Big moves afoot by Dell and VMware; today’s bold move is tomorrow’s change in strategy.
The article below is by 451 Research analysts William Fellows, Carl Brooks, Michelle Bailey, and Peter Christy.
Emphasis in red added by me.
Brian Wood, VP Marketing
The in and the out: IaaS landscape shifts again
There was a good deal of movement between the tectonic plates in the IaaS world recently, as Dell decided to withdraw from the battle, while VMware has effectively scrapped ‘Plan A’ and is starting another, more direct assault on the IaaS kingdom. Both moves reflect the impact that Amazon is having on the marketplace, and amplify to one and all that this is no phony war.
Dell, still in the midst of a major reorganization and privatization effort, has scrapped plans for offering an open-to-the public IaaS facility that would have competed with Amazon Web Services (AWS), Rackspace Cloud and similar offerings. The public cloud option was to be based on OpenStack; Dell was (and remains) a heavy early contributor to the OpenStack project, and its Data Center Services business unit has significant ongoing experience in building OpenStack-based IaaS environments for customers.
451 Research feels that while this move has little effect on Dell’s prospects overall, it helps clarify the competitive landscape around IaaS, and shows the distinction between supplier and provider more clearly. The supposition is that Dell’s IaaS service was not remunerative; it was mainly an asset used for sales around other hardware and software products (the ‘never say no’ theory of sales) and as a working proof of execution on OpenStack by Dell.
To make a real stab at the public cloud and compete with AWS, Microsoft, Rackspace, et al., Dell would have needed to make a significant global investment. It is likely Dell didn’t want to pour sales and marketing into it, nor scale it out. Dell doesn’t have the global datacenter asset base to jump-start IaaS deployment, meaning go-to-market would have been extended (Dell has announced plans to build datacenters to support further service options).
Dell’s services business has not been a bright spot recently – server sales certainly have, however. The company recently announced a new line of high-capacity blade servers to serve tech-dependent SMBs. For instance, Dell has plenty of IaaS options for cloud builders, and the recent purchase of enstratius further enables hybrid infrastructure management. Likewise, Dell’s major acquisition last year of Quest points to a strong bet being made on software sales to the midmarket; indeed, the firm has undertaken a core reorganization around sales and a channel that leverages Quest’s centralized operations in place of Dell’s existing multi-headed sales force.
Dell’s public cloud/IaaS environment was quite limited in scope and customers; further plans to dial back on other application services and virtual desktop are not known at this time. Instead of delivering its own services, Dell will use partners to deliver public cloud services, and will double down on enabling customers to integrate with and manage multiple cloud environments in hybrid models. In doing so, it’s turning itself into a cloud service broker, and will be positioned to deliver ‘best execution venue’ options and strategies to customers.
Dell has said it will become a supplier for a number of providers of public cloud services, including Joyent, ScaleMatrix and ZeroLag Communications. The company originally worked with Joyent in 2009 to create a pre-built rack for running Joyent’s cloud stack. In 2010, it decided to develop a a PaaS system using Joyent’s cloud software stack. But that deal, and indeed the Joyent relationship, seemed to go cold in subsequent years – until now.
In practical terms, Dell exits its VMware-based vCloud Datacenter Service, and will not offer the OpenStack-based public cloud IaaS service due later this year. It’s not clear what effect this will have on Dell’s datacenter program. In 2011, it announced plans to build 10 new datacenters over two years to support its continued expansion into cloud services including PaaS, IaaS and VdaaS, and traditional managed and colocation services.
Publicly, Dell said that key to the move was the need to let customers benefit from interoperability and flexibility. Of course, owning and operating a cloud service increases the difficulty of delivering an agnostic, multi-cloud strategy to customers. The acquisitions of Gale and enstratius point to Dell’s mult-cloud/hybrid-cloud ambition, although it will need further smarts here. Vendors that may benefit from Dell’s move – either indirectly because it validates the market, or from potential partner, channel, marketing and M&A opportunities – include cloud brokers, cloud cost and spend management (IT business management) and cloud integration firms.
The 451 take – Dell
We always got the sense that Dell’s play into the public cloud was testing the water, rather than an all-out assault on the market. And with Dell looking to go private, products and services that do not have long-term strategic value will clearly be red-flagged. Cloud services are strategically important to Dell given its SMB base, and it will be important for its technology to have a role.
