Wither Dell?

Lead Analyst: Cal Braunstein

CEO Michael Dell is coordinating a buyout of Dell Inc. for $24.4 billion in the hopes that the company can more effectively go through its transformation if it does not have to deal with reporting results quarterly to fickle investors. Michael Dell's MSD Capital (his investment firm), has teamed with Silver Lake Partners to take the company private. Microsoft Corp. will be assisting in the buyout in the form of a $2 billion loan. If the buyout is successful – which it should be at some price – what does it portend for IT executives and commercial accounts?

To understand where Dell needs to go, one needs to first see where it is. Dell started as a low-cost PC company in the consumer market. It gradually switched to a bifurcated model – PC for consumers and PC and servers for the commercial space, primarily the public, small and medium business (SMB), and large enterprise markets. Over the past six years the company acquired 22 companies – 10 in 2012 alone – and expanded into other hardware components, software and services, including cloud services. But the company has lost its momentum. It lost PC market share and sales in 2012 faster than most of its competitors, which is disastrous for a company that derives more than half of its revenues from end-user computing solutions.

Smartphones and tablets have curtailed the growth of the traditional PC market and Dell's commercial business has not made up for the loss in end-user revenues. In fact, in both businesses Dell is considered a low-cost commodity hardware provider and not a market or thought leader. The company has not fully integrated all of its acquisitions and is struggling to reach its strategic goal of becoming a one-stop shop. The buyout gives the company time to re-think and execute a long-term strategy, reorganize and change its culture. As CEO Meg Whitman at Hewlett-Packard Co. (HP) can attest, a turnaround is a multi-year effort and doing so in public when quarterly results can be volatile is not fun. Thus, the desire by Michael Dell to go private.

While there are a number of challenges that Dell must address, there are two that will make or break the success of the new corporate strategy. The vendor must either exit the end-user computing market or once again become a market leader. It is lacking products in the key current and future end-user markets and it cannot regain its position with just PC solutions to hawk. Secondly, Dell has not been able to transition from a culture of transaction selling to one of relationship sales. If the vendor is to become one of the top one-stop providers in the commercial space, it will have to invest in customer relationship management. This is a massive cultural change that goes to the core of the company. HP has struggled with the clash of this cultural divide since it acquired Compaq in 2002. IBM Corp. took more than 10 years to change its culture. The underlying question will be whether or not CEO Dell, by trade a transactional salesman, can lead the culture shift to succeed with its new corporate vision.

In addition to the above challenges, there are a number of other key issues to be resolved. IT executive relationships with Dell depend on how these shake out.

Assets.  Dell will need to decide which assets it has today are worth keeping and which are to be shed. In strong customer relationship management organizations, people are a primary asset. Will Dell address this? Additionally, once it has its strategic vision in place, what additional acquisitions are needed to complete the puzzle? Will the new Dell have the funds to acquire the companies it needs or will the buyout end up choking the firm's ability to compete effectively? Dell recently moved into the equipment leasing space. Will it have the wherewithal to remain?

Business Model. What will Dell's new business model be? It will have to compete with HP, IBM and Oracle Corp. – all of whom are innovators, bring more than commodity products and services to the table, and want to own the complete business relationship with their customers. Each has a different business model. Where will the new Dell position itself?

Business Partners and Channels. Dell will have to re-evaluate how it works with business partners and uses various sales and distribution channels. Dell does have a cloud presence but can it leverage it the way Apple Inc. or Google Inc. do? Can it be a full service provider and still utilize business partners and channels effectively? Without strong business partners and channels Dell will not be able to compete effectively.

Microsoft. Microsoft did not become an owner but a lender to Dell. This will cost the company more than just money. Will it restrict the vendor from providing certain products or solutions?

Processes. Dell needs to revamp its development, operations, and sales processes to be fully integrated and customer relationship based. The customer must come first; not the products or services. This will be a long-term change, which may be agonizing at times.

Technology. Today Dell assembles some products and has the intellectual property (IP) for those products and services that the company acquired. Can it leverage the IP and become recognized as an innovator or will the IP assets wither and the talent depart? Over the past year Dell has been bringing on board the resources to take advantage of the assets. Will the new Dell continue down the same path? If Dell stays in the end-user computing space, will it be able to figure out how to do mobility and social (key components to staying competitive)? If not, will it bite the bullet and exit the business?

The company was at one time the leader in the PC arena. Then it became one of the top players. Now it wants to be a leader in the full-service enterprise space where it is not a top player and is losing momentum.

