VMware disappointed the Street in its earnings call last Thursday. That’s not all that surprising; they’re hardly the first. The company actually turned in decent revenue numbers, but earnings and guidance fell short of expectations. That’s not new in today’s tech market either. So why talk about them? Because if the future is the cloud, cloud-native, containers, and transformation of IT and the network, VMware should have knocked the cover off the ball. We need to try to figure out why, to see whether there’s a VMware problem or a problem with our vision of the future.
On their earnings call, VMware noted two issues that impacted their performance. One was the fact that they had an issue with the efficiency of closing deals at the end of the quarter, a problem they didn’t have last year. The other was that there was a larger-than-expected portion of deals that focused on SaaS and subscription revenue versus (one-time) license sales. That pays off more in the long term (how many companies are moving to a subscription model?) but in the near term it impacts current-quarter realization.
Let’s address that second problem first. As I noted, nearly every software giant in the industry has been pushing for a shift to annual subscriptions for software rather than one-time perpetual licenses. VMware, obviously, has been one. The question then is why they were surprised when their strategy worked?
I think a part of the reason, perhaps the largest part, is that VMware does a lot through channel sales rather than direct. I’ve been a reseller myself (back in the 1980s), and I understand the space fairly well from the inside, and from consulting with vendors who focus on reseller channels for sales. One of the challenges with channel sales is that the channel does what the channel finds most effective for its own revenues. When you make a change in your pricing model, the channel finds the best way to bend it to their favor. Subscription sale of software, SaaS, and stuff like that have a lower price on-ramp for the customer. Might the channel have used that to reduce the selling cycle, thus shifting the sales faster than expected? They didn’t go into that.
Deal-closing efficiency can also be related to the channel, or more specifically to the relationship between sales and marketing. If there’s a business-related (as opposed to technology-related) topic that’s dominated my consulting practice over the years, it’s optimizing that relationship.
Marketing isn’t about making a sale by email, it’s about providing leads through web, email, or other avenues of information dissemination. I used to draw a diagram on a whiteboard during my sales/marketing sessions: “Editorial mentions sell website visits, website visits sell sales calls, sales calls sell the product or service.” The information-equivalent of this is that strategic vision precedes tactical fulfillment. You get your stuff written up in the tech media, which means you present some exciting strategic message. The titillation that generates causes many to visit your website, where they find the hooks between that excitement and an avenue for them, the buyer, to connect with it. That causes them to ask for more information, and you’re now in sales-tactical mode.
This progression is particularly critical where you’re dependent on channel sales. What a channel wants is leads. To get them, a vendor has to have the first two steps in the progression—editorial notice and website visits—covered. To have that is to have a great strategic vision and articulation. Sadly, VMware doesn’t have enough of that.
I offer the following comment, made by the CEO on the call, in response to a question on the overall demand environment: “The bigger picture, we would say, is unchanged.” It’s hard for me to imagine a worse perspective. Even if it were true, you don’t ever want to imply that the market isn’t changing, unless you own all of it. But it’s worse when, as in this case, it isn’t true at all.
We are in the early stages of the most transformational set of changes in application architecture and information technology that the world has ever seen. I’ve been in this business a very long time, and I’ve never seen the like of it. Containers, Kubernetes, the cloud, and cloud-native are combining to almost remake the rules of application design, development, and hosting. The potential application of the new model could raise IT spending by 40% to 60%, based on past cyclical trends. Does that sound “unchanged” to you?
This is all the more ironic when you consider that VMware is in perhaps the best position in all the industry to exploit the new model. When you consider that VMware has been pushing cloud tools, network tools, orchestration and federation tools, and even service provider infrastructure elements, and therefore is a broad-based technology supplier, reliant on exploiting broad trends in a product-line-symbiotic way. It’s like they built a boat without thinking about where the water was.
The CEO, a moment after the comment I just cited, noted that “we expect to see tech spend well exceed GDP”, and I assume that means growth of tech spending exceeds growth of GDP. Well, that has in fact happened three times in the history of IT, in three distinct cyclical moves driven by a new productivity paradigm having been realized. The last cycle ended in 2000, and it’s not picked up again.
I think that VMware is right in thinking that it’s critical for the industry (and for VMware) to see that cycle reignited, but if that’s true, why downplay the revolution? There are only three possible reasons.
