First let us break down the facts around the deal:
As has been analysed threadbare the deal reduces the total debt Dell is carrying and will even reduce the ratio of Dell debt to EBITDA. As a result, it is highly likely that Dell’s credit rating will move up from their current BB+ level to investment grade – which can have a lot of implications for future capital raising. There is also a buzz in the market that Dell Technologies may also sell off Boomi soon and write down another USD 3 Billion approximately in debt.
It is interesting to note that the company has been willing to let go off VMware even though it will dilute their profitability ratios – VMWare business being obviously more profitable than Dell’s traditional businesses which are heavily based on products.
The last few years has seen Dell reselling a fair amount of VMware products. From a number of perspectives Dell has been a key reseller for VMware and now contributes almost 34% of VMware’s revenues.
This chart is a testament to the power of execution that is inherent within Dell. This performance was aided by market growth – but even then it is remarkable how Dell has been able to scale up taking VMware to their customers. The two companies have very different sales cycles. A VMware sale typically has a longer cycle with a completely different set of touchpoints from the boxes that Dell is so good at selling – which have shorter cycles. The sales cycle for EMC products is closer to VMware’s which would have helped. The sales of the VXRail hyperconverged appliance have also jumped in recent times and this would have driven an equivalent spike in VMware revenues. It is still a remarkable achievement to be able to bring these three diverse groups together and grow revenue.
Market Impact of the Spin-Off
Does it make sense then for VMware to part with their largest reseller? Would it not be better for VMware to continue to drive this and use Dell’s execution skills to drive more growth? Data suggests that there could be another twist to this story.
VMware has been growing impressively as a company when one looks at the black line and while the growth has slowed in percentage terms, this is on a much higher revenue base. FY2021 revenue is close to 2x the revenue in FY2014. However, when one considers it without the Dell reselling revenue (the red line) it looks a lot less impressive especially in the last couple of years when it is an anemic 3%. When comparing this growth we also see a slowdown of sorts in recent years for VMware.
Anecdotal evidence suggests that vendors such as HPE became more cautious and tried to diversify their business. It is entirely possible that if we looked at VMware as two separate businesses – one with Dell and one independent – the independent business has been losing share in the last few years.
The optical separation from Dell may then help VMware in rebuilding stronger relationships with the other players in the market including the hyperscalers. This may fuel further VMware growth. To do that VMware will have to manage a balancing act:
On the one hand keep growing their reseller revenue with Dell. They are on a good wicket so far and need to make sure this continues. While the revenue from appliances – which come loaded with VMware – is a sure-fire proposition, other growth needs to be harvested carefully. Dell has a multitude of offerings and taking their eyes of the VMware ball is super easy.
Build trust and closer ties with the other vendors to keep driving revenue. VMware’s leadership in the market means they already have ties with other industry leaders like HPE, AWS and so on. These will need to become much deeper; VMware will need to build the trust that they will give these vendors equal status even as they are building new appliances with Dell.
The one complicating factor here is that Michael Dell remains the Chairman of the Board of VMware. This may give other vendors pause and they may still want to keep their options open instead of putting all eggs into the VMware basket.
VMware is at a fairly critical inflection point in their business. The growth of cloud technologies still bodes well for virtual machines which has been their mainstay, but this is also likely to drive growth for more containerisation. They have great products for that part of the business also. However, as container adoption is likely to explode VMware would not want vendors to shift, to say Red Hat, and develop deeper partnerships with them or other competitors. They would like to keep the vendors on VMware – be it a virtual machine or a container. One does feel the future battle for VMware really rests on how well they will be able to grow in the container space. This will have to be done while continuing to innovate to keep the lead in the virtual machine space. Doing it will be quite a feat!!
Finally, what then of Dell? The company seems to have a talent for running businesses which are in long-term secular decline – but running those businesses well. Their PC business is delivering almost 7% operating income and has continued to show growth. The PC market last year was on fire thanks to the pandemic which dramatically increased the demand for devices – growth was double digits for a market which has declined almost every year since 2011. As Dell is fond of saying the PC industry has sold over 5 billion machines since the PC was declared dead!
The server market seems to have stagnated over the last couple of years which is a bit of a surprise given the growth in cloud. Dell’s revenue has declined two years in a row pointing to possible issues which need fixing in that part of the business.
