Does EqualLogic buyout mean splitsville for Dell and EMC?

Few would question the spectacular results of the EMC/Dell reseller partnership over the past five years. Dell's manufacturing and reselling of EMC's entry-level AX-series and midrange Clarrion arrays has represented more and more of EMC's bottom line, as well as growing Dell's share of the external disk array market. But Dell's announcement this week that it will buyout iSCSI vendor EqualLogic, could place the two companies in divorce court as EqualLogic's disk arrays compete directly with EMC's lower-end boxes.

When it comes to revenue, EMC's partnership with Dell has been a winner. Earlier this year, Dell sales represented 10% of EMC's accounts receivable. Dell's relationship with EMC was so tight that at one time Dell's GM of storage said EMC is likely the only storage company it would consider buying because the two companies work so well together. At the same time, Dell has seen its slice of the external disk storage market climb steadily. But as both companies have seen strong growth through the marriage, Dell has also seen some selfish potential.

Dell's storage sales have slowly begun encroaching on EMC's entry-level storage business with arrays of its own, namely Dell's modular PowerVault MD3000 line of arrays. In fact, that's where Dell will likely integrate EqualLogic's iSCSI technology, according to Mike Artebury, director of storage operations at Dell.

EMC executives have admitted that their own lower-end and midrange sales have eaten into bread and butter, high-end Symetrix sales. The low and midrange market is now a key to EMC's continued growth. So, EMC shares dropped on the news of Dell's proposed $1.4 billion buyout of EqualLogic. Why? Because the move by Dell was a clear signal that it intends to extend its own line of external disk array products, and any iSCSI products will compete directly with EMC's AX150i and CX3-10 boxes, which Dell currently resells.

One could also speculate that the enormous $1.4 billion price tag that acquisition-adverse Dell is paying for EqualLogic is an indication that it wasn't the only company bidding. After all, Nashua, N.H.-based EqualLogic employs a little more than 300 people and only produced $68.1 million in revenue in 2006, though its sales did climb to $91 million in the first nine months of this year.

Yet any offer had to be influenced by EqualLogic's plan for an IPO, which it filed for in August. And, the company is second only to Network Appliance in iSCSI sales. The good news for IT shops is that Dell loves commoditizing. So any products it produces will likely end up challenging the market in general to lower its overall external storage prices.

Both EMC and Dell have said the EqualLogic deal won't effect their partnership. That was expected. Last year, the two companies extended their parthership through 2011. And, what couple, except those beset by paparazzi, would willingly air their dirty laundry? But now that Dell has its own SMB storage supply, how much longer will it depend EMC? Only as long as it's profitable to do so, and only time will tell how long that is, but the EqualLogic purchase will likely shorten the wait.


Copyright © 2007 IDG Communications, Inc.

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