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The Dell-EMC Merger: 7 Challenges

  • As the Dell-EMC merger heads towards completion, it's clear that most of the integration work remains to be done. There are overlapping products galore, which will confuse the customer base and, until the unified company presents a rationalized product line, will present a barrier to new sales. After all, who wants to be stuck with one of the products that’s discontinued!

    There are people issues, too. At the top, VMware CEO Pat Gelsinger missed the EMC World show, sparking a bunch of rumors of his departure, which he's since denied. But it’s down in the sales trenches that the pain starts. Enterprise operations are moving to Hopkinton, Mass., with layoffs likely. Deeper down, though, there are fundamental mindset differences between the two companies.

    Just look at the prices for storage drives, for instance. EMC charges $14,000 list price for a 1 TB solid-state drive. Dell charges just $4,000, but also sells a perfectly good $300 SSD online, roughly matching Internet pricing. If Dell-EMC moves to Dell’s model, which makes sense in a commoditizing market, revenue per sale will plummet. The compensation of EMC’s salesforce, and even its very survival with the company, are based on revenue achieved. Lower prices inevitably mean lower commissions..

    In the past, Dell lagged IBM and HPE in the enterprise. Dell aims to get a much better enterprise story out of the merger, with the storage armamentarium needed to complement its server and network lines to provide a complete sale. The Dell story is progressing nicely already, with a strong emphasis on software-defined networking bearing fruit and partnerships to deliver hyperconverged systems and Ceph object stores.

    EMC is more focused on protecting the current businesses while delivering ways to join different storage families together. It’s worth noting that the star attraction at the recent EMC World was the VNX3 (Ultra) array, which is a remake of EMC's block storage solutions. That’s hardly embracing software-defined anything!

    Looking at the businesses that make up the new empire, there is a strong sense of internal stress caused by self-protection and territorial infighting. The merger comes as the IT industry struggles to change direction. PCs are dying. The cloud is eating into enterprise sales, while the very successful ODMs delivering to the public cloud giants are entering the US market with inexpensive quality gear. Technically, we are migrating to Ethernet universal storage appliances and hyperconverged systems with data compression while SANs are following the PC into the history books.

    Continue on for a closer look at the challenges ahead for the Dell-EMC marriage.

    (Image: Dell)     

  • Product overlap

    Mergers often result in overlapping product lines, but Dell-EMC takes this to a new height, especially in the mid-market. There are too many similar solutions and economics, making a shakeout necessary. For example, there's Dell’s Compellent and EqualLogic product lines and EMC’s Isilon and Unity/VNX3 lines. The problem is that all of the products are decent, but none stand out as clear winners.

    Pity the poor rep who has to explain six solutions for Ethernet block storage! How to sell one without dissing the others, for instance? Artificial positioning is a disaster, since customers see through it and the Internet is there to dole out rude comments.

    Each product family has a loyal customer base and rationalizing products will move part of the base into a limbo where new ideas like software-defined storage and white-box, open-source solutions are preferable. Compound this with the systemic, growing weakness in the SAN storage sector and erosion of the customer base is likely.

    (Image: shahzairul/Pixabay)

  • Dissimilar business models

    Dell and EMC come from opposite poles of the business spectrum. In a sense, this makes them complementary, but it also creates issues, especially  when it comes to the midmarket. Sales, delivery, and support are all commoditizing, driven by COTS system ubiquity. That means these factors are moving towards and past the Dell model.

    The merged company has to decide if 20X+ markups from cost and 50% average discounts work in future markets. If, as seems likely, EMC will get more Dell-like, revenue will be impacted and the EMC salesforce will struggle to transition to lower revenue per unit sale and more online selling.

    Failure to fix the issue could leave EMC stranded with a pricing structure undercut by the very Dell divisions it had hoped to supplant and, of course, by the market in general.

    (Image: jackmac34/Pixabay)

  • Strategic alignment

    In the Dell-EMC merger, aligning strategies is not “You take the high road and I’ll take the low”! The customer base has become more diffused across market tiers as cloud clusters and remote operations evolve. Good salespeople will need to cover a broader spectrum of product and be able to tell a cohesive story, rationalize pricing differences, and clearly recommend solutions.

    More importantly, the company has to articulate a roadmap that is relevant to the industry’s direction. For Dell and EMC, this is going to be a challenge. Dell Technologies – as Michael Dell said the company will be called -- will have to overcome weaknesses in key Dell lines such as PCs and the protectionism of the array teams at EMC while also presenting a strategic vision to build customer, and Wall Street, confidence. 

    (Image: EMC Corp.)

  • The team

    The top team for the merged company is pretty well sorted out. There are of course winners and losers and the industry is sensitive to  those apparent choices. Gelsinger’s absence at EMC World sparked many rumors, for instance. The shakeout extends through the executive layers, but, in the end, rationalizing the total work force as products are discontinued is bound to cause layoffs on a major scale.

    Given the size of the new empire, completing reorganizations and layoffs will take many months, and getting everything running smoothly with morale recovering will take longer still. The internal pain will seem like confusion to customers, who may have to endure changing contacts and frequent disconnects in service. The company will be less efficient for a good while!

    (Image: EMC Corp.)

  • The cloud

    EMC, and to a lesser extent Dell, have found competing in the cloud to be very difficult. The problem is that the Chinese ODMs have had low-overhead, low-margin business models, with very low wages in the early years. Dell and EMC couldn’t compete profitably, and as a result, have little success in the large public cloud market

    That would leave the nascent private/hybrid cloud market, which is predicted to pick up much of the commercial IT business in the next few years. The problem is that the enterprise end of the market will emulate Google, AWS and Microsoft Azure to lower costs, while COTS has lowered the technical barriers involved. The Open Compute Project is also stimulating use of minimalistic systems.

    The challenge for Dell-EMC is to articulate a value proposition that compensates for their higher internal cost, while attacking product and distribution channel cost issues. These are not small challenges, and whether Dell Technologies can overcome them is likely to be the long term key to success or failure.

    (Image: giografiche/Pixabay)

  • Data compression and fat drives

    We all know that storage needs are expanding fast. The unstructured Internet of Things is on the horizon. This doesn’t translate into growing storage revenue, though, which impacts Dell-EMC, for which storage is the highest revenue generator. Data compression is becoming a commodity feature. It reduces raw capacity by an average 5X factor, thus reducing that raw storage capacity need by a whopping 80%.

    Vendors have developed SSDs with 16 TB capacity and Google plans deployment later this year. SSD improvements are driving costs down lower than  even bulk SATA HDD by next year, with capacities above 20 to 30 TB. That’s 10X the average capacity of any storage drive three years ago.

    Combine the two factors and even with a 10 times growth in stored data, we need just 20% of the number of drives and, more importantly, many fewer boxes to house them. All this spells bad news for Dell-EMC.

    (Image: PeteLinforth/Pixabay)

  • Software-defined infrastructure

    Moving much of the storage and networking software stacks to virtual instances or containers means much lower prices for hardware, mainly ODM white boxes. The value-add will migrate to software. EMC made a start in that direction with ViPR, but that seems to have lost steam. Dell is getting its feet wet with a Nutanix partnership. Neither company is a leader in software-defined storage, though Dell has jumped on the SDN bandwagon and put together a good networking portfolio.

    Moving to a more software/services model is a tough transition, but that’s critical for Dell-EMC if it wants to have marketable value-add.

    (Image: geralt/Pixabay)