This morning HP announced they were trumping Dell’s bid for 3PAR, offering a whopping 33% on top of Dell’s 85%+ premium. I’ve read lots of chatter about why, but I think much of the analysis misses the mark. I thought it would be worthwhile putting the deal in historical context.
First, let’s talk a little bit about data centre and storage history. Storage many years ago used to be housed with the CPUs. The large vendors shipped computers with high end processors, packed with disk drives and called them servers. As data storage grew faster than compute, the industry began to decouple storage from the compute, giving birth to companies like EMC.
EMC and Hitachi Data Systems operated in the high end enterprise segment with very large storage arrays designed for high performance, availability, and reliability. Because of how critical and difficult storage is, very few of the server makers chose to wade into the market. In fact, most compute players would regularly OEM product from the specialised storage makers. This led to a very happy symbiotic market with clean lines where everyone knew their place, and each of these vendors in fact OEM’d one another’s products. For example, Sun and HP each resold HDS’s products. Dell resold EMC’s products. Brocade was built almost entirely on a channel model.
A couple of moves really changed this panacea. First, EMC got a hold of VMware and virtualization subsequently became the hottest trend in the data centre. This pulled EMC into the server side of the market and led them to rapidly expand beyond storage into systems management, software, and other layers of IT spend. Second, Cisco announced they would be entering the high end server market. This clarified their growing ambitions from dominating the router market into the compute part of the IT spend. Cisco announced a JV with VMware and EMC to complete their product vision late last year. Third, Dell bought Equallogic and HP bought LeftHand Networks, both signaling a movement towards owning IP for storage (albeit the mid market). Dell had been partnered with EMC going back to 2001 and was a meaningful channel for EMC’s mid range products.
So what’s happening now? Every major data centre platform vendor sees two major trends going on. First is the rise of the dynamic, agile data centre within enterprises. This requires being able to spin up resources – compute, network, and storage – automatically in response to business demands. Second is the eventual move of the data centre to private and public cloud offerings. In this model, the vendor no longer sells equipment to the enterprise, but assembles and runs all the parts as either a dedicated or shared service.
In order to fulfil this vision, you need all parts of the stack working together seamlessly. This is where 3Par comes in. 3Par was born during the great storage gold rush of the early 2000s. Bringing their product to market took over $200MM in venture capital, including some recaps along the way. They were one of many startups that were funded to build flexible, modular, high end systems, but one of the few to survive. An enterprise’s lifeblood is storage and they would not trust startups lightly. This required high burn to build the technology, and then high burn on the sales side to succeed in market. To 3Par’s credit, they managed to get public and raise sufficient capital to sustain themselves to critical mass and profitability. And now they benefit from scarcity value.
Looking at the landscape, 3Par is the only real alternative to EMC and Hitachi in terms of high end storage. EMC has its own ambitions for data centre dominance, while HDS is part of a much larger conglomerate. If you believe you need to own storage and server, both to fulfil the vision above and to avoid partnering with a competitor, than 3Par is the only place to get this type of deep high end storage technology. Given HP and Dell have a much larger sales channel than 3Par, these guys can immediately double, triple or quadruple sales from 3Par products overnight once it is part of their catalogue. Both reasons afford the premium we are seeing.
Going forward I’d expect to see more data centre consolidation. There are some major battles brewing as companies compete to own the enterprise! Network Appliance has long been rumoured as a fit for Cisco. Plenty of other combinations make sense as well. It’s clear to me, though, that the march is towards creating end to end solutions and masking complexity. Should be a fun next few years to watch!
Amish Jani is a Managing Director at FirstMark Capital. This post originally appeared on his blog, and is reprinted with permission.
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