As I think about this latest acquisition, there are three major themes worth exploring.

The first theme has been covered widely already — the impact of data deduplication, why it’s hot, the value of differing approaches, why it needs to go everywhere in the stack, etc. 

No need to cover that one here.

The second theme is the impact to EMC, Data Domain and our mutual customers. 

I attempted to sketch out how Data Domain’s technology and offering could potentially create a surprising amount of scale and synergy when juxtaposed with EMC. 

There were some colorful comments on that one.

The third theme revolves how this acquisition is emblematic of broader themes in the industry, and how a certain class of IT vendors will find themselves with hard choices to make going forward.  Although I’ll be using NetApp as an example, the discussion actually covers a fairly broad spectrum of well-known IT players.

And, yes, I’m wearing an asbestos suit …

Big Things Afoot In The IT Biz

No surprise, we’re in a period of rapid consolidation in the IT industry.  Being a large, successful IT vendor is now a game of scale and synergy — scale to reduce the costs of development, distribution and support, and synergies across the portfolio to increase the value of the overall offering.

For example, if one looks at what Oracle is doing, it’s pretty clear they’re thinking this way.  EMC’s transformation from a single product vendor (Symmetrix) to the broad portfolio of today reflects that thinking as well.  Cisco might fall into this camp.  And there are other examples, if you think about it.

If you get involved in corporate strategy, you have this “aha” moment when you fully grasp the amazing potential of scale and synergy.  However, realizing that potential is another thing altogether, as we’ll see in a moment.

Get Big Or Get Bought

Now, let’s look at the chessboard from another perspective.  Imagine you’re a mid-sized IT vendor, and you’ve become really successful with “your thing” — maybe it’s a particular technology, or a business model, or something else relatively innovative that’s gotten you to a certain size.

At some point, other people start to figure out what you’ve done, and start to offer alternatives that are just as good — or sometimes better — than your unique gig. 

You might think you can compete through size and strength, until these newer competitors get bought up by the bigger companies, and then the tables turn on you.

For example, Dell had a killer business model — until other vendors copied it.  In the late 90′s, EMC had a lock on high-end enterprise storage, until there were “good enough” alternatives from other vendors.  NetApp has a nice file system with some useful tricks, but has never been able to move much beyond this. 

Lots of other examples in the industry when you look at it this way.

The key point here is simple — the things that fuel the initial phases of growth of any successful IT vendor only have a limited life span — the rocket fuel doesn’t last forever.

So, What’s An IT Vendor To Do?

It’s easy — buy or get bought.  Either play the “scale and synergy” game, or sell yourself to someone who wants to play that game.

To play the “scale and synergy” M&A game, you’ll need three things:

(1) money, in the form of cash or equity
(2) a reasonable pool of attractive candidates to buy
(3) the ability to extract the “scale and synergy”

I am no financial engineer, so I don’t have much to say about capital structures, debt to equity ratios, dilution and so on.  I can follow those conversations, but I don’t have much to say.  To simplify the discussion, let’s assume that our moderately successful IT vendor has a pile of money to work with.

The problem that’s specific to these class of mid-sized vendors right now is that it’s a pretty shallow pool of acquisition targets.  The larger and more interesting targets that have shipping products, happy customers, demonstrated growth potential, etc. are drawing the attention of the bigger players. 

These bigger players not only have more money, but usually have demonstrated an ability to extract more value from an acquisition.  Which tends to leave either very small companies who haven’t demonstrated success, or a few picked-over shop-worn names that everyone else has looked at already, and decided to pass.

That’s the M+A target pool that NetApp and others in their category are facing right now.  Not a lot of attractive choices, and — if there is one — there will likely be acquired by a bigger player who’s more interested and can make a better offer. 

Making An Acquisition Work

The only proven way to make M+A work is to invest in building a machine and doing it over and over and over again.  That’s the formula at Oracle, Cisco, EMC, Microsoft and the other big players.  We’re not perfect, and we all make mistakes, but each company has a core discipline and track record in making acquisitions work.

