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Software and EMC

Among the predictions in this space for the year 2014 was the idea that disruption was coming to storage. Having looked at the numbers, this prediction may have been off: disruption had apparently already arrived. By my math, these are EMC’s revenue growth rates for the last four years for its Information Infrastructure business: 18.43% (2010), 17.92% (2011), 2.05% (2012), 3.48% (2013). While the Information Infrastructure includes a few different businesses, Information Storage – what EMC is best known for – is responsible for around 91% of the revenue for the Information Infrastructure reporting category. And Information Infrastructure, in turn, generates 77% of EMC’s total consolidated revenue – the rest is mostly VMware (22%).

All of this tells us two things. One, that EMC has seen a multi-year downward trajectory in its ability to grow its storage business, and two, that storage is responsible for the majority of the company’s revenue. Put one and two together and it’s clear that the company has a problem.

How the company has reacted to these developments, meanwhile, can help observers gain a better understanding of what EMC believes are the causes to this under-performance. Based on the announcements at EMC World, it’s easy to sum up the company’s strategic response in one word: software. From ScaleIO to ViPR to the acquisition of DSSD and its team of ex-Solaris engineers, a lot of the really interesting news at EMC World was about software, which is an interesting shift for a hardware company. EMC is committed enough to its software strategy, in fact, that it’s willing to directly compete with its subsidiaries.

If it’s true that EMC is betting heavily on software to restore its hardware growth, the next logical question is whether this is the appropriate response. Based on what happened to the major commodity compute players – Dell has gone private, HP is charging for firmware and IBM left the market entirely – it’s difficult to argue for a different course of action. It seems unlikely that the optimal approach moving forward for EMC – or any other storage provider, for that matter – is going to be heavy hardware engineering. There are customers, particularly loyal EMC customers, that are hungry for hardware innovation and will continue to pay outsized margins for that gear moving forward. There are many more customers, however, willing to explore software abstractions layered on top of commodity hardware, otherwise known as software-defined storage. There’s a reason that EMC’s primary points of comparison were vendors like Amazon and Google rather than its traditional competitors.

Like its counterparts in the networking space who are coping with the implications of software-defined offerings in their space, EMC essentially had two choices: bury its head in the sand and pretend that the business is fine, or begin to tactically incorporate disruptive elements as part of a longer term strategy for adapting its business. Which is another way of saying that the company only really had one realistic choice, which to its credit was made: EMC is clearly adapting. Software-defined storage was a common topic of discussion at the company’s event this week, and while there are still areas where the embrace is awkward, the company clearly understands the challenge ahead and is taking steps to adjust its product lines and the models behind them. The transition to what it calls the “third platform” – EMC’s terminology for the cloud – will pose monumental challenges to the business longer term, but by betting on software EMC is investing in the area most likely to deliver differentiated value over time.

The biggest problem with the transition to the “third platform,” however, isn’t going to be their engineering response. As the company likes to point out, it is investing heavily in both M&A and traditional R&D, and with names like Bechtolsheim, Bonwick, Shapiro et al coming on board it’ll have the requisite brainpower available. But the problem with its current strategy is that it does little to prioritize convenience. As we’ve seen in the cloud compute segment, customers are increasingly willing to trade performance and features for speed and ready availability. And like most systems vendors, EMC is not currently built to service this type of demand directly; they will instead have to settle for an arms supplier-type role. Even in software, which is intrinsically simpler to make available than the hardware EMC has traditionally sold, the company keeps assets like ViPR locked up behind registration walls. In a market in which technology decisions are being made based more on what’s available than what’s good, that’s an issue.

The gist of all this, then, in the wake of EMC World is that the company is inarguably adapting to a market that’s rapidly changing around it, but has tough problems to solve in availability and convenience. The loyalty of EMC accounts is absolutely an asset, one that the company will need to rely on as customers make the “third platform” transition moving forward. But the company also needs to remember that technology decision making at those loyal EMC accounts has changed materially, and is increasingly advantaging players like Amazon at the expense of incumbents.

The focus on software engineering, therefore, is appropriate and welcome, but insufficient by itself to address the coming transition. Only a focus on reducing the friction of adoption, and improving developer engagement, can fix that.

Disclosure: EMC is a client, as are Amazon and VMware.

Categories: Business Models, Cloud, Storage.