And I Yawn Again at NTAP

There have been so many blogs written in just one day about the Network Appliance deal to buy the chunk of LSI called Engenio. Between Steve Duplessie at ESG, Greg Schultz of StorageIO, and Andrew Reichman of Forrester, I figured the deal was pretty much covered. This morning on Twitter I saw another half dozen links to blogs about it. With all this coverage you would think this was a game changer in the industry. It’s as if Google bought Microsoft.

I find myself bored by it.

While I like be a contrarian sometimes, that is not the case here. I don’t think it’s a bad deal. All the points have been made as to why it’s a good deal and I can’t dispute any of them. Controlling one’s technology is a good thing. Increasing gross margins on products is also a good thing. And you can’t complain about adding incremental revenue. All very good.

But not very great. Not very bold, not very exciting, not game changing, and certainly not transformative. It’s a boring move not a bold one.

Look, there are are only a few types of sustainable models for companies. They are:

• Emerging – what every startup is. They don’t know what they will be when they grow up but that’s okay. This is where our most exciting technology comes from. Eventually, however, they will have to grow up and become something else or getting eaten but someone else.
• Parts Supplier – you make parts for other people. Like headlights or NICs. Great work, especially if you spread it out amongst a lot of companies. The goal of a Xyratex. Qlogic, or an Atto for that matter is to be a supplier to as many people as possible and build something of an aftermarket for your components. Think Cummings (they make engines).
• R&D Shop – companies that produce only intellectual property. You see this in Pharma and semiconductors but most computer tech companies want to control their R&D. If a big company sees something it likes in another company, they just buy it.
• Outsourced Services – who doesn’t outsource call centers and manufacturing these days? Most of the services industry falls into this category. It’s the business process equivalent of a parts supplier.
• Specialty Supplier – the big companies can’t make everything. High performance or special purpose products can’t be produced in enough volume for the big companies to be interested. We used to have more of these in the hardware industry. SGI was one and sort of still is. Alienware certainly was but was bought. Software is rife with specialty companies. Software can get away with it because they have almost no recurring costs. It’s all R&D and no inventory. What is important is that these companies have something that is very important to a small number of people but enough people to sustain the company. They are unique but have demand.
• Conglomerate – a set of loosely related companies. Some are completely unrelated like GE (aircraft engines and broadcast media?). EMC looks more like a conglomerate than anything else. You can try and put a “Data Management” wrapper around them but RSA, EMC storage, Documentum, and VmWare are only loosely connected in the marketplace. Conglomerates manage companies or divisions like a portfolio. They diversify to guard against downturns. Storage is down? That’s okay because security is up and so on. Google is looking more like a conglomerate every day. And when the need growth they buy some other company in a different space than where they are now.
• Solution Supplier – soup to nuts in a particular market. HP can provide you everything from mobile devices to laptops to storage to servers. Oracle and IBM can also provide you with almost a whole solution. For these companies, it’s a matter of defining your boundaries. Is is business hardware to business software like Oracle? Maybe it’s all software from infrastructure to desktops to game systems like Microsoft. It’s about delivering a complete end-user solution. When you need more growth, you push out the boundaries.

Then there are the odd ducks. The folks who sell directly but in a narrow non-unique space. They are too big and too old to be Emerging but sell direct rather than to other companies in their market. Not diverse enough to be a conglomerate, they don’t supply enough of the whole system solution to be considered a real solution supplier. And they don’t do anything special enough to be a specialty supplier. This is where I see NTAP now. Basically a one trick pony in a whole herd of mustangs.

NTAP was the specialty supplier when NAS was new. Now, all the solution suppliers and some conglomerates have NAS in their bag of tricks. It’s just not that special anymore. They might have superior technology (don’t know really) but they clearly are at a disadvantage when someone wants to buy a whole system. If I’m putting in a new application, I can buy most of my parts from Oracle, IBM, or HP. No one has everything (well, maybe IBM does) but their services divisions can help me to get whatever I need. Heck, even Dell is better positioned for the IT business.                             

For me to buy from NTAP, I have to only want storage. Just storage. Not servers, not infrastructure software, not desktops, and not mobile devices. If all I need is storage then they have to compete against the conglomerates and all the storage products that the conglomerates and systems suppliers have too. That’s not to say that NTAP is doomed. I believe all those other smart people that say they are a good company and this deal will help them. They can compete effectively in their niche. But their niche is not special enough anymore to drive people to them and them alone. It’s always a bake off for NTAP. They are no longer a specialty supplier but it’s not clear what they are anymore. What I don’t see with this deal is a growth plan. Incremental revenue is not about moving forward. It’s running in place. There is nothing in this deal that will really drive meaningful revenue growth or make them an HP or even an EMC.

LSI was smart here. They know where they are in the food chain. They supply parts. What they do is the computer tech equivalent of making headlights. A good solid business but not one where Engenio fit. They got money for it and can focus on making more of the type of parts they make best. Good move LSI.

What is unclear is what NTAP wants to become. If they stay where they are things will only get harder. If they keep patching the cracks with spackle the house won’t get any bigger or better. Maybe they should buy Brocade or merge with/get bought by Cisco. Doubling down in storage isn’t going to do the trick. To get meaningful growth they will need to do something a bit more risky and bold.