However, taking the company private raises issues of using free cash flow to pay down the debt that is used to make the buyout leveraged, and that restricts cash for other investment purposes. We suppose that when Dell re-prioritized, the cloud may not have made the cut. Competing with Amazon, Microsoft, Google and Rackspace was never going to be a winning proposition for Dell in any case, not least because it’s already some years behind. Moreover, IaaS is outside of Dell’s core competencies; there are a lot of competitors, and probably not that much specific demand from its own user base. Dell customers can get IaaS anywhere, so Dell has little incentive to work hard to push the shop brand. It’s a very small blip in its revenue stream.
The company is better off helping providers optimize their IT assets over time, and doesn’t need to confuse the situation by being seen as a competitor. Customers that adopt holistic, hybrid digital infrastructure strategies will want choice and to avoid lock-in. To this end, Dell’s ‘arms dealer’ status is more than enough for the moment. After all, companies that made the most money during the gold rush were the ones that sold tools to the gold miners. Sounds like Dell wants everyone else to take the risk; they’ll build the tools, thank you.
Dell’s move clarifies the competitive landscape around IaaS – a bit. There is now a clear distinction shaping up between IaaS driven by consumer-facing tech firms (AWS, Google, Microsoft) and the ‘true’ provider market (Rackspace, SoftLayer, et al.) and helps put OpenStack in its place as a panacea for those looking to do IaaS.
Finally, Dell isn’t the first, nor will it be the last, to take a flyer on IaaS and then ditch it; because it is, in fact, still a very specific kind of business execution that vendors aren’t naturally suited for unless they already have a major online service-delivery competency, even if the technology is pretty straightforward these days.
VMware vCloud Hybrid Cloud Service
VMware just announced pricing and availability for its VMware vCloud Hybrid Service (vCHS), which is a channel offering from VMware hosted on third-party datacenters. The target audience is enterprises seeking to extend their current VMware vSphere virtualized datacenter infrastructure into the cloud, and looking for a seamless way to do this. The service was previewed in April. It supports vSphere applications and operating systems, virtual networking to extend existing Layer 2 or 3 networks from the datacenter to the vCloud Hybrid Service, and support vMotion, high availability and vSphere Distributed Resources Scheduler. Users will view, manage and migrate VMs from vSphere to the cloud service using the vCloud Connector plug-in.
Importantly, vCHS also enables VMware to back into third-party software sales. VMware will offer SAP HANA, Business Objects, NetWeaver and other SAP software as a subscription both on-premises and on vCloud Hybrid Service, with full production support from SAP and VMware. SAP will certify vCloud Hybrid Service. SAP’s sales force will take this out to its customer base – much of the customer base is said to want HANA on subscription. VMware will sell SAP, while SAP will be compensated for selling vCHS.
VMware vCHS is available in June through an early-access program, with general service availability in the US expected in Q3 2013. There are two flavors: vCloud Hybrid Service Dedicated Cloud provides physically isolated and reserved compute resources and will be sold on an annual term with pricing starting at $0.13 an hour for a fully protected, fully redundant 1GB virtual machine with one processor; the multi-tenant vCloud Hybrid Service Virtual Private Cloud has a dedicated allocation for customers. Virtual Private Cloud will be sold on a monthly term, with pricing starting at $0.405 cents an hour for a fully protected, fully redundant 1GB virtual machine with one processor.
The 451 take – VMware
VMware’s move acknowledges the growing importance of Amazon in the market – and the danger of ceding control over how enterprises spend money on virtual servers, wherever they are. However, given that vCHS is specifically targeted at extending enterprise virtualization into the cloud, the price comparison that end users will be examining is vCHS’ cost versus running VMware internally, less so a straight comparison with Amazon. Indeed, it’s whether vCHS can come in below the threshold at which outsourced elastic services need to be priced to become attractive (perhaps no more than 4x the cost of internal resources).
VMware is also placing a special emphasis on the partner community to drive sales. Besides competing to some extent with AWS and other non-VMware IaaS providers, the service is also competing with VMware service providers, especially those that aren’t adding any value or grafting their own services on top. Those service providers most impacted include vCloud Powered partners using vCloud Director as well as the vCloud Datacenter Service providers like CSC and Bluelock (now that Dell is taking down its service while Verizon/Terremark never achieved VDS certification). Savvis, Terremark and Dimension Data are among those providers that use the VMware hypervisor but not the vCloud Director cloud management platform, and have instead grafted their own front ends onto it and developed value-added services to ride atop.
VMware’s goal for vCHS is to make it easy for customers to add external capacity from a service provider – in a fashion that is as transparent as possible, both to the IT group and to the business. As it stands, enterprises will get access to its IaaS service baked into their on-premises deployments, which is a big leap forward. As end users seek ways to find the most suitable venues for running their applications, VMware wants to become that point of control for on-premises or hosted connectivity.
Special from 451 Research’s Market Insight Service.