RFG POV: Dell has a long, tough transformation ahead. By going private it will no longer have to worry about the stock market price but will still have to answer to investors. RFG does not expect the company to pull out of any markets in the near term – although the printing and peripherals business is exposed – but a number of the executives and employees whose visions are out of sync with new direction will depart. In the full-service enterprise space Dell will have to be more than a low-cost provider. It must become a hardware, software, and services innovator, determine its positioning vis-à-vis competitors, make additional acquisitions to fill in the gaps, and spend time and resources building relationships that may not yield near-term revenues. Whether or not the stakeholders will allow the company to spend enough money and time to make the conversion is an open question. The fallback position may be to go back to being a low-cost or custom commodity provider to the commercial market.  Moreover, Dell will have to invest in a new end-user computing model, watch its market share shrivel, or quit the space. One thing is for sure – it cannot be all things to all players and must pick its choices carefully. Dell must articulate its strategy to business partners, customers, and employees over the next three to six months or loyalty may falter. In any event, IT executives should expect Dell to provide support and a smooth transition for businesses that are divested, restructured, or sold. IT executives desirous of using Dell as a strategic provider should continue to work closely with Dell, keep abreast of its strategy and roadmaps and factor the knowledge into the corporate decision-making process. Additionally, IT executives should not be surprised or concerned to find the company fails to make the short-list of candidates. There are plenty of options these days.

HP Cloud Services, Cloud Pricing and SLAs

Lead Analyst: Cal Braunstein

Hewlett-Packard Co. (HP) announced the HP Cloud Compute made generally available in Dec. 2012 while the HP Cloud Block Storage cloud entered beta at that time. HP claims its Cloud Compute has an industry leading availability service level agreement (SLA) of 99.95 percent. Amazon Inc.'s S3 and Microsoft Corp.'s Windows Azure clouds reduced their storage pricing.

Focal Points:

• HP released word that the HP Cloud Compute moved to general availability on Dec. 5, 2012 and will offer a 99.95 percent monthly SLA (a maximum of 22 minutes of downtime per month). The company extended the 50 percent discount on pricing until January. The HP Compute cloud is designed to allow businesses of all sizes to move their production workloads to the cloud. There will be three separate availability zones (AZs) per region. It supports Linux and Windows operating systems and comes in six different instance sizes, with prices starting at $0.04/hour. HP is currently supporting Fedora, Debian, CentOS, and Ubuntu Linuxes, but not Red Hat Enterprise Linux (RHEL) or SUSE Linux Enterprise Server (SLES). On the Windows side, HP is live with Windows Server 2008 SP2 and R2 while Windows Server 2012 is in the works. There are sites today on the East and West coasts of the U.S. with a European facility operational in 2013. Interestingly, HP built its cloud using ProLiant servers running OpenStack and not CloudSystem servers. Meanwhile, HP's Cloud Block Storage moved to public beta on Dec. 5, 2012; customers will not be charged until January at which time pricing will be discounted by 50 percent. Users can create custom storage volumes from 1 GB to 2 TB. HP claims high availability for this service as well and claims each storage volume automatically is replicated within the same availability zone.
• Amazon is dropping its S3 storage pricing by approximately 25 percent. The first TB/month goes from $0.125 per GB/month to $0.095 per GB/month, a 24 percent reduction. The next 49 TB prices per GB/month fall to $0.080 from $0.110 while the next 450 TB drops from $0.095 to $0.070. This brings Amazon's pricing in line with Google Inc.'s storage pricing. According to an Amazon executive S3 stores well over a trillion objects and services 800,000 requests a second. Prices have been cut 23 times since the service was launched in 2006.
• In reaction to Amazon's actions Microsoft's Windows Azure storage pricing has again been reduced by up to 28 percent to remain competitive. In March 2012 Azure lowered its storage pricing by 12 percent. Geo-redundant storage has more than 400 miles of separation between replicas and is the default storage mode.

The HP, Oracle, SAP Dance

Lead Analyst: Cal Braunstein

Hewlett-Packard Co. announces reorganization and write-downs and gets good news from the courts that it has won its Intel Corp. Itanium lawsuit against Oracle Corp. Oracle must now port its software to Itanium-based servers. In other news, Oracle agreed to a $306 million settlement from SAP AG over their copyright infringement suit. However, the soap opera is not over – Oracle may still push for more.

