Hardware is good, software is better
Hardware is good, software is better
There's still good money to be made selling high-end storage systems, but software is better. That is the simplified analysis of EMC's stunning turnaround from record losses to forward profit projections. By Gerard Knapp.
At an international press briefing in June at its sprawling new complex in Hopkinton, Massachusetts, CEO Joe Tucci said "we've got great balance at EMC", with growth in services, software and hardware. While all three divisions are growing, it appears that it's software and services that are adding more to the bottom line as the hardware market becomes increasingly competitive.
In fact, Tucci said that other acquisitions of software companies were likely in the future. This would follow on from the purchase of Legato and Documentum in the storage software and content management areas, respectively, as well as the highly strategic acquisition of VMware.
While EMC did generate income from its proprietary software attached to its large systems, the CEO realised that "there is no long-term market for software that is not open", so the company looked at vendors that could help it achieve greater returns.Last month, EMC announced it was amalgamating its software operations into the Enterprise Software Group, or ESG. The combination of Legato and EMC's storage software offerings, as well as Documentum's strength in content management, has seen the company roll out the strategy of information lifecycle management (ILM).
VMware is a highly strategic buy for EMC, as it opens up a new market of small-to-medium enterprises that have systems and storage based on Intel/Windows technology. Essentially, VMware allows those users to effectively increase their overall storage capacity by using existing systems more efficiently.
Another reason that VMware is not part of ESG is that its largest customer is IBM, a major competitor to EMC in the high-end RAID storage market.
Better figures
Overall, figures supplied by EMC showed that of the US$8.1 billion revenues the company expects to make in 2004, some US$1.5 billion will come from software operations. However, software and services' contribution to profit is thought to be much higher-as much as 40 percent (EMC was reluctant to share the breakdown of profit contributions).
Until 2001, the company had based its operations and revenues on selling high-end RAID storage systems. And in 2001, it recorded a loss of US$508 million, but by 2003, it had rebounded to earn US$496 million and this year it is projecting earnings of US$850 million.
This transformation of EMC's fortunes was due to revised pricing of its storage systems (and using new-generation ATA disk drives), but it's also from the increased revenues from software and services.
According to several EMC executives who gave presentations at the press briefing, a major driver for growth in storage systems, software and services is compliance-the requirement for end-users to comply with emerging legislation and regulatory requirements in the age of e-commerce and electronic documentation, particularly via email.
The other area that Tucci identified was the SME market, traditionally not an EMC stronghold. He believes that EMC's strategy of information lifecycle management can be applied to the SME market, even to the software offered by Documentum.
One thing that both EMC and Documentum had in common-prior to the acquisition-is that both were known for premium pricing. EMC once had an admittedly 'arrogant' approach to the market, while Documentum priced its software at one of the highest per-seat licence fees among all DM vendors.
But a major part of Tucci's vision is to extend the functionality of the respective product offerings-driven from working with some of the world's largest companies-to the smaller-sized enterprise.
From discussions with Documentum executives, apart from some new-found humility working under an imposing CEO, it appeared the company was still coming to terms with the acquisition. It was unable to say how many Documentum users also used EMC, or vice-versa. Instead, the size of their enterprise customers meant that each usually had a broad array of storage systems.
Documentum still quotes its strength in the pharmaceuticals market-the vertical market that gave the company its first major business wins back in '90s-and expressed a little surprise that Tucci was planning to make its software more accessible to end-users (meaning it would be less expensive). "Well, whatever way Joe tells us, we'll jump. He's the boss," said David Milam, Documentum's chief marketing officer.
Like many other companies that have turned around and headed into a new direction via acquisitions, the challenge facing EMC is to integrate all the technologies it has acquired, and to retain the key staff that developed the original products.
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