The first is that VMware simply doesn’t see the strategic shift at all, which is what that (awful) quote seems to suggest. The glacier is moving downhill and they’re dodging the rocks it dislodges and the water that flows out, so they think there’s a flood and avalanche. If that’s the case, then the steps they’ve taken are simply fortuitously aligned with the real glacial impact of the application and IT shift. Serendipity can work; somebody always wins the lottery. It’s just a bad strategy for dealing with real-world, right-now, issues and opportunities.
A lack of recognition of the strategic shift would explain why VMware let their most important strategic initiative, Tanzu, drift out without the place-holding fanfare it needs and deserves. It’s very possible that the strategic shift I’ve described in IT is already visible to customers, and that their reaction to it is to hold off on a major commitment until they understand how VMware would deal with the shift. That could explain the slow closes in Q4, and also the shift from license to subscription at a faster-than-expected pace.
But then there’s this quote from the call: “And we really believe this gives us a tremendous position to help customers with their modern applications in Kubernetes, one of the most important shifts in enterprise architecture since the cloud.” That sure sounds like strategic awareness to me.
The second possibility is that VMware sees the shift but doesn’t know how to address it. They’re focusing on tactical presentation of strategic assets because they don’t have the strategic presentation yet. Tanzu, under this condition set, would be a tactical bundling of assets in response to changing sales focus.
You could read their recent M&A, including Pivotal and Nyansa, as proof of this possible explanation for VMware’s slippage. Pivotal, in particular, is a problematic acquisition from a strategic perspective. They were spun out of VMware once, and it’s always going to raise questions if you spin somebody out and they buy them back. Pivotal is the commercial conduit for, and major contributor to, the Cloud Foundry Foundation, the open-source community that developed Cloud Foundry. VMware had linked itself to Pivotal in past releases (Pivotal Container Services), and while you could make a convincing case for thinking about Cloud Foundry as a cloud-native framework, it would be more convincing if you’d already articulated a cloud-native vision, that broad strategic sweep I’ve mentioned above.
Then there’s the last possibility, which is that VMware is expecting to be bought, likely by Dell. A major reason why that might be the case is the IBM/Red Hat deal.
IBM has a strong, loyal, and rich installed base for its mainframes, and the best account control in the industry. The problem is that there will likely never be any additions to that base, and natural IT evolution is eroding it. Red Hat, the VMware competitor in the new-architecture-for-the-new-IT space, brought IBM a broader base and a way of strategically advancing their current base. Win-Win. IBM isn’t a direct competitor with Dell in the sense of server for server, but the big IBM accounts are surely Dell targets, and HPE is a competitor who could at any time launch their own initiatives aimed at that IT revolution I’m predicting.
Dell acquired (or merged with) EMC in 2015-2016, and got VMware with it, and Dell remains the major shareholder. There have been persistent rumors that Dell might acquire the remainder of VMware, for the simple reason that servers are just warehouses in which you store software under the new IT model. All the differentiation and innovation in the world of IT will come from software, and now in particular it’s the new application model that will drive the bus. Would Dell want another player to grab control? Even if HPE couldn’t buy VMware (since Dell holds so much of it), the future of IT is (technically speaking) the Kubernetes ecosystem, and that’s almost entirely open-sourced. HPE could get smart here, perhaps, and cobble their own Tanzu-like thing together?
VMware has multiple possible reasons for its seeming strategic paralysis, but no justifications. You cannot be in a market driven by a major strategic change, then drag your feet in dealing with or exploiting it. They’ve got the best technology base in the industry to do that, but it’s starting to look like their failure to aggressively position their own assets, for whatever reason, is enough to erode the value of that asset. IBM/Red Hat and HPE (to a lesser degree) now threaten them, and VMware has only a short window in which to respond—as short perhaps as the end of this year.
Then there’s the service provider space. VMware should have a really good position there, and their Project Maestro has recently been converted into a commercial orchestration offering. They do have the proper components for a solid solution to carrier cloud, but again their positioning is opaque to say the least. They need a broad vision of what carrier cloud is, and does, before they can present a solid vision of how to implement it. Again, there’s no effective response to the opportunity.
Their biggest barrier to an effective response is, generally speaking, themselves. Second is Pivotal, whose acquisition might be a reflection of “self-ness”. Unless they have a strong vision for somehow leveraging Pivotal without colliding with Kubernetes (which Pivotal only recently accepted) or knave (which I think could be the basis for a broadly valuable Cloud Foundry competitor), they’re wasting time and management focus with it. If they do believe there’s redemption for Pivotal, then they need to get their story on that out there. The good news is that b******t has no inertia; you can have it as fast as you can talk. The bad news is that eventually it buries you if you don’t build a platform that can rise above it.