As the company focuses on these key challenges in the market it probably makes sense for them to lower their debt and earn more freedom to operate. One never knows – given the number of surprises that Michael Dell has engineered over the last decade such as taking Dell private, acquiring EMC, stabilising it, then going public again, making a windfall in the process – if he has some other rabbits yet to be pulled out of his hat!!!
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Ecosystm Principal Advisor, Darian Bird says, “The announcement of Nutanix Clusters on Azure is another piece of the hybrid puzzle that will allow Nutanix clients to extend their private cloud environments into public infrastructure. Organisations want the control associated with a private cloud but with the flexibility to scale up and down in the public cloud. Key to hybrid cloud is an additional layer that enables applications to be shifted from one cloud to another, either to prevent lock-in or to choose the best environment depending on the circumstances.”
The deal will also broaden the sales and support experience for Microsoft and Nutanix. “Nutanix has emphasised licence portability as a key characteristic of its hybrid cloud strategy. Microsoft clients will be able to use Azure credits to pay for Nutanix software, while those already with Nutanix licences will be able to port those over to Clusters on Azure. Simplified cloud procurement will be critical for IT departments looking to optimise cloud expenditure across multiple providers.”
Bird adds, “Organisations will now be able to manage servers, containers, and data services on Nutanix HCI, on prem or in the cloud through a single control pane with Azure Arc. Microsoft has realised that producing a true hybrid cloud system requires it to manage as many types of infrastructure as possible, whether they come from niche partners or major competitors. IT departments want the choice of supplier without adding complexity to their systems.”
Last year, Nutanix partnered with HPE for the general availability of HPE’s integrated hybrid cloud as a service offering, HPE GreenLake for Nutanix, and the HPE ProLiant DX solution.
Earlier in the month, Nutanix launched its global partner multi-cloud program – Elevate – to bring Nutanix’s global partner ecosystem under one integrated architecture managed through consistent tools, resources and platforms, to accelerate their clients’ multi-product, multicloud roadmap in their transformation journeys.
“Nutanix has made great strides in its shift from hardware vendor to HCI provider and it’s now focused on delivering tools that enable the shift to cloud. These recent moves will help Nutanix catch up to VMware and become a viable alternative in a hybrid cloud environment,” says Bird.
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Our ongoing Ecosystm study on Digital Priorities in the New Normal shows how the crisis has forced organisations to re-evaluate their cybersecurity risks and measures. It also showed that the IT environment of most organisations was woefully unprepared for the changes that occurred (Figure 1). Perhaps unsurprisingly, fewer than 7% said that their IT environment was fully prepared and close to 40% reported lacking scale, capacity and IT skills in-house.
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The combination of these shortcomings may very well push more organisations to outsource their security management to Managed Security Service Providers (MSSPs) – a service space that has been growing rapidly in recent years.
Many IT organisations are fairly familiar with MSSPs, but COVID-19 may have forced many to re-evaluate their choices as the work and threat landscapes have changed.
This new tool can help technology buyers understand which vendors are leading this space, which are the ones that have market momentum and which are executing and delivering on their promised capabilities. Unlike similar vendor evaluations on the market, the positioning of vendors in Ecosystm VendorScopes is based solely on quantifiable feedback given by the Tech Buyer community, in the global Ecosystm Cybersecurity Study, that is live and ongoing on the Ecosystm platform. It is thus independent of analyst bias or opinion or vendor influence – customers directly rate their suppliers in our ongoing market benchmarks and assessments.
It is also free to access and share for all Ecosystm subscribers!
Fragmented Asia Pacific MSSP Market
The VendorScope clearly shows how fragmented the MSSP market is. Not only is the number of vendors that have a customer base significant enough to appear on the grid very large (22) – but about half of them are in, or verging on being in, the “Front Runner” segment (Figure 2).
There are a few key factors that contribute to this picture:
The services they offer tend to align well with the customers’ organisational strategies and to integrate well with existing systems. This, basically, can be boiled down to one word: Cloud. Most organisations have IT strategies revolving around multiple and/hybrid cloud deployments and using MSSPs makes a lot of sense.
Momentum for this service segment is generally high. The MSSP space is experiencing high growth these days and we see a fairly high number of mentions for both current and planned deployments with many of the vendors in the study.
Despite the large number of vendors in the “Front Runner” segment, a famous few stick out. IBM appears to have a higher market momentum than its competitors and together with Microsoft, they have the largest share of mind with potential customers in this space.