Focal Points:

• CEO Meg Whitman, in her continued attempt to turn the company around, is writing down the value of its Enterprise Services business by $8 billion and making management changes. HP paid $13.9 billion to acquire EDS back in 2008.  John Visentin, whom former HP CEO Leo Apotheker anointed to manage the Enterprise Services behemoth a year ago, is leaving the company.  Mike Nefkens, who runs Enterprise Services in the EMEA region, will head the global Enterprise Services group, which is responsible for HP's consulting, outsourcing, application hosting, business process outsourcing, and related services operations. Nefkens, who came from EDS, will report to the CEO but has been given the job on an "acting basis" so more changes lie ahead. In addition, Jean-Jacques Charhon, CFO for Enterprise Services, has been promoted to the COO position and will "focus on increasing customer satisfaction and improving service delivery efficiency, which will help drive profitable growth." HP services sales have barely exceeded one percent growth in the previous two fiscal years. HP further states the goodwill impairment will not impact its cash or the ongoing services business. The company also said its workforce reduction plan, announced earlier this year to eliminate about 27,000 people from its 349,600-strong global workforce, was proceeding ahead of schedule. However, since more employees have accepted the severance offer than expected, HP is increasing the restructuring charge from $1.0 billion to the $1.5-1.7 billion range. On the positive front, HP raised its third-quarter earnings forecast.
• HP received excellent news from the Superior Court of the State of California when it ruled the contract between HP and Oracle required Oracle to port its software products to HP's Itanium-based servers. HP won on five different counts: 1) Oracle was in breach of contract; 2) the Settlement and Release Agreement entered into by HP, Oracle and Mark Hurd on September 20, 2010, requires Oracle to continue to offer its product suite on HP's Itanium-based server platforms and does not confer on Oracle the discretion to decide whether to do so or not; 3) the terms "product suite" means all Oracle software products that were offered on HP's Itanium-based servers at the time Oracle signed the settlement agreement, including any new releases, versions or updates of those products; 4) Oracle's obligation to continue to offer its products on HP's Itanium-based server platforms lasts until such time as HP discontinues the sales of its Itanium-based servers; and 5) Oracle is required to port its products to HP's Itanium-based servers without charge to HP. Oracle is expected to comply.
• Oracle said it agreed to accept damages of $306 million settlement from German rival SAP to shortcut the appeals process in the TomorrowNow copyright infringement lawsuit. Oracle sued SAP back in 2007 when it claimed SAP's TomorrowNow subsidiary illegally downloaded Oracle software and support documents in an effort to pilfer Oracle customers. SAP eventually admitted wrongdoing and shut down the maintenance subsidiary. In November 2010, Oracle had originally won a $1.3 billion damages settlement, the largest ever awarded by a copyright jury but it was thrown out by the judge, who said Oracle could have $272 million or could ask for a retrial. To prevent another round of full-blown trial costs, the warring technology giants have agreed to the $306 million settlement plus Oracle's legal fees of $120 million; however, Oracle can now ask the appeals court judges to reinstate the $1.3 billion award. SAP stated the settlement is reasonable and the case has dragged on long enough.

RFG POV: HP suffers from its legacy product culture and continues to struggle to integrate services into a cohesive sales strategy. The company does well with the low-level technical services such as outsourcing but has not been able to shift to the higher margin, strategic consulting services. While the asset write-down was for the EDS acquisition, HP had its own consulting services organization (C&I) that it merged with EDS and atrophied. It took IBM Corp. more than 10 years to effectively bring its products and services sales groups together (it is still a work in progress). RFG therefore thinks it will take HP even longer before it can remake its culture to bring Enterprise Services to the level Meg Whitman desires. The HP Itanium win over Oracle should remove a dark cloud from the Integrity server line but a lot of damage has already been done. HP now has an uphill battle to restore trust and build revenues. IT executives interested in HP's Unix line combined with Oracle software should ensure that the desired software has been or will be ported by the time the enterprise needs it installed. The Oracle SAP saga just will not go away, as it is likely CEO Larry Ellison enjoys applying legal pressure to SAP (especially since the fees will be paid by the other party). It is a distraction for SAP executives but does not impair ongoing business strategies or plans. Nor will the outcome prevent other third parties from legally offering maintenance services. IT executives should not feel bound to use Oracle for maintenance of its products but should make sure the selected party is capable of providing a quality level of service and is financially sound.  

