When Dell finalized the massive $67 billion deal to buy EMC last fall, it marked the biggest tech deal in history and included $57 billion in debt. Why would Dell make such a deal? According to an article published in Fortune this week, The Gamblers Behind Tech’s Biggest Deal Ever, Dell believes that by getting bigger, it can capture the lion's share of the data center market.
While it could be right, there could also be a couple of potential flaws in that thinking. First of all, being big comes with its own set of problems. It makes it difficult to shift in a highly volatile marketplace. Further, combining two companies the size of Dell and EMC means combining systems, laying off redundant workers and bringing together two vastly different company cultures with all the inherent politics associated with that.
Secondly, there are some questions about the long-term growth of the data center market, as more companies shift their workloads to the cloud. Perhaps CEO Michael Dell and his deep-pocketed partners at Silver Lake believe that as those customers swing to the cloud, his company can play both ends against the middle, and grab some of the cloud data center market share. But, there is a major problem for them (and HPE, Cisco, and others who sell equipment and software to data centers): The largest companies have been building their own hardware.
Companies like Facebook, Amazon, and Google that require hyper scale are finding that they need to control every aspect of the hardware in the data center. The traditional vendors tend to hide some of the technical details that these companies want to access and manipulate at a very granular level. When you need to squeeze out every bit of efficiency out of the equipment, you need to have the complete control over it that only building your own gives you.
That means that businesses that would have gone to companies like Dell Technologies, no longer have to. When you have $57 billion in debt, that's probably not what you want to hear, but Dell still has plenty of factors working in its favor, especially the fact that the cloud transition, even though we are more than 10 years down the road from the launch of AWS, is still very early in terms of market size.
Traditional IT still reigns (for now)
Gartner is projecting $3.4 trillion in overall IT spending in 2017. By contrast, it was predicting $204 billion in overall public cloud spending for 2016, up from $175 billion in 2015. That still leaves a lot of room for traditional vendors like Dell to operate.
The key for Dell moving forward will be, to what extent companies continue to invest new money into their data centers. Surely, the hybrid reality, where some of the workloads live at home in the data center and some in the cloud will exist side by side for some time, but just how many large enterprises will continue to invest in new data center equipment moving forward remains a looming question.
What's more, as the cloud's biggest players vie for customers and build ever more features into their platforms, they could begin to take increasingly large chunks of business away from traditional hardware vendors like Dell.
Of course, Dell picked up some key pieces in the EMC deal including VMware, Pivotal, and Virtustream — all of which can play a role in the private and hybrid cloud orchestrations of enterprises in the future. VMware recently signed a big deal with AWS to offer its own flavor of virtualization in the cloud, a huge win for AWS, that would in an interesting twist, ironically also help Dell (proving just how complicated markets are these days).
In the Fortune article, Michael Dell made clear he's fond of zigging when others are zagging, and he and his investors obviously believe deeply in the combined company or they wouldn't have made that enormous investment to buy EMC. Only time will tell if they made a sound bet.
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