This company profile is part of a new series at SiliconANGLE, where we detail trends, technologies and people.  SiliconANGLE is about covering all the angles.  This “SiliconANGLE” format aims to deliver the subject in an easily digestible form, covering all the angles that pertain to a company, its history, development and future.  Here’s The SiliconANGLE on EMC, one of the world’s most influential companies involved in cloud computing.  The company is coming off a week-long high, touting the globe with its Big Data advancements, changing the way an entire industry is looking at cloud management.

EMC is a thirty year old company that essentially created the storage systems business as we know it today. The company began with humble roots selling memory for minicomputers. Through many failures, perseverance, vision and a take-no-prisoners culture, the company evolved into a storage industry powerhouse in the 1990’s by developing the Symmetrix high end storage system which unseated IBM as the dominant player in market.

The first Symmetrix had 24GB of disk capacity, less than the flash storage of many smartphones of today. Throughout the 2000’s, the company leveraged its early successes and via a series of acquisitions re-invented itself, focusing much more on software revenues and diversifying the its product portfolio. Incredibly, by virtue of its acquisition of VMware (completed in 2004) EMC is today positioned amongst the industry’s power players including IBM, HP, Microsoft, Oracle and Cisco in defining the future of enterprise IT. While much smaller than these firms from a market valuation standpoint, EMC is growing faster than the industry’s largest firms and is positioned to be the next big player in enterprise IT.

In a move that had ramifications to customers, partners, competitors and investors, EMC spun out VMware in a 2007 IPO; however the company has maintained an 80% majority ownership stake in the company. This single decision has defined EMC and its actions are largely designed to exploit VMware and leverage the platform for competitive advantage. As a result, EMC’s valuation has been largely determined by VMware and in 2010, the value of EMC’s VMware holdings exceeded the value of EMC’s core storage business (see chart). As a result, investors have rewarded VMware with a high earnings multiple but have penalized EMC’s core business in an effort to hedge the VMware risk inherent in EMC’s stock.

By comparison, VMware’s shares in the past twelve months have soared nearly 120% while EMC’s have jumped roughly forty percent. EMC has set out to pave a new growth path through acquisitions, picking up several growth companies in the past two years including Data Domain, Greenplum and most recently Isilon Systems. These moves have yet to pay off in terms of stock value for EMC’s core business however EMC is positioning for growth as well as consistent performance, leading many to believe the firm is currently undervalued. Others feel EMC is fairly valued because of the risks of its large VMware ownership.

In an email on the subject, Wikibon analyst Dave Vellante responded to SiliconAngle with the following assessment:

“EMC’s core business is undervalued in my opinion, but because EMC has flatly stated it will maintain 80% of VMware ownership, investors hedge that frothy valuation risk by lowering their perceived value of EMC’s core business. Personally I think VMware is the enterprise IT economy and will be a $100B market cap company some day.

“EMC is an interesting value and growth play because it throws of lots of cash but also has tremendous growth potential because of VMware. To accelerate growth in its core business, EMC has gone on an acquisition spree buying companies like Data Domain ($2B+), Greenplum and Isilon ($2B). These are all high octane businesses that I expect to contribute substantially to EMC’s growth. In the era of so-called big data you’d have to say EMC is pretty well positioned—better than most.”

BusinessANGLE:

Facts

Founded: 1979 as a hardware manufacturer selling plug compatible memory boards for minicomputers. First product was a 64KB board for Prime Computers systems. To fund the company, the founders sold office furniture.

Founders: Richard Egan, Roger Marino

IPO: April 4th, 1986 at a price of $16.50 (Currently EMC on NYSE)

Approximate Market Value: $49B (as of 1/21/2011)

Key Executives: Joe Tucci, Chairman and CEO; Bill Teuber, Vice Chairman, David Goulden, CFO; Pat Gelsinger, President and COO; Howard Elias, President and COO; Jeremy Burton, Chief Marketing Officer; Sanjay Mirchandani, CIO

Other critical players: Paul Maritz, CEO VMware and former Microsoft executive. John Egan, Board Member EMC and VMware; Former EVP of EMC and son of founder Richard Egan. Todd Nielsen, COO of VMware and former Microsoft executive.  See more here.

