How Dell’s and HPE’s Transformations Impact Them May Depend on Their Carrier Cloud Positioning

Just as we enter a critical period for the role of servers in networking, we’re seeing some of the major server players enter a period of transformation.  Dell has finalized its EMC/VMware acquisition, and HPE has announced they’re selling off their enterprise software business.  These two decisions seem to cement both vendors into a position of a “platform” company, and in an age of cloud, SDN, and NFV it’s not easy to say what that means.

Solution sales used to be the watchword in tech.  You saunter into an account, listen to their problems and opportunities, and whip out a ready-made offering that addresses them.  This model was sensible because it kept other players out of the account, where they could muddle up or even steal the deal, by insuring you had everything the buyer needed.

Obviously this approach fails when the buyer already has some of what they need.  As technology commitment matures for any buyer, they are fitting pieces into an existing pie to address their needs rather than building out one-off to do that.  If you sell “solutions” that are made up of a combination of hardware, system software, applications, networks, and so forth, your solution will likely overlap or even collide with what’s there already.  The modern tech world has moved toward selling parts not cars.

Solution selling poses a second risk, which is that the time you spend listening and suggesting a “solution” isn’t likely to benefit only you when other vendors are already in place.  In fact, nobody wants to educate the buyer anymore because it’s expensive and because everyone else will then step in to undercut your price because they don’t have to cover the cost of all that problem-solving.

This is what Dell and HPE seem to have been thinking.  We sell servers.  To use servers, you need system software to create a “platform”.  You don’t need applications, so we won’t even offer them.  Applications make the connection between business benefits and IT platform costs, and that means that they are where most of the problem-solving costs come in.  And virtualization, the cloud, and NFV are essentially extensions of system software, a part of the platform, right?

Yes, and no.  There is no question that the plumbing of all these modern tech revolutions are at the platform level, but the new technologies have something in common with the solution-buyer needs of old.  There has to be a business case.  People didn’t buy servers and software and wait around for something to do with them, nor will they deploy the cloud, SDN, or NFV without some compelling benefit to play off.  That’s what poses the challenge for Dell and HPE.

Every vendor in any new technology space has to ask the question “What’s in it for me?”  If you’ve committed to being a server/platform vendor, then the only credible answer is “Servers and platforms!”  If you’ve also already bought into the notion that solution selling is for suckers who want others to piggyback on their efforts and insights, then you’ll probably want to package servers and platforms to fit into cloud, SDN, and NFV deals.  The question is how.

If we look at cloud computing as a pure enterprise-data-center-offload mission, then it will reduce the total number of servers sold for the simple reason that something that’s cost-driven can’t end up costing more overall than what it’s replacing.  My own modeling says that in any event no more than a maximum of a third of current IT spending could be displaced by the cloud.  This would make pure application-hosting cloud computing pretty much a non-event in terms of potential revenue.

That means the winning cloud can’t be enterprise data center offload.  You either have to target SMBs to broaden your TAM, or you have to do stuff in the cloud that wasn’t being done before.  Or both.  And whatever course you take, you have to decide whether you’re ready to lead the charge into the new market opportunity or wait for it to be developed by others.

It’s my view that both Dell and HPE have decided not to do solution selling with NFV or SDN, but rather to assume that the two technologies have momentum that they can ride.  They see the evolution to these technologies as being one where their differentiation is important.  While I don’t think the story is as clear and explicit with the cloud as with SDN or NFV, I think it’s true in the cloud as well, particularly if you focus on the two key new-TAM points of stuff not being done or the SMB space.

Who promotes the new stuff that could drive up cloud usage?  If it’s not vendors like Dell or HPE, then is it the cloud providers alone?  If that’s the case, then I think we’ve made a great case for an Open Compute Project, because if the providers are going to carry the water they’re not going to pay fat margins to vendors to supply the technology.  But if Dell or HPE are going to make a case for a supercloud mission, they need to fulfill the mission with web services that support it.  Microsoft and Amazon offer web services for a couple dozen specialized cloud-specific capabilities.  Add to that inventory and enrich the capabilities of the basic tools already there, and you could build cloud-specific apps.  Why wouldn’t you want to offer that if you were trying to provide cloud platforms?

The SMB space is even clearer.  Nobody can really sell to an SMB except a local reseller, VAR, or integrator.  Every major vendor has a channel program to drive this kind of business.  If those same players are going to adopt cloud computing, then they’ll need to have specialized tools to lower the bar, and be facilitated by those same local resellers.  Who, we just heard, already have relationships with vendors like Dell and HPE.  So if Dell and HPE did specialized platform software to help channel partners drive the cloud SMB business, they’d have something they could bring to the table with cloud providers.

The telco space is the clearest of all, issue-wise, and the big opportunity, for both Dell and HPE.  While my model says that you could have a massive cloud transformation without the participation of telcos, it would take three times as long and penetrate a smaller piece of IT spending.  Some telco applications, like mobility and CDN, could add over 30 thousand data centers and millions of servers, and nobody but the telcos can invest in this.  Other applications, like IoT, could add even more servers and are difficult to credibly launch except with strong telco participation because telcos have a history of investment in technologies that require a massive capital build-out.  As I noted earlier, I think it’s clear that neither Dell nor HPE have been prepared to spend resources to develop a credible SDN or NFV market—no “solution selling”.

I think Dell’s acquisition of VMware puts them in a position where driving the market is more important, because the natural course of both SDN and NFV would be based on standards that VMware has no particular play with.  On the other hand, VMware has a super-credible enterprise-proven solution applicable to both SDN and NFV.  They can promote it if they can wire the deal early, but not if it’s already gone to OpenStack and Open Daylight.  SDxCentral says that VMware is “getting serious” about the telcos and NFV”.  If serious means wanting seriously to get the check, I agree.  With respect to deeper meaning, I’m still looking for the full solution to a business case.

HPE has always been a very strong player in NFV technology and they have decent if underplayed SDN assets.  Unlike Dell, who would have to build or partner to get a full-spectrum NFV approach that could make a broad business case, HPE has all the pieces.  However, they seem to believe that they can simply follow the progression of PoCs into deployments, and unfortunately none of the PoCs really make a broad business case, particularly for carrier cloud.  But this could change if Dell takes a serious run at the NFV and carrier cloud space, because HPE cannot afford to play second fiddle to Dell here.  The Street is mixed on whether HPE would be worth more as a bunch of split-off parts or as a whole, and carrier cloud might be the deciding factor.

If you model out all the possible ways in which the cloud could deploy, what stands out is that it deploys fastest if it has broad support from a class of provider whose rate of return expectations are historically low and who are not judged by the Street on the size of their capital budgets.  The network operators and public utilities are the only players who fit that model.  Dell and HPE, then, would be the most likely to succeed if they promoted carrier cloud.  Neither are doing that effectively right now, they’re simply admitting it exists, and that may be the stroke that leads to commoditized Open Compute competition being the real winner in the cloud.