by Steven Burke and Matt Brown
December 14, 2015
Strategic service providers Monday said VMware's sudden decision to throw in the towel on its EMC-Virtustream cloud joint venture creates confusion and uncertainty around the virtualization market leader's cloud future.
The vociferous reaction came after VMware said it will not be participating in the formation of the Virtustream Cloud Business that it had agreed to be part of just two months ago.
The change in strategy was accompanied by the resignation of two members of VMware's board of directors: former Accenture CFO Pamela Craig, a two-year board member, and former Cisco CFO Dennis Powell, an eight-year board member.
VMware also appointed EMC board member Donald Carty -- the former CEO of American Airlines who was appointed to the EMC board in January -- to the VMware board.
"This is confusing," said Jamie Shepard, senior vice president for health care and strategy at Lumenate, No. 145 on the CRN Solution Provider 500. "We had communicated the benefits of this venture to our customers, and they were looking forward to a vCloud Air-Virtustream business. Now you have a phantom roadblock preventing it from happening."
The biggest impact will be to the cloud services pipeline that Lumenate was building with VMware-Virtustream. "This was a big part of our pipeline for the first quarter," he said. "We were hoping to see the vCloud Air and Virtustream models integrated. Customers were applauding that. Now we have to readjust."
For strategic service providers advising customers on cloud strategy, it is a sure sign they can not rely on the "vendor community to define our cloud business model," said Shepard.
The uncertainty around VMware's future cloud strategy and direction comes in the wake of Dell's blockbuster $67 billion planned acquisition of storage market leader EMC, which owns 81 percent of VMware.
Attempting to drive more shareholder value, EMC and VMware told investors just four weeks ago that they were creating a a new cloud services business jointly owned by the storage market leader and its VMware subsidiary. CRN reached out to VMware, EMC and Dell for comment and will update this story if we hear back.
The centerpiece of the new business is Virtustream, the enterprise-grade cloud services business EMC acquired for $1.2 billion in July. The new 50-50 EMC-VMware-owned business will be run by Virtustream CEO Rodney Rogers.
VMware CEO Pat Gelsinger last week during a keynote address at the NexGen Cloud Conference downplayed the uncertainty created by Dell's pending acquisition of EMC.
Speaking just three days before EMC board member Carty joined the VMware board, Gelsinger said it doesn't matter whether there's a "D" or an "E" in front of the VMware name, as VMware will continue to have an independent board of directors under Dell as it did under EMC. "The result is, we will keep doing what we are doing," he said at the event, which is hosted by The Channel Company, the parent of CRN.
Kent Christensen, practice director at Eden Prairie, Minn.-based EMC partner Datalink, said the move could signal VMware's exit from EMC's federation of companies.
"This is a sign that VMware is not going to participate in the federation as much as it was earlier," Christensen told CRN. "It's a sign that it could get spun out. That's clearly what EMC wants."
"There's a lot of confusion around the whole thing. The parent company says, 'You're going to be part of Virtustream and public cloud.' That's a big statement. For [VMware] to say, 'No, we're not' is quite a statement. They're not falling in line."
Dan Serpico, president of FusionStorm, No. 47 on the CRN SP500, one of the top partners for EMC, VMware and Dell, said he sees more "confusion" in the market as a result VMware's strategy shift. "It was EMC that made it a big deal," he said. "They made a big announcement, with a lot of fanfare, and now you get this very small announcement that [VMware] is not doing it. I don't know if it's good or bad, or if the original plan wasn't going to work the way they thought it was going to work."
Serpico said the Virtustream Cloud Services arrangement was too new to have much impact on partners."It's so new that I don't know where our role was for that anyway," Serpico said. "The merger was evolving, so the impact on the channel community was evolving anyway, so I don't know that the change is disruptive."
Douglas Grosfield, the founder and CEO of Five Nines IT Solutions, a Kitchener, Ontario, strategic service provider, said the VMware cloud confusion is one more sign of the "muddy waters" that are part and parcel of vendors scrambling to define a clear path to the cloud for customers.
"There is a lot of confusion in the market right now," he said. "VMware pulling out of this venture introduces more confusion. 'Muddy waters' just doesn't do justice to what is happening in the market. There are a lot of cloud horse owners in the form of vendors that don't know which horse to put in the race. How is the average business person or consumer going to know where to place their bets?"
Grosfield says the VMware confusion hammers home the importance of strategic service providers like Five Nines IT Solutions giving clear direction for customers to drive business value from cloud-based services. Grosfield sold his stake in a traditional managed service provider business, Xylotek Solutions, just one month ago to start Five Nines IT Solutions.
"There has never been a time where strategic service providers like Five Nines are more necessary," he said. "You have to be able to blow all the vendor smoke away for end users, assimilating all the stories and rumors and backpedaling that happens in the industry today. We have to be able to get down to the nuts and bolts of what technologies customers need to invest in. They can't afford to make a mistake and bet on the wrong horse. You need to invest wisely in technology so your business can be stronger and more profitable. We are the pole in the stand that customers can anchor themselves to."
Daniel Ives, managing director and senior analyst for FBR & Co. , a New York investment firm, called the VMware decision to throw in the towel a good move.
"This has been a hot-button issue since it was announced in conjunction with VMware's earnings, post the EMC/Dell deal, and has put pressure on shares accordingly," said Ives in a research report following the announcement. "Virtustream was going to result in a, roughly, $200 [million] to $300 [million] non-GAAP hit to the bottom line for VMware in 2016, and this remains one of the more 'head scratching' moves we have seen recently across the tech space. With tech investors already having 'white knuckles' around VMware, post the EMC/Dell deal, and given the nature of the tracking stock, for VMware to actively participate in this initiative (coupled with a softer outlook) was the 'one-two punch' that added to pressure on shares recently. We are glad management/board heard the loud frustration of investors and decided to move away from this ill-timed initiative."
VMware, for its part, said in the 8-K filing that it will update its 2015 fourth-quarter and full-year financial results in Jan. 2016.
The CEO for one of VMware's top enterprise partners said he sees the backpedaling as a sign of the financial turmoil facing cloud providers like Virtustream even in the face of strong results from Amazon Web Services and Microsoft.
"A lot of these cloud companies are grossly unprofitable," said the executive, who asked not to be identified. "Their market capitalization does not support their financial performance. There are two games being played here – what is right for the customer and then what goes on in the boardroom with regard to the stock price. There is a consistent conflict between the two. Part of the Dell-EMC deal requires them to realize the financial value of VMware because EMC owns so much of it. Dell and EMC are trying to take that money and do something with it."