Most people aren’t aware that EMC was doing acquisitions way back in the 1990′s.  I would offer that we weren’t very good at it back then, just like any midsized IT vendor in our category.  It wasn’t until we set off in a new strategic direction (thanks to Joe Tucci) that we invested enough effort to get really good at the whole thing.

By comparison, NetApp hasn’t been able to demonstrate any real success in making their acquisitions work.  The Spinnaker acquisition could hardly be called a success (it almost tore the company apart), Decru disappeared into obscurity, Topio was withdrawn from the market.  One could argue that Onaro is enjoying some small modicum of success, but does it really matter?

Hard Choices Ahead

It was interesting to hear Dan Warmenhoven publicly tick through the list of potential suitors for NetApp, and take each and every one of them off the table for one reason or another.  While I could debate his logic, it’s very clear that he and the rest of his management team are thinking long and hard about “Option A” — be acquired.

By comparison, “Option B” — buy a lot of stuff — isn’t working out so well.  There are bigger and more skilled players competing for the same acquisitions, and they can justify paying more simply because they have a track record of extracting value through scale and synergy.

Which leaves us with “Option C” — carrying on as before.  Continue to focus on one single product and technology  (e.g. WAFL), continue to enhance it with new features such as dedupe and various forms of integration, incrementally tune the business model in terms of margin, channel mix, keep a brave face in public, etc. — but hardly exciting in the big scheme of things.

Unfortunately, much as NetApp got their start in offering “good enough”, there’s a host of players waiting in the  wings waiting to do the same thing to them: open-source file systems such as ZFS, small aggressive players such as Isilon, Compellent and 3Par, and even encroachment from the consumer/prosumer/SMB marketplace. 

Not to mention big players like EMC that have enormous R+D budgets and are prepared to use them as a weapon.

Add to that the structural transition going on in the market from physical to virtual, and from enterprise IT to service providers (private cloud thinking in a nutshell), and you’ve got to ask yourself some hard strategic questions.

No Obvious Answer

Now, this discussion is nothing against their technology (every technology has strengths and weaknesses), or a discrediting of their rabid fans (who I will undoubtedly hear from in their typical colorful fashion), or even a critique of their conduct (still have big issues with that one) but in terms of The Big Game, it’s not clear what their next move will be.

And it’s not just NetApp — I could construct a rather long list of other IT technology companies who are roughly in the same position that they are, and are facing the same set of uncomfortable choices.

Any thoughts?

You may or may not know that — during an acquisition — we are very limited as to what we can say. 

Rather than run afoul of various mysterious rules and regulations, we all just feel it’s better if we clam up until the deal is actually done.

Well, this morning we were informed that — for all intents and purposes – we can start talking about the acquisition publicly.

This post covers what it means to EMC, Data Domain and Data Domain’s customers. 

I’d like to write a subsequent post at some point with what this means to NetApp — especially in the broader context of industry consolidation and go-forward strategies.  And it ain’t pretty.

So let’s dive in, shall we?

The Core Of A New Business

The internal letter was pretty clear and unambiguous: Data Domain will eventually be a full product division within EMC.

This means that — over time — they will likely be the core orchestrator of all related EMC assets in this space — engineering, partnering, go-to-market, support, etc. 

This is roughly analogous to what happened with other acquisitions: EMC has a bunch of related assets, we acquire a centerpiece, make them the core, and continue to integrate and innovate around that core.

It’s a play we know well.

What Technology Assets Could Fit?

The list of potential EMC assets that could potentially play one way or another with Data Domain is quite extensive. 

Disclaimer: none of these are commitments, just idle speculation on the kinds of things that are possible once you juxtapose Data Domain across the broader EMC.

This sort of hybridization can be very powerful — we’ve already done it with a number of technology acquisitions.  It takes time to sort out the roadmap, do the integration work, productize, etc. — but it’s all interesting stuff.

So … let’s take a tour around the EMC portfolio, shall we?

On the hardware side, we’ve got some nice storage target devices to choose from that complement what Data Domain is selling today: CLARiiON, V-Max, Celerra, Centera, Atmos — even Iomega!  Potentially these might be sold as an integrated appliance, or as a software target — lots of interesting scenarios there.

