Monday, November 02, 2015

Can NetApp Survive the EMC-DELL Whiplash?

All data storage vendors are going through a tough times. EMC decided to sell itself to Dell and go private to help survive the coming storm. Ever since EMC-DELL deal was announced, investors and customers are looking at NetApp - wondering if NetApp will survive as an independent storage vendor.

Enterprise storage industry is in a state of transition that is driven by the confluence of multiple technological advancement including Flash, software-defined storage, Big-Data, Cloud, and converged/hyper-converged systems.

Given the tough business environment, NetApp is going through tough times. Q3 2015 revenue dropped by 11%. As revenues drop, free cash flow has also dropped for last three quarters in a row. Eventually, the bottom will fall off, and profits will disappear and blood bath of red ink will spread all over NetApp's balance sheet.

NetApp Insight Conference in October 2015 indicates to that NetApp is trying to reverse the sales decline - mainly by migrating customers to 'Data Fabric' and aims to reposition NetApp as a global data management company.

Data Fabric strategy is designed to allow customers to store, access, protect, share and archive data in consistent and predictable ways across multiple internal and external data centers - including public clouds.

The days of NetApp selling storage boxes will soon come to an end, and the new CEO George Kurian has a big task on his hand to transform NetApp into a Storage Software Vendor for Hybrid clouds.

This denotes a major shift in NetApp's strategy  - which is fraught with risks.  Along the way NetApp will continue to lose revenues, it will have to rejig its sales force who will have to work hard to convince its existing enterprise customers to move to data fabric.

When revenues drop so does share prices, and with that there will be large attrition and job cuts. With declining revenues and reduced staffing, the strategy will be tough to execute.

Challenges Facing NetApp

NetApp is facing several challenges - which can be summed up in one word "Google".

Not that Google is a direct competitor, but it personifies all the challenges NetApp faces:

1. Data moved to Cloud
2. Move towards commodity hardware
3. Open Stack & Open Source Software

Data moved to Cloud

Cloud is now main stream, and customers are moving lots of data to cloud. Recent advances in cloud archive storage, cloud access gateways and hybrid on-premises/cloud data management will accelerate the movement of data to the public cloud.

As enterprises move data to cloud, they will need less of storage boxes - which has a direct impact on NetApp's revenue.

Move towards commodity hardware

Big Cloud service provides have built their data centers on commodity hardware and have also developed deep engineering expertise to design and build complex storage systems for their data centers. As a result, none of the big cloud service providers (Google, AWS, Microsoft Azure ) are buying storage boxes from NetApp.

To rub salt on NetApp's wounds, Facebook and others are supporting Open Computing Project - which publishes design specifications and design documents for the custom-built servers, racks, and other equipment used in Facebook's data centers. Other cloud service vendors are fast to copy suit and order generic hardware ODM vendors in Taiwan and Asia.

Eliminating the requirement for proprietary hardware and embracing off-the-shelf platforms is leading the next revolution of data center technologies, and this is no place for NetApp.

Industry's move towards commodity hardware and Open Compute Project is rapidly eating into NetApp's revenue, and thus taking out steam out of its engine.

Open Stack & Open Source of Software

Open Source movement that started in universities has become main stream and is now impacting hardware. Starting from FreeBSD and Linux, Open Source software has grown to offer entire cloud stack solutions - called as "Open Stack". Open Stack software allows companies such as Google, Rackspace to build cloud scale data centers on commodity hardware.

Today, several companies including IBM & HP are supporting & distributing Open Stack - which is a complete set of software solution needed to run a data center. NetApp also taken a knee jerk reaction to integrated its arrays with Open Stack.

In addition to Open Stack, several other vendors are open sourcing their storage software. EMC recently announced open sourcing of its ViPR Controller - a Software defined Storage solution. Similarly Nutanix made its Acropolis App data fabric software free and open source.

The steady flow of open source software from established vendors makes it tougher for NetApp to sell high value data fabric software stack.

