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A Dell of a deal: What a VMware spin-off could mean for datacentre operators

Analysts doubt that Dell would be fool enough to entirely divest itself of VMware, which continues to offer massive value to the enterprise. And how would a change affect the datacentre?

With Dell exploring a spin-off of its VMware investment by September 2021, datacentre operators might be forgiven for wondering if this will force changes across their technology roadmap, and whether they should plan accordingly.

Simon Michie, CTO at colocation operator Pulsant, says VMware’s role in the datacentre is “hugely important”, partly because of its reputation for reliable support of workloads at scale. “The majority of workloads sit on a VMware platform of some sort,” he says.

Importantly, people with strong VMware skillsets are “broadly available” and much of the perceived enterprise value is in software and services anyway – not the underlying hardware. With the growth in task-optimised platforms that can sit alongside a VMware core, the supplier looks to be on the up again, having shown it can continue to innovate under Dell’s ownership.

Michie notes that migration to a different platform would therefore need to be a strategic decision. Such a move would require different IT operating models and skillsets that would probably cost a lot to set up and support, affecting a whole ecosystem of datacentre customers and service providers. Some might prefer to move VMware-based workloads to private and hybrid cloud environments as a managed service.

“Platform migration is uncommon,” he says. “I’d want to be sure the benefits outweighed the cost of change and any risks were considered and mitigated. More commonly, we see clients integrating their VMware-based workloads with new cloud-native applications running on Kubernetes or engineered using proprietary hypercloud functions and services.”

Michie says he would be surprised if Dell divested itself entirely of its 81% controlling stake in VMware in any case. In fact, if there were some kind of spin-off, VMware might innovate even faster, swallowing shares of direct competition as well as continuing along its current path of acquiring emerging technologies. Dell would surely be likely to try to retain something for itself out of all this, even if there is a spin-off or spin-out.

Michie adds: “I think the interesting questions are: what would Dell do with the money? Would they just pay down debt or would they make alternative investments? If so, what would they be? And to what extent has VMware been held back under Dell ownership? If they can plan and execute on a move like this effectively, it should be good for both shareholders and clients of both organisations.”

Dell itself has indicated that any spin-off would look to benefit both companies, without trashing gains from existing arm’s-length commercial arrangements and close operating relationships across go-to-market, services, research and development, and intellectual property agreements.

A dynamic duo?

Meanwhile, Dell and VMware have continued working together towards integrations that target growth in the hottest areas for the datacentre. A recent announcement was VxRail, a hyperconverged, ruggedised Dell-VMware system with software for data-intensive edge environments. In June, this came hard on the heels of multiple acquisitions from Octarine to Tanzu and beyond.

Eric Hanselman, principal research analyst at 451 Research, part of S&P Global Market Intelligence, says: “Dell Technology Cloud is that shift towards a much stronger connections through and with VMware to provide cloudy capabilities on Dell equipment. And in fact that the organisation has been creating tighter bindings and better integration between Dell products and VMware.”

Once upon a time, “tighter bindings” often meant less interoperability, even supplier lock-in. But that is not so much the case in 2020. A full Dell/VMware integrated environment offers automation for many mundane operating tasks, such as updating firmware, managing rolling updates across linked infrastructure, and day-two operational capabilities.

“The automation and orchestration elements sit together more tightly and work together more smoothly,” says Hanselman. “It’s not something that excludes other vendors. If you’re running other vendors’ equipment, whether or not that’s Cisco UCS or HPE, these will still work well and, of course, VMware has a very strong incentive to make sure all those systems work well in their environment.”

Both technically and as a sales organisation, VMware continues to stand on its own feet, complemented by a strong ecosystem. It will not be easy to sway or displace, especially while transitioning to other environments remains costly and difficult. Although VMware is often considered expensive, and Dell may look at other relationships, and the IBM/Red Hat connection may also go forward towards next-stage capabilities, there “isn’t a lot of motivation” for change, says Hanselman, especially when in-house skillsets are such a big part of the cost barrier to any migration.

“I don’t think we can anticipate any significant fracturing of the VMware product portfolio”
Eric Hanselman, 451 Research

“The constant concern about VMware is that the licensing in some way makes operational costs higher,” he says. “And enterprises tend to look at what they know and what they understand. However much they grouse about licensing fees, they still tend to see value there. The question is what the financial structures look like. I don’t think we can anticipate any significant fracturing of the VMware product portfolio.”