Gray Clouds on the Horizon

Lead Analyst: Cal Braunstein

Focal Points:

• According to a new Gartner Inc. report, global IT spending percentage growth for 2012 is projected to be 3.0 percent, down from 2011 spending growth of 7.9 percent. The brightest spot in the analysis was that the telecom equipment category will grow by 10.8 percent – however that is down from 17.5 percent in the previous year. All the other categories – computer hardware, enterprise software, IT services, and telecom services – are growing slowly between 1.4 percent (telecom services) and 4.3 percent (enterprise software). The drop in spending is attributed to the global economic stresses – the eurozone crisis, weaker U.S. recovery, a slowdown in China, etc. For 2013 Gartner is projecting higher spending on hardware and software in the data center and on the desktop, better growth on telecom hardware (but down from 2012), and slightly higher spending on telecom services. In support of these projections is the latest Challenger, Gray report that shows during the first half of the year, 51,529 planned job cuts were announced across the tech sector. This represents a 260 percent increase over the 14,308 layoffs planned during the first half of 2011. Job cuts are so steep this year that the figure is 39 percent higher than all the job cuts recorded in the tech sector last year. Three tech companies are responsible for most of the job losses – Hewlett-Packard Co. (HP) announced it was slicing headcount by 30,000 and Nokia Corp. and Sony Corp. are each reducing staffing by 10,000. While the outplacement firm expected more cuts to be made over the course of the next six months, it does see bright spots in sectors of the business.
• According to Uptime Institute's recently released 2012 Data Center Industry Survey, cloud deployments have significantly increased globally over the past year. 25 percent of this year's respondents claimed they were adopting public clouds while another 30 percent said they were considering it. Additionally, 49 percent were moving to private clouds while another 37 percent were considering it. In 2011 only 16 percent of respondents stated they had deployed public clouds whereas 35 percent claimed they had deployed private clouds. 32 percent of large organizations use the public cloud, whereas 19 percent of small organizations and 10 percent of "traditional enterprises" employ public clouds. When it comes to private clouds, 65 percent of large organizations have claimed to have deployed private cloud but only 39 percent of small and mid-sized organizations were doing so. Public cloud adoption rates are 52 percent in Asia, 28 percent in Europe, and 22 percent in North America. Private cloud adoption rates are 42 percent in Asia, 52 percent in Europe, and 50 percent in the U.S. Cost savings and scalability were the top two reasons given for moving to the cloud while security was the major inhibitor for not adopting cloud computing (27 and 23 percent respectively), followed distantly by compliance and regulatory issues (64 and 27 percent respectively).
• Oracle announced the results of its big data study, in which 333 C-level executives from U.S. and Canadian enterprises were surveyed. The study examined the pain points that companies face regarding managing the deluge of data that organizations must deal with and how well they are using that information to drive profit and growth. 94 percent of respondents claimed growth with the biggest data growth areas in the areas of customer information (48 percent), operations (34 percent) and sales and marketing (33 percent).  29 percent of executives give their organization a "D" or "F" in preparedness to manage the data influx, while 93 percent of respondents believe their organization is losing revenue opportunities. The projected revenue loss for companies with revenues in excess of $1 billion is estimated to be approximately 13 percent of annual revenue from not fully leveraging the information. Most respondents are frustrated with their organizations' data gathering and distribution systems and almost all are looking to invest in improving information optimization. The communications industry is the most satisfied with its ability to deal with data – 20 percent gave their firms an "A." Executives in public sector, healthcare and utilities industries stated they were the least prepared to handle the data volumes and velocities. 41 percent of public sector executives, 40 percent of healthcare executives, and 39 percent of utilities executives rating themselves with either a "D" or "F" preparedness rating.

Trends: HPC, Programming, and Security

Lead Analyst: Cal Braunstein

Focal Points:

• IBM took back the top slot in the supercomputer rankings with the LLNL Sequoia installation, which delivered 16.32 petaflops of sustained performance running across the 1.57 million PowerPC cores inside the box during a Linpack benchmark run. Sequoia has a peak theoretical performance of 20.1 petaflops. To deliver the 16.32 petaflops IBM claims it only consumes 7.89 megawatts. The IBM supercomputer shifted the K massively parallel Sparc64-VIIIfx machine built by Fujitsu Group for the Japanese government down to number two. The Fujitsu Sparc machine had a sustained Linpack performance of 10.5 petaflops against a peak of 11.3 petaflops but it consumed 12.7 megawatts. Sequoia is 2.5 times as energy efficient as the Sparc K. IBM now has five of the top 10 high performance computing (HPC) engines. 372 of the processors, or 74.4 per cent of those on the list, are based on Intel Corp. Xeon or Itanium processors, down slightly from the 384 HPC machines on the November list. The latest Top 500 list has 58 Power-based processors, up from 49 six months ago. There are also 63 clusters based on Advanced Micro Devices Inc.'s (AMD's) Opteron processors, unchanged from last year.
• According to Indeed.com companies are embracing the Web to reach customers and employees and are therefore turning to the programming languages and technology stacks made popular by companies such as Facebook Inc. and Google Inc.   Current programming languages such as C++, Java, and .NET will still be the primary languages for enterprise applications but the scripting languages will dominate the Internet. The below chart produced by Indeed.com shows the variances in job growth rates. Aside from the Internet movement another key reason for the adoption of PHP and Python is the movement to open source. Python appears to be a run-away winner because of its design elegance and framework simplicity. The next most used languages are Java and then .NET.