Open Source Software movement adds tremendous head winds to NetApp's sales and transition to "Data Fabric" strategy.

NetApp's Missteps

Internally, NetApp faces several challenges. Many of them comes from its strategy missteps and NetApp missed several good opportunities:

1. Missing Flash in Sales
2. NetApp misses the BigData boat
3. NetApp slips on SDDC & SDS solutions
4. Share buyback instead of technology acquisitions

Missing Flash in Sales

EMC was a latecomer to Flash party.  But in a short span of time, EMC's ExtremeIO became the market leader with more than 30% market share. Comparatively, NetApp's Flash Array lost out to ExtremeIO and Violin Memory, a startup.

Even now, NetApp does not seen to have a good product roadmap or product strategy to conquer Flash Array market.

NetApp misses the BigData boat

BigData needs Big Storage. Apache HDFS is designed to run on commodity hardware using the disk drives connected to servers. However, enterprises found that there is a need for a dedicated array for low cost data storage needed for Big Data Analysis. While EMC executed brilliantly with its Data Lake strategy - positioning EMC Isilion and EMC ECS arrays, and with Pivotal HD distribution. Today, EMC Isilion alone generates more than $2 Billion in sales from BigData sales. (Also see: Data lake - Solving the challenge of Big Data Integration)

NetApp slips on SDDC & SDS solutions

NetApp missed the Storage virtualization and Software Defined Storage market and waited too long to respond. As a result EMC & VMWare are able to take a lead with VSAN, ScaleIO and ViPR,  & ECS in large enterprise market, while several startups such as Chep, Nutanix, Nexanta have also leaped ahead.

In response, NetApp released FAS 8000 Flexarray Virtulization software - which was still tied to its hardware and did not get much success. Though, there is a lot of work in progress within NetApp on SDS - but I guess that NetApp has missed the boat.

Share buyback instead of technology acquisitions

One Big Strategy which worked for NetApp in the short run was Share buyback. NetApp constantly rewarded its investors with big share buybacks. $1 Billion in 2013, $1.2 Billion in 2014 & $2.5 Billion in 2015.

These big share buyback programs helped fend off pressure from Elliot Management, it also meant that NetApp did not have the money to buy other technology based firms. As a result, NetApp has fallen behind the technology curve in all aspects of storage technologies.

Since 1996, EMC has acquired over 50 companies, while in comparison NetApp has completed only 9 acquisitions.

Road Ahead

Transformation from a hardware vendor to a software vendor will be a work in progress for a long time. During which NetApp will have to rejig its top management. Departure of the company's CMO, Julie Parrish, is just the beginning.

Moving to Data Fabric Strategy entails selling more software to its existing (& shrinking) customer base. One hope for NetApp is that customers will move back to some on-premise solutions after experiencing 'sticker shock' from AWS and other public cloud services. According to Val Bercovici, NetApp's 'cloud czar' says this process is already under way.

Another hope for NetApp is that Dell-EMC deal will distract EMC for a long time and this will allow NetApp to create a space for itself. In addition, splitting of HP & Symantec-Veritas also helps in distracting competition.

But a multi-billion dollar business strategy cannot be based on HOPE!

My Take on NetApp

NetApp is one of the 'old guard' stand alone storage vendors left in the market. With an impending revenue collapse and severe market challenges, there is no way NetApp can survive on its own in this environment.

NetApp's product positioning of 'Data Fabric' as a bridge between private infrastructure and the public cloud has merit but it has huge market challenges. NetApp was never known as a software vendor and to succeed as a software vendor, it needs to merge with a strong software player - such as Microsoft or Veritas, who can take on a smaller and focused market.

I doubt Kurian and his management team can transform NetApp to become a storage software company while protecting its revenues. NetApp must strive to protect its margins - while it jettisons its hardware business.

A good option is to spin off its hardware business, while merging its data fabric software with another enterprise software vendor. In short, Dell's EMC acquisition rings a loud bell for NetApp, and like EMC, NetApp's days as an independent company is numbered.

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