The Dell-EMC amalgam makes a lot of sense through the close-focus lens of short-term synergies, protecting established enterprise customers and horizontally filling out a legacy product portfolio, however strategically it looks to be more an act of reactive weakness, if not desperation. While the combined entity will be a powerhouse of traditional enterprise IT products, it does nothing to address the growing disruptive threat from public cloud services like AWS. Indeed, the deal is a typical example of established market leaders focusing on narrower and narrower slices of high-end customers as a disruptive technology erodes its entry-level and mainstream base.
As I write in this column, the deal happens against a backdrop of a server market slowing down, where most of the growth is happening among second-tier vendors and ODMs, and sales declines for large, enterprise storage arrays even as overall storage capacity continues to skyrocket. Both of these can be traced to the increasing popularity of cloud services. Considered in this light, the Dell-EMC deal looks like a classic reaction to disruptive technology.
There is near universal public cloud acceptance and swelling adoption by large enterprises, as evidenced by GE’s statement at re:Invent that it would eliminate 90% of its data centers and move 9,000 applications to AWS. Considered in this light, the Dell-EMC deal looks like a classic reaction to disruptive technology. As a reminder, Clayton Christensen’s theory of disruptive innovation “describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” The key element of disruptive versus sustaining innovation is the rate of technological change: not only is it much greater, but disruptive improvements occur faster than the rate at which customers can absorb new technology. Thus, products that are initially only suitable for low-end markets rapidly mature and add features that make them suitable for mainstream, and eventually even high-end needs. This process is incredibly destabilizing to established vendors.
As I detail in the full column, the Dell-EMC combination smacks of two enervated companies combining to capture a greater share of a stagnating market and a classic case of horizontal integration. While I agree with the early consensus that this combination will be fruitful for both companies (ex-VMware) in the short-term, it doesn’t address the long-term threat to incumbent IT vendors from cloud services. Read on to understand why.