Why did Dell and VMware beat Street estimates, while HPE and IBM fell short? The companies themselves are clearly interested in answering that question. Investors obviously have an interest in this question, but anyone in tech should be interested too, because the answer may a signal on future technology direction.
It’s not difficult to see the major difference between Dell and the HPE/IBM pair. Dell sells both servers and data center equipment and personal computing products, while both HPE and IBM have focused primarily on enterprise data centers. It’s not difficult to see the difference between the VMware/IBM pair and Dell/HPE; the former two are software/service-centric and the latter hardware centric. But these two pairings show that the “major differences” in products and strategy don’t account for the results. Or do they? Maybe we just have to think of two different factors in juxtaposition.
One factor, of course, is the difference between the software/service and the hardware/server business model. Hardware is generally a capital expense, meaning that it has to be depreciated and represents a kind of strategic inertia. You buy it and you’re stuck for the depreciation period unless you want to take a hit. Software is often either open-source or subscription, and support in either case is an expense. Because the major determinant in the last quarter’s results is the onset of the pandemic and lockdown, it’s not surprising that a bend toward software/services might come about.
Another factor is the difference between the data center and the desktop. I know that many people thought that work-from-home (WFH) would be a boon to virtual desktops as users sought to support workers at home without having everyone get a PC. That apparently wasn’t the case; sale of PCs was strong, and servers were generally much weaker.
But why did IBM, a software/service business, do worse than VMware, with a similar bend? It’s almost certain that one reason is total addressable market. IBM’s footprint tends to be the giants, the largest enterprises. As I’ve noted in blogs before, the problem with a “Fortune 500” market is that there are only 500 of them. VMware has a broader market base, something IBM lost when it exited the server business, and which Red Hat’s acquisition is only now helping them regain.
Still, IBM/Red Hat and HPE also sell software, and with Red Hat included for IBM, both have a similar potential market scope. Why didn’t they perform as well as VMware? For IBM, the reason is the typical after-acquisition organizational turmoil. You can’t help feeling threatened when your company gets bought, or makes a buy that suggests your own role might be under threat. Sales strategies have to change, which always makes sales organizations uncomfortable and always demands new marketing programs to develop leads. What might Red Hat have done on its own? We’ll never know.
For HPE, the issues are more complicated. HPE is primarily a server company who also sells platform software. Enterprises I talked with over the years have said that while they often consider buying a server-and-platform-software package from the same vendor, they would be less likely to buy software from a server vendor without getting the server piece. That means that from a marketing perspective, HPE has to fight hard to stay even if capex pressure reduces interest in servers, and that marketing would have to be very effective and very software-targeted.
HPE hasn’t done that, and part of the reason is the usual problem of competing interests. If you sell software as a server vendor, you may be considered an enemy by other software vendors (like Red Hat and VMware). They’ll try to keep you out of data center deals to protect themselves, so you tend to take a lower software profile to protect your server business. It’s hard to gain traction in software and services by hiding your offerings under a bushel. To make matters worse, IMHO, HPE has never been a strong marketing player in software, or software-centric markets.
We can say that the combination of an expense-versus-capex focus and a PC-versus-data-center focus worked out, but that may sell the winners short, particularly VMware. Could VMware be setting up for a drive to shift the focus of “hosting” away from the hardware and onto the platform? Servers, then, could be something like raised flooring in data centers; you need them but they’re really just part of the landscape.
That would be a pretty smart play for VMware, and of course their vSphere stuff gives them significant experience in the platform-centric data center space. Over the last year, they seem to have jumped on the whole container issue aggressively too, and they’ve also launched initiatives aimed at providing the platform for the carrier cloud. All of this gives them good collateral to justify engagement, and virtualization can be played either as a cost-savings approach (great during a lockdown) or as a way to prep for the future (always popular). VMware acknowledged the evolution of a new vSphere vision, and a new container vision (built around their Tanzu framework) on the earnings call, which proves that management knows the potential value of the software-platform-centric vision of hosting.
