s investor call to discuss the deal, that the virtualisation technology was one of the hearts of the matter. This is not a takeover geared to consolidation and cost efficiency, welcome as those will be when up against the might of Huawei on the full-service front, or a potentially reinvigorated, post-reorganization HP.

"This deal is about accelerating growth opportunities [through SDN]," said VMware CEO Pat Gelsinger. In particular, those opportunities lie in the IoT and the big data it generates. Joe Tucci, CEO of EMC, said on the call: “There are more opportunities now than in history of man. There is massive telemetry with sensors being built into everything imaginable, generating massive amounts of data." Now Dell will be able to provide all the devices to underpin that, from PCs to servers to storage, said the firm (skimming neatly over its many failed forays into mobile devices).

Another important point made by Dell at its press conference – and one which may make HP shiver – is the private firm’s ability to innovate rapidly, and also to play a long game without the pressure of the quarterly results call and the activist investor.

Full platform for operators

The focus on IoT, big data and cloud services is predictable, but Dell is not confining itself to the classic enterprises with which it has dealt for so long. It certainly has service providers, including carriers and cloud operators, in its sights. Here, an increased software defined network and integration element will be critical for it to add value and find its place between IBM on one hand, and Ericsson or Huawei on the other. Telcos have generally been poor at building their own cloud platforms, and so a one-stop-shop will be welcome.

One analyst, Heavy Reading’s Caroline Chappell, commented: "There you have it - a complete software defined data centre solution, hardware and all. From a service provider (not enterprise) perspective, this is good for Dell which has struggled to articulate a strong telco cloud story on the grounds that it is only a box company in a market where telcos in particular want help building/integrating end-to-end cloud.”

For EMC, too, this is a chance to achieve greater economies of scale and greater differentiation as part of a broader group, though the outcome for its extremely canny and valuable VMware acquisition looks more mixed, since the virtualisation pioneer will lose its box-independent stance. Of course, as Gelsinger insisted on the analyst call, VMware will retain its deep relationships with IBM, HP and others, at least for now, but it will never again have the same clean perception as an independent. And it may restrict its ability to form new strategic alliances, particularly with the carrier suppliers. These are trying to create their own end-to-end, ‘cloud-in-a-box’ offerings and need virtualisation partners too, but if VMware is seen as the property of a potential new rival for telcos’ affections, they will look for alternatives, often in the open source world.

Particularly interesting will be the reaction of Cisco, which aims to be a powerhouse in the carrier cloud and the virtualised telco, and which has been very close to VMware and EMC in the past.

EMC, which has a famously federated structure, has other important assets, including RSA Security, Documentum and Pivotal. All of these have great potential value for an integrated Dell platform, but are likely to have to conform to a more unified and centrally driven organization. Tucci said that, eventually, VMware, EMC and their Pivotal venture would likely be public companies again.

Pivotal, actually a joint venture between EMC and VMware, is particularly interesting in the IoT. Most importantly, it powers the Predix big data analytics platform which GE (an investor in Pivotal) has created for the Industrial Internet, and which the manufacturing giant aims to turn into a global service based around de facto standards it is driving. Predix, an inhouse development which is now the heart of a cloud service, will be using Pivotal’s Cloud Foundry to enable application development, deployment and operations. Cloud Foundry is an open source computing PaaS (platform as a service) that was initially developed by VMware, but is now solely owned by Pivotal.

The combined company will, naturally, be run by Michael Dell, who took the company he founded into private ownership for about $25bn in 2013. For EMC, it will relieve pressure from activist investor Elliot Management, which have been calling for higher growth, perhaps through a sale or a VMware spin-off (EMC has enjoyed more than 40fold return on its $635m investment in VMware and Gelsinger said Michael Dell aimed to increase his holding in the unit over time). Although EMC is number one or two in nearly all its markets, its share price has been quite stagnant in recent years.

CEO Joe Tucci has agreed to stay at the company until the close of the deal and may stay longer. EMC had 21 per cent of the storage market last year, according to Bloomberg, against Dell’s 10 per cent, while Dell was second in servers by units shipped, though has been suffering from the long-drawn-out decline of its original core market, the PC. ®

For full coverage of Dell's EMC buy, click here

Copyright © 2015, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

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