Customers Focus: Broad customer base primarily includes enterprise IT infrastructure professionals in the Global 2000 and small and mid-sized businesses. Recent acquisitions of companies including Iomega and Mozy extends EMC’s reach to end consumers.

Key Partnerships: VCE – a joint venture between VMware, Cisco, EMC and Intel. The JV is primarily an EMC-controlled entity with substantial involvement from Cisco. The partnership is designed to accelerate the adoption of converged infrastructure by combining best of breed technologies and getting to market ahead of the competition.

Description: EMC is the world’s largest storage systems company and has defined today’s enterprise storage business. The company’s culture was seeded by founder Richard Egan with a never-give-up attitude that was legendary in technology circles. The company struggled in its early days to find a successful market niche and had a near disaster when a disk drive supplier encountered critical reliability problems forcing EMC to spend heavily to replace many of its minicomputer disk systems at customer sites. Subsequently, Egan hired Moshe Yanai and a team of elite Israeli engineers who developed the Symmetrix mainframe disk system. The concept behind Symmetrix was to use smaller commodity disk drives (5.25″ in diameter at the time) and mirror them for protection. The result was substantially cheaper, faster and more reliable storage. Customers gobbled up EMC systems which were priced at around $1M each.

Discussion

During this period, Egan hired Michael Reuttgers to lead the company which set course on creating the disk storage systems business, attaching to virtually any server market with a meaningful installed base. In the midst of the dot.com boom, EMC acquired Data General, inventor of the CLARiiON storage system, to shore up its line of midrange products. Over time the Symmetrix and CLARiiON became two important pillars of EMC’s revenue strategy which eventually added software and services components as well.

However after the dot.com bubble burst, EMC was exposed to a massive decline in its stock value and substantial contraction in its market opportunity. EMC hired current Chairman and CEO Joe Tucci from Wang in 2000 as President and COO. Tucci was soon promoted to CEO and Chairman at which point he completely transformed EMC through a series of moves, including numerous acquisitions which broadened the company’s portfolio, reduced its reliance on the high end and diversified into higher margin software markets. VMware was by far Tucci’s most important acquisition but others including Legato, Documentum, RSA, Kaysha, Avamar, Iomega, Data Domain, Greenplum and most recently Isilon have shaped the company’s diverse portfolio of today. The 2008 acquisition of a small startup company called Pi brought former Microsoft executive Paul Maritz who Tucci eventually put in charge of VMware, replacing co-founder Diane Greene.

Today, EMC is positioned with an extremely broad infrastructure portfolio covering storage hardware, software, data protection, security, virtualization, cloud and consumer products and services. The underpinning of EMC’s portfolio is VMware with the company’s primary objective being to optimize the value of VMware while at the same time moving other parts of the company forward.

Growth Strategy

EMC’s has a multi-pronged strategy for growth, combining in-house research and development alongside its acquisition stream. The basic underpinning of EMC’s growth strategy includes providing infrastructure for public and private cloud computing opportunities. Moving away from a pure play storage focus, EMC’s has its sights set on cloud computing and so-called big data, the storage, protection, management and analysis of petabytes of information. As well, in the pre-dot com days, EMC’s channel strategy was almost predominantly direct sales and boasted more than 65% gross margins. Today, EMC has a significantly more diverse distribution channel strategy with a higher contribution from lower end products. Despite an increasing mix toward software revenue, its gross margins remain below historical highs.

To this end, EMC’s partnership with and ownership of VMware are crucial for the company. According to several observers, EMC’s basic market assumptions are as follows:

*The world is moving toward Intel-based commodity server technology
*Data growth is exploding – especially unstructured data – and the amount of data stored will increase 44X this decade
*CEOs are demanding simplified IT with greater agility
*Increasingly, storage specialists will give way to IT generalists
*So-called private clouds will provide the security, data protection and management control that most enterprises demand
*Public clouds will be used in conjunction with private clouds in a hybrid model that is safer and more reliable than pure public models
*Enterprises will adopt private and hybrid clouds more so than public clouds

For EMC, its goal is to deliver on this premise by leveraging VMware and making it the fundamental technology enabler of this vision. EMC’s strategy is to optimize the piece parts of its portfolio for virtualized environments and provide integration and convergence through virtualization and partnerships such as VCE. The company operates to leverage its special relationship with VMware while at the same time allowing VMware to operate independently and form partnerships with EMC’s competitors. Nonetheless, EMC tries to leverage its relationship with VMware to lead in the areas of VMware integration and time to market. This dynamic underscores EMC’s challenge of executing on its own portfolio to increase its core value while at the same time maximizing VMware’s contribution to its valuation.