I think this all helped them in the quarter, but it also illustrates a potential vulnerability. In fact, VMware has two vulnerable points that I see. The last quarter shows that they’re in an early position of strength, which is a great place to be when addressing vulnerabilities, but they can’t afford to rest on their laurels.
First, they’re flailing around a bit with respect to containers and Kubernetes, the two things that you absolutely have to get right in enterprise computing these days. They were a bit slow in centering on Kubernetes, and their recent acquisition of Pivotal (which was at one point spun out of EMC/VMware) has required they tidy up the Pivotal stuff to create a unified positioning. Pivotal was the prime supporter of the Cloud Foundry Foundation, which was the source of an early platform offering for cloud-native. Hopefully the Pivotal deal was to create a true cloud-native ecosystem, and hopefully that ecosystem will be revealed shortly. If not, then VMware has handed IBM/Red Hat a pass to exploit the cloud-native space, which they certainly seem to be working to do.
The second problem relates to carrier cloud. One of the biggest mistakes HPE made was to presume that the NFV ISG standards process would build a big market for servers, when in fact the direction of activity was promoting white-box universal CPE. Even before HPE got started in earnest to promote its carrier sales efforts, operators were telling me that capex savings associated with function hosting could not be expected to justify NFV deployment or carrier cloud. NFV, then, is not a helpful driver for carrier sales of data center servers or platform software.
VMware isn’t as dogmatic about NFV as HPE was, but they’re still more NFV-centric in their carrier positioning than I think is wise. What operators need isn’t NFV platform software, it’s cloud-native platform software that could perform the mission that NFV was defined to form. They could blow some positioning kisses at NFV (as Microsoft has, for example, in its own marketing to the telcos) and then close with a strong carrier-cloud-cloud-native offering. Since they’re already committed to cloud-native (via their Pivotal move), why not go all-in?
Tanzu, VMware’s umbrella architecture, seems to be where everything is going, enterprise-wise. The acquisition of Octarine and (re)acquisition of Pivotal could enhance that framework considerably, if played optimally. That framework, as a kind of “Tanzu-for-operators” could then be a carrier cloud platform. If that positioning was done quickly and effectively, then operators who wanted to use public-cloud hosting for early carrier-cloud applications could simply buy IaaS services and host VMware’s solution in the cloud, with the promise of moving it to the data center when scale builds. That would be a good story for VMware, and something operators would love, but it can’t be told if operators commit to an Amazon, Google, or Microsoft carrier-cloud platform that can’t be migrated easily to the data center.
On their earnings call, CEO Pat Gelsinger said “We continue to see extraordinary interest in a software-driven approach to the 5G network and VMware’s telco cloud. Carriers deploying our telco cloud solution have seen substantial improvements CapEx and OpEx as well as agility in deploying new services. We now see the opportunity to extend these benefits to the radio access network using virtualized RAN deployed on telco cloud. We’re pleased to be expanding our partnership with Intel to address carrier needs in this area. We’ll provide additional details regarding our partnership at a future date.” All this is great, as long as it doesn’t fall back into a “we host 5G and telco cloud VNFs” story. There are too many stronger players already doing that.
Any of the top telco software vendors could make a decisive move in the carrier cloud space. Given that most of them have been pushing NFV, and given the fact that these vendors already have strong sales to the telcos, mostly in the OSS/BSS area, they’re going to get a hearing when they make a sales call. To counter that, VMware needs to focus not on what others are saying, but what they seem reluctant to say, which is that NFV isn’t the right answer and most operators know that. Sure, they want to “fix” it, but that’s where blowing an NFV kiss comes in. A fix is a nice front for a new approach.
If Tanzu is the key to success for VMware, then perhaps Kabanero is the key for IBM, and they could be exploiting it, or at least cloud and carrier cloud symbiosis. Dell’s doing OK, obviously (they can ride VMware’s software coat-tails), so that leaves HPE. They need their own branded and promoted super-approach to containers and carrier cloud, and they need it quickly. They don’t want to be the only player of the four we’ve been talking about that misses another quarter.