• Symantec released the findings of its 2011 SMB File Sharing Survey of more than 1,325 SMB organizations this week. The survey results found SMB employees are increasingly adopting unmanaged, personal-use online file sharing solutions without permission from IT. These behaviors are making organizations vulnerable to potential data losses and security threats. A Symantec executive observed that a staggering 71 percent of small businesses that suffer from a cyber attack never recover. 74 percent of respondents who adopted online file sharing did so to improve their productivity. Respondents also cited risk concerns included sharing confidential information using unapproved solutions (44 percent), malware (44 percent), loss of confidential or proprietary information (43 percent), breach of confidential information (41 percent), embarrassment or damage to brand/reputation (37 percent), and violating regulatory rules (34 percent). However, only half of the respondents stated they would go to IT for help with sharing large files while only one-third expressed interest in utilizing an already existing IT solution. 14 percent now report the average shared file size is greater than 1 GB. Additionally, more and more people are remote. The survey found that about 37 percent of SMB organizations will have employees working remotely, up from 32 percent today.

RIM Slides, HP Offers DC Architecture, Security Breaches

Lead Analyst: Adam Braunstein

In the latest round of disappointing news from smartphone vendor Research in Motion, Ltd. , the company declared that it will miss quarterly projections and has solicited the advice of two banks to help it evaluate future revenue options. To improve the energy efficiency of data center operations, Hewlett-Packard, Co.'s new Net-Zero Energy Data Center architecture works to marry renewable energy supply with IT workloads. Lastly, several security breaches leaked passwords onto the Web.

Focal Points:

• Things continue to decline for troubled smartphone vendor RIM as the company announced that it will miss previous estimates for its March-June quarter and that it has hired two banking firms to help it evaluate future opportunities. The company further declared that it intends to institute "significant" staff reductions this year as it aims to shave $1 billion out of its operating costs. Sales of BlackBerries in the U.S. have fallen more than 60 percent since 2009 while its stock has plummeted 93 percent since its high in 2008; reaching its lowest level since 2003. Hoping for a marked turnaround after the release of the highly-revised BlackBerry 10 later this year, new CEO Thorsten Heins has previously declared that the company will abandon the consumer market to focus on enterprise sales. The company now claims 78 million subscribers worldwide and accounts for approximately 6.5 percent of the global smartphone market. RIM's secure, managed network and robust patent portfolio could be worth north of $8 billion. Elsewhere, RIM also announced that it is discontinuing production of the 16 GB PlayBook tablet and will concentrate production on the larger 32 GB and 64 GB models.
• HP Labs has unveiled a new data center architecture, called the HP Net-Zero Energy Data Center, designed to cut total power usage by 30 percent and dependence on grid power by more than 80 percent. The model centers around a management architecture that marries IT workload planning and energy and cooling resources using four core HP modules. A prediction module forecasts costs and availability, a planning module balances workload with processing requirements, and an execution module allows for real-time management. Lastly, a verification and reporting module helps ensure gaps are closed between predictions and real-world behaviors. The paradigm calls for matching energy supply with energy usage required by the IT workload to maximize the usage of available energy. Non-essential, batch workloads that do not require immediate processing would be scheduled during daylight hours when power from solar arrays is most plentiful, for example.
• Several high-profile breaches were reported this week including one where 6.5 million LinkedIn passwords were leaked on the Internet. While it is unclear when the hack took place, a hacker possibly based out of Russia posted the hashed passwords sans usernames to a Russian forum over three days in the last week. One leading security firm surmises that about 60 percent of the SHA-1 passwords have already been cracked. LinkedIn has said that it is contacting users whose accounts have been compromised and instructing them as to how to reset their passwords. In an unrelated attack, dating site eHarmony has also admitted that an unknown quantity of member passwords has been stolen. Presidential nominee Mitt Romney had one of his personal e-mail accounts compromised this week by an anonymous prowler who was able to execute a password reset by correctly guessing the answers to password reset security questions. This follows the method employed to obtain access to one of vice presidential candidate Sarah Palin's personal accounts nearly four years ago.