Sure, the shift to containers is raising an array of questions – but, so far, VMware has continued to handle that deftly, just as it handled the shift to new virtualisation/orchestration capabilities in the OpenStack movement.

VMware integrated OpenStack capabilities to address that concern and has done something similar with the Tanzu and vSphere adaptations to be able to address concerns about containerisation on VMware’s own terms, says Hanselman.

He notes, however, that DevOps and continuous integration/continuous delivery are another part of the equation, with much of that dependent on investments in automation and orchestration even before considering a supplier transition. Then there are increasing pressures around business process transformation, adding to the skillset problem, which for cloud frameworks and the likes of newer entrant Kubernetes is a huge issue.

In the wake of the Covid-19 pandemic, demand for technical skillsets may rise even more as supply is reduced – for example, by reduced movement of labour.

“That’s not to say there aren’t additional efficiencies that you could gain by going directly to Kubernetes-orchestrated container environments, doing bare-metal containers, or a whole set of things,” says Hanselman. “When we look across our client base, there are a whole set of container consumption models and ways to build that infrastructure more efficiently.

“The larger challenge is how many organisations are able to make that jump, with the capabilities and skills in the teams they have today. There is tremendous desire, but there is also reality.”

VMware’s future as a datacentre staple assured

So, all things considered, VMware is expected to remain a key building block in the datacentre, even as technologies continue to evolve. According to Gartner, VMware remains dominant in on-premise server virtualisation, thanks to vSphere, vSAN and NSX, while working harder this year to offer more for developers, for example through the Tanzu, Pivotal and Heptio acquisitions, as well as cloud computing, via the expanding VMware Cloud part of the portfolio.

Although pricing and licensing can be pain points for VMware customers, the company is pivoting “appropriately” in cloud computing, according to a 22 July 2020 Gartner vendor rating provided to Computer Weekly.

Michael Warrilow, tech and service provider research vice-president at Gartner, agrees that most datacentre operators would be unlikely to benefit, on balance, from a big move away from VMware, even to containerisation.

“Not without a massive and unjustifiable effort,” he says. “Containers and virtual machines serve different purposes. Containers are almost entirely dependent on Linux too, so Windows applications are not easy to migrate from virtual machines to containers.”

The forecast growth in enterprise adoption of container management does reflect the appeal of cloud-native architecture, says Gartner – but there are issues.

Warrilow says containerisation would require a big investment in new custom applications, rejigging existing applications, or both, to achieve the required results across IT workload transformation, in aid of digitisation and greater agility. Despite containers’ increasing importance, not least because of forecast strong revenue growth from $466m today to $944m in 2024, a platform shift for the datacentre is highly likely to be too costly.

“Most VMware customers were VMware customers before EMC became part of Dell,” says Warrilow. “Very few, if any, would see reason for that to change based solely on ownership. Factors such as increasing use of cloud-native services would be more of a factor.”

Read more about VMware and its strategy

Meanwhile, the Tanzu buy enables Kubernetes clusters to be provisioned more easily from a VMware environment, via the native Kubernetes application programming interface (API). And vSphere 7 in particular has key Kubernetes capabilities, meaning that multiple separate systems are no longer required for virtual machines (VMs) and containers.

Also, open-source containers such as MySQL often offer little visibility into the stack and don’t conform to security or auditing standards, but VMware is trying to address this with Tanzu Application Catalog, via another acquisition, the Bitnami library. This should help to improve the abilities of code running in production across multiple clouds at scale.

VMware finances look healthy, too. The first-quarter 2021 earnings announcement shows revenue of $2.7bn, up 12% from the year-ago quarter, with about half of its revenue coming from US sales. Subscription and software-as-a-service (SaaS) revenue alone in the first quarter came to $572m, up 39% year on year, with licensing rounding that up to $1.2bn.

It acquired Octarine for securing containerised Kubernetes applications, and boosted core products including VMware Cloud Foundation, vSphere, NSX T, vSAN and vRealize Operations Cloud, as well as updating partnerships with Amazon Web Services,  Microsoft Azure, Google Cloud, Dell and Alibaba.

Analysts have suggested that Dell, already carrying huge amounts of debt, lean towards a full spin-out or partial sell-off of VMware to raise cash, as well as simplify the capital structure, rather than taking VMware fully in-house. That is if any change is made at all. Neither Dell nor VMware spokespeople were able to offer further comment at the time of publication.

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