Forecast: cloudy: The merger of Dell and EMC stems from the rise of cloud computing

“THE waves of change we now see in our industry are unprecedented and, to navigate this change, we must create a new company for a new era.” Joe Tucci, the chief executive of EMC, a big vendor of digital storage devices, is usually not prone to sweeping statements. But the merger announced today between EMC and Dell, a computer maker, is indeed unprecedented.

At $67 billion, it is the biggest corporate marriage in the information-technology (IT) industry ever. It is also emblematic of a divide running through the IT sector. Dell and EMC are members of an old guard, which is scrambling to regroup in the face of the biggest shift in the industry since smaller, networked machines dethroned mainframe computers in the early 1990s. That shift is the move to cloud-computing services hosted in data centres with big connections to the internet. Of the firms leading the charge, none is stronger than Amazon Web Services (AWS), the cloud-computing arm of the online giant.

At the same time as Mr Tucci and Michael Dell, the founder of Dell, were negotiating the deal last week in New York, AWS was holding an annual corporate shindig in Las Vegas. “This is the new normal,” extolled a visibly excited Andy Jassy, the unit’s boss, to the applause of a gathering of thousands of its customers as he reeled off one new service after another.

Amazon started offering computing services via the internet in 2006 as a way to even out the load of its IT systems, which were only fully used during the shopping season before Christmas. But its cloud rapidly became a business of its own. Today AWS offers hundreds of different services, from raw number-crunching and data storage to encryption and machine learning. It claims more than 1m customers, from the tiniest startups to a behemoth like General Electric.

Exactly how big Amazon’s cloud is, however, remains a mystery. In Las Vegas Mr Jassy said that AWS now has 50 “points of presence” (which may mean data centres) worldwide and presented many charts showing triple-digit growth, but was silent on absolute numbers. At the same event last year the firm said that every day AWS was adding enough new server capacity to support all of the computing needs of Amazon’s e-commerce business ten years ago (when it had $7 billion in annual sales). If AWS were a standalone public company, it would probably be worth not much less than Dell and EMC combined.

These two companies have not been oblivious to the disruption around them. Mr Dell, who founded the firm in 1984 in his college dorm room, where he put together personal computers (PCs) from off-the-shelf parts, took it private in 2013: he wanted to be able to lead it through its transformation without the distractions of quarterly results and activist investors. Mr Tucci, for his part, has shown a knack for buying firms that sell key components for cloud computing—and then letting them go about their business. EMC’s loose “federation” of firms includes Pivotal Labs, which helps firms build cloud and mobile applications, and VMware, the market leader in virtualisation software, which makes corporate data centres more efficient by spreading work around servers.

Yet both firms are still dependent on the business that made them big. Since Dell no longer publishes financial results, it is hard to know what exactly is going on. But analysts say that despite a push into selling more corporate technology, such as servers and storage devices, Dell still relies for the majority of its revenues on PCs—a business which continues to decline as a result not just of cloud computing, but the rise of smartphones. Global PC shipments fell by nearly 8% in the third quarter, compared with the same period a year ago, according to Gartner, a market-research outfit.

EMC’s mainstay, digital storage devices of all kinds and related software, is still growing, but no longer as fast as it used to—because many firms now opt to store data in the cloud or to buy cheaper gear from competitors. Early in this decade storage sales increased by double digits annually, a number which dropped to 2% last year. In July the firm posted a 17% decline in quarterly profits and warned of tougher times ahead. Before news of the merger talks broke, its share price had dropped by 17% since the beginning of the year.

All of which helps to explain why Messrs Dell and Tucci are keen to merge their companies. Consolidation would give the merged firm more bargaining power, not least when dealing with big cloud providers themselves, and would also gel with another trend in the IT industry: converged infrastructure. Traditionally, servers, storage devices and networking equipment have been sold separately. Now they are being increasingly offered in integrated bundles by one vendor, sparing customers the tedious task of making them work together—a trend that has been pioneered by EMC in a joint venture with Cisco, a big maker of networking gear. The next step, which some big cloud operators that make their own hardware are already taking, is to merge the different components by using basic computers and have software turn it into servers, storage devices or routers as needed. This development would play to Dell’s strengths: it excels at making commodity hardware.

Where Dell and EMC go, expect other of members of the old IT guard to follow. The efforts of Cisco, IBM, Oracle and SAP to boost their cloud-computing businesses have yielded only mixed results so far. More deals are likely, therefore. Earlier this year, for instance, Oracle was mentioned as a potential buyer of Salesforce.com, a big provider of web-based business software. So far, the only firm from the old guard that seems certain to remain in the top league is Microsoft, which has managed to build a sizeable cloud business called Azure. Dell and EMC have made their bid to join it. But it is Amazon that looks ever more likely to be the new top dog of the tech pack.

Article source: http://www.economist.com/news/business/21673523-clouded-marriage-merger-dell-and-emc-more-proof-it-industry-shifting?fsrc=rss

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