Hewlett-Packard (NYSE: HPQ) appears to have beaten Dell (Nasdaq: DELL) into submission. Its reward: the pleasure of opening its gargantuan checkbook to pay $2.1 billion for storage specialist 3PAR (NYSE: PAR). But what does the big deal actually mean?
What's the story?
After HP increased its all-cash offer yet again, Dell tried another boost, including some stock swapping and a long-term distribution deal. 3PAR declined, and now the storage industry is turned on its head once again.
I have argued that Dell needs 3PAR a lot more than HP does, but there's a limit for everything, and HP has more resources. Dell now has to turn elsewhere for the cloud-friendly storage solutions that made 3PAR both famous and valuable; it may even develop its own high-efficiency storage management systems.
In that respect, the 3PAR drama looks a lot like the similarly uneven tug-of-war between NetApp (Nasdaq: NTAP) and EMC (NYSE: EMC) last year, where the bigger and richer EMC walked away hand-in-hand with deduplication expert Data Domain. Even so, NetApp's own deduplication solution is a big growth driver today.
A room with a view
I spoke to Rackspace (NYSE: RAX) Chief Strategy Officer Lew Moorman about the implications of the 3PAR deal, and he saw a wholesale transformation of the IT industry in these tea leaves. Rackspace uses more Dell systems than HP solutions, but it's a customer of both. The company's evaluating 3PAR technology in its labs, but it has yet to place any real orders there. Moorman is prepared to work with either HP or Dell, should his company decide to implement high-efficiency storage systems.
"Servers are turning into complete systems these days," he said, "and that includes having storage solutions for every machine you sell." Complete packages like these reap higher margins than just selling one or two pieces of the puzzle, which explains why everyone is getting into this business model now. This acquisition is "a natural fit" for both Dell and HP, in Moorman's view.
The downside is that whoever wins -- in this case, HP -- risks jeopardizing existing relationships with other storage vendors like EMC and NetApp. That's exactly what happened to Cisco Systems (Nasdaq: CSCO) when it got into selling servers alongside its traditional networking portfolio. Large and important partners like HP have pulled out of certain Cisco relationships. Cisco CEO John Chambers had better be sure that the additional market opportunity in selling complete systems is worth losing these good friends.
What's going on?
That said, Dell is far from dead in the water. While 3PAR was and is the indisputable leader in the thin-provisioning game, the other large storage vendors are plunging into this market with verve and enthusiasm. If Dell can't own a technology of its own, it will still be able to find a partner for bundling this kind of functionality into its complete-system packages. Margins may be slightly lower, but Dell is used to hanging out in that space. It'll do all right.
In fact, Dell could even be considered the winner in a backhanded-compliment sort of way. If HP intended to drive prices up on its longtime rival, the company misjudged Dell's capacity and willingness to pay, and took the process one step too far. Now HP is on the hook for nearly twice the price tag that Dell had envisioned when the bidding war started. It will take a lot of incremental storage sales to make up for that investment. Moorman said that's certainly achievable, but it won't be easy.
The IT industry is indeed changing before our eyes, and a field full of traditional "coopetition" is transforming into a smaller group of larger players, all in head-to-head rivalry instead. That's how Moorman sees it, and I agree wholeheartedly.
"Is it good or bad for us?" he asked. "Who knows?" Only time will tell, but you're free to hypothesize in the comments below.