But other vendors are hot on their heels. AWS and F5 stand out with their relatively high presence in the region, and TCS and Huawei appear to have stronger than average pipelines.
Where we do see weak spots with most vendors is in quality of service and the connected customer experience, which historically have proven to be a potential Achilles’ heel for many vendors in high growth areas. As the MSSP space matures, we would expect customer experience to become increasingly important when customers choose a service provider.
We would certainly encourage any organisation that is looking into managed security to not ignore or downplay the customer service and support aspect. IT security is a complex area – even if it is managed by a service provider – and the service providers’ ability and flexibility in this area can make a huge difference.
Fujitsu and HPE stick out with regards to QoS and customer service. These two are also good examples of how the vendors differ and seemingly could complement each other. In a sense, one could almost see the MSSP VendorScope as an early blueprint for which mergers and acquisitions (M&As) would make sense – at least for those that are driven by the pursuit of skill sets and competencies and not just market share.
In the Top 5 Cybersecurity and Compliance Trends for 2020, Ecosystm predicted that 2020 will witness a significant uplift in M&A activities in the cybersecurity market. Of course, with the global pandemic, all bets are off, and the predicted M&A wave may have been delayed by a year or so.
But the MSSP space certainly appears ripe for consolidation.
Ecosystm Vendorscope: Managed Security Service Providers Signup for Free to download the Ecosystm Vendorscope: Managed Security Service Providers report
“Edge computing has been widely touted as a necessary component of a viable 5G setup, as it offers a more cost-effective and lower latency option than a traditional infrastructure. Also, with IoT being a major part of the business case behind 5G, the number of connected devices and endpoints is set to explode in the coming years, potentially overloading an infrastructure based fully on centralised data centres for processing the data,” says Mortensen.
Although some are positioning the Edge as the ultimate replacement of cloud, Mortensen believes it will be a complementary rather than a competing technology. “The more embedded major cloud providers like AWS and Microsoft can become with 5G providers, the better they can service customers, who want to access cloud resources via the mobile networks. This is especially compelling for customers who need very low latency access.”
Affirmed Networks Brings Microsoft to the 5G Infrastructure Table
Microsoft recently announced that they were in discussions to acquire Affirmed Networks, a provider of network functions virtualisation (NFV) software for telecom operators. The company’s existing enterprise customer base is impressive with over 100 major telecom customers including big names such as AT&T, Orange and Vodafone. Affirmed Networks’ recently appointed CEO, Anand Krishnamurthy says that their virtualised cloud-native network, Evolved Packet Core, allows for scale on demand with a range of automation capabilities, at 70% of the cost of traditional networks. The telecom industry has been steadily moving away from proprietary hardware-based infrastructure, opting for open, software-defined networking (SDN). This acquisition will potentially allow Microsoft to leverage their Azure platform for 5G infrastructure and for cloud-based edge computing applications.
Ecosystm Principal Advisor, Shamir Amanullah says, “The telecommunications industry is suffering from a decline in traditional services leading to a concerted effort in reducing costs and introducing new digital services. To do this in preparation for 5G, carriers are working towards transforming their operations and business support systems to a more virtualised and software-defined infrastructure. 5G will be dynamic, more than ever before, for a number of reasons. 5G will operate across a range of frequencies and bands, with significantly more devices and connections, highly software-defined with computing power at the Edge.”
The acquisition of Affirmed Networks is not the only Microsoft initiative to improve their 5G offerings. Last week also saw Microsoft announce Azure Edge Zones aimed at reducing latency for both public and private networks. AT&T is a good example of how public carriers will use the Azure Edge Zones. As part of the ongoing partnership with Microsoft, AT&T has already launched a Dallas Edge Zone, with another one planned for Los Angeles, later in the year. Microsoft also intends to offer the Azure Edge Zones, independent of carriers in denser areas. They also launched Azure Private Edge Zones for private enterprise networks suitable for delivering ultra low latency performance for IoT devices.
5G will remain a key area of focus for cloud and software giants. Amanullah sees this trend as a challenge to infrastructure providers such as Huawei, Ericsson and Nokia. “History has shown how these larger software providers can be fast, nimble, innovative, and extremely customer-centric. Current infrastructure providers should not take this challenge lightly.”