Dell-EMC Merger Accelerates The Cloud Squeeze

  • The private and hybrid cloud markets have not grown as anticipated.
  • Dell's move on EMC is a bid for this market
  • The real hope lies in an Internet of Things separate from that used by people.

The decision by EMC (NYSE:EMC) to be taken private by Dell, making it the majority owner of Vmware (NYSE:VMW), was seen by Dell as a move to get out of the PC hardware space and into the cloud tools space, but will it work?

Ever since clouds became their own industry, around 2010, there has been an assumption in the market about how they would evolve. Public clouds like Amazon's (NASDAQ:AMZN) web services, it was said, would take the public-facing business, and the new businesses, but the world’s biggest enterprises would eventually build their own private clouds, and connect them to the public infrastructure in what was called hybrid cloud.

The world’s largest tech companies, including VMware and EMC, rushed into this opportunity. So did HP (NYSE:HPQ) and IBM (NYSE:IBM). So did the world’s big phone companies, like AT&T (NYSE:T), Verizon (NYSE:VZ) and CenturyLink (NYSE:CTL). So did the old web hosting companies like Rackspace Hosting (NYSE:RAX).

But something I wrote consistently through this era remains stubbornly true. Price sells cloud. Price sells cloud to a degree that even surprises me.

Low prices have gradually shaken-out weaker cloud players, like HP. But those prices have also shaken out many of what I call the cloud arms merchants. There is a relentless push to virtualize everything about the cloud – not just processing but storage and networking. The idea is to turn hardware into software, to keep squeezing out hardware costs of all kinds and then, through constant price pressure, maximize the load factor of the resulting big cloud.

What this means is that, if you’re selling any kind of hardware, you’re in a world of hurt. While VMware is a software play, parent EMC is still selling hardware, in the form of large-scale storage arrays. Dell itself is a hardware company, even if it’s trying to sell server racks with vast amounts of capacity rather than just desktop PCs.

Thus Matt Asay, an observer whom I’ve trusted for years, writes that the Dell-EMC merger is like the HP-Compaq merger, dinosaurs mating on their way to oblivion.

As he notes, EMC has been missing its sales targets for years. So has IBM. The problem is that enterprises don’t want to build their own infrastructure. They don’t want a lot of private cloud, with all the operating expenses that go with it. They like the economics of public cloud. That’s where they’re going to go.

The counter to this argument, of course, is that there are cloud arms merchants that are prospering. VMware is doing quite well. So is Pivotal, which is focused on clouds that run the Internet of Things. And so are other software plays like Red Hat (NYSE:RHT), which has been growing its top line at 20% per year while seeing only slight margin erosion.

I think that, assuming Asay is right, the chief hope for Dell in this deal is Pivotal’s IoT work. As hackers increasingly see physical infrastructure as a target, it seems clear such systems need their own Internet, separate from the rest, operated using the same security as transaction processing networks. Pivotal can build such systems, using Dell parts.

The cloud squeeze has taken out the Internet of people. Things are Dell’s only hope.

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