Next up, the EMC backup and recovery portfolio: the NetWorker suite that does not only all the classical backup/restore stuff (using a variety of mechanisms), but EMC’s Data Protection Advisor (DPA) which has found a strong following from people who need to manage this stuff at a service delivery level.

Can’t forget Avamar either — the industry’s premier client-side dedupe which now can be paired in interesting ways with the industry’s premeir target-side dedupe.

Celerra — in particular — has a nice abstraction where files can be stored in dedupe format transparently from the access mechanism — another interesting potential pairing.  That same abstraction might make sense for other EMC storage platforms as well.

And, of course, there’s RSA security, Ionix end-to-end management, EMC’s general proficiency and differentiation with VMwareand fully virtualized environments, and — well — there’s no shortage of cool things to look at.

There’s more I could share, but I think you get the picture.

What Integration Assets Could Fit?

EMC spends a lot of time and money bringing pieces together — not only technology integrations, but qualification, solutioneering, etc. — basically making sure all the pieces work together as a complete environment that’s fully characterized, supported, documented, etc.

I guess the first starting point is EMC’s eLab — still the industry standard for device-level interoperability and qualification.  Right away, you can see the Data Domain product being qualified as part of larger and/or more complex topologies, backed by EMC’s methodologies and customer service.

And then there’s the EMC Proven Solution effort that’s focused primarily on fully virtualized environments running tier 1 applications such as Exchange, SAP, Oracle et. al.  Won’t be too long before Data Domain is part of that party as well.

There’s also a few specialized labs of note — in particular the newer VCE lab (VMware, Cisco and EMC), which represents a rather largish investment focused on building private clouds built on virtualization for both enterprises and service providers.

Again, plenty here that makes the Data Domain capabilities potentially even more valuable and attractive in an EMC context over time.

What Go-To-Market Assets Could Fit?

I know most people outside the industry don’t think much about go-to-market strategies, preferring instead to debate the pros and cons of different technologies, but — in the final analysis — nothing really succeeds unless there’s an efficient way for it to reach a mass audience.

And there the picture is potentially very interesting.

Of course, we’ve got our worldwide direct sales force — already engaged in storage and backup discussions, and already selling complementary technologies.  Data Domain just plugs in to this effort.

We’ve also have a specialized sales force that works with customers having more modest requirements, and brings in a wide range of partners, resellers and integrators in doing so.  Again, another plug in.

Not to mention our existing engagements with OEMs, global system integrators, outsourcers and service providers — again, more synergy from an existing market engagement model that’s already focused in this space.

And, finally, there’s EMC’s professional services that can assess a requirement, do the integration, create the run book, and event run the entire environment in a managed services context.  All potentially very complementary, if you think about it.

And Let’s Not Forget Customer Service

One thing EMC is known for is best-in-class customer service.  We’ve built the business largely on that reputation.  Bringing EMC’s global customer services capabilities to any acquired product removes an important set of concerns for many customers, making it easier to move ahead with newer technology.

Again, more synergy.

Feel Free To Criticize

Everyone has their opinion about this acquisition — was it a good idea, was it a fair price, what was the real rationale, etc. Some people just don’t like it when EMC does something smart.

People are free to speculate as they see fit — as they always will do — but from where I sit, there is a real and tangible 1+1=5 scenario here.

Data Domain employees win.  Data Domain partners win.  Data Domain customers win.  EMC customers, employees and stakeholders win.

You just have to look at it the right way.

Welcome Aboard, Data Domain .. And Your Customers

There’s already been some great communication and interaction with the Data Domain team, and — again, from where I sit — we’re all excited to have this great team as part of the EMC family.

And, to all of Data Domain’s customers, I’d encourage you to ignore all the competitive FUD you’re likely to hear over the next few months.  None of it will be true, I’ll assure you now.

We know how to do this integration stuff … we’ve done it many times before, with great resutls for everyone.  And this should be no different.

Only great things are ahead …