Services is another critical area for EMC. Its strategy in professional services is to provide deep storage and information management expertise to clients while at the same time not competing with its services partners such as Accenture and CSC. EMC services head Howard Elias has flatly stated that EMC has no intention of acquiring a large services company (a la Dell’s acquisition of Perot) as it would encroach on its partners services businesses.

For more current information on EMC see here.

MarketANGLE:

According to analysts, one way to view EMC’s businesses is to divide it by product category (e.g. high end storage, midrange, etc). Another way to view the company’s operations is to split them into the following major segments:

*Enterprise Storage – which comprises high end Symmetrix (VMAX); midrange VNX (former CLARiiON and Celerra) and VNXe; and other storage hardware/software bundles (e.g. Centera)
*Virtualization – via VMware which breaks down into platforms, management and applications
*Other software plays – RSA, Avamar (backup), Legato (backup), Documentum (now IIG – document management/information management)

EMC’s core business and the one that throws off the lion’s share of its free cash flow is enterprise storage. According to IDC, the enterprise storage market for external subsystems generates approximately $25B worldwide and EMC owns about a 26% share of that business. In its traditional business, EMC’s main competitors are IBM, HP, Oracle/Sun, NetApp and a host of smaller players. While IBM has historically been #2, NetApp is poised to take over the #2 position and is the one company that has consistently caused EMC trouble. NetApp is gaining share faster than any other storage company and has been consistently outperforming the market.

In its midrange business, EMC is staving off threats, particularly from NetApp with unified storage. EMC’s recent VNX and VNXe announcements were made in direct competition with NetApp which has led the market with so-called unified storage – that is the merging of file (NAS) and block (SAN) storage into a single platform. In addition, EMC is facing increased pressure from HP, which just acquired 3PAR to compete with EMC’s midrange and high-end businesses, IBM which acquired XIV and Dell at the lower end which recently acquired Compellent. For years, EMC and Dell were tight partners in a distribution relationship whereby Dell resold EMC storage. With the previous acquisition by Dell of EqualLogic and now Compellent, Dell and EMC are no longer strategic partners.

In addition, the emergence of a new breed of scale out storage from the likes of IBM (SONAS), DDN, HP (through the Ibrix acquisition) and NetApp (via its Spinnaker acquisition and in-house R&D efforts) have caught on in the market, particularly as clustered systems – that is systems that scale out and appear as a single logical pool of storage. EMC’s $2B acquisition of Isilon has placed it immediately in a top position to capture share in this growing market which serves the unstructured data needs of customers requiring many hundreds of terabytes or petabytes. As well, object storage holds great potential and EMC’s Atmos system is positioned to compete in this market with Internet companies such as Google and startups like Cleversafe.

EMC’s is one of the whales in enterprise storage, not just in terms of market share but also in portfolio breadth (e.g. backup software). It competes with Symantec and at the same time partners with backup software companies to advance its backup portfolio (e.g. Data Domain products). EMC’s backup and recovery systems (BRS) business comprises hardware and software from Data Domain, Avamar and Networker (former Legato) to generate what analysts estimate was close to $2B in revenue in 2010.

EMC’s acquisitions of Documentum and RSA are not clean fits with storage. Unlike VMware – they’re not game-changing. They are businesses that emc is trying to manage to profitability. RSA is more strategic due to the cloud play and the importance of security.

From a market perspective, there are three disruptive forces on which EMC must capitalize:

1. storage simplification/modern virtualization architectures – i.e. VMware, 3PAR, Compellent, Isilon
2. Scale out/global name space/big data – Isilon, Greenplum, atmos
3. Server Virtualization/cloud – VMware, Atmos, core storage products made simpler

EMC and other larger market players are incrementally evolving the installed base and trying to keep it throwing off cash as long as possible, while at the same time bringing on new technologies. In the case of EMC, it means leveraging products from its acquisitions – e.g. Isilon, Greenplum, while continuing to evolve the installed base. In 2010, EMC threw off $3.4B in free cash flow, mostly from legacy products. The trick for EMC is to continue to add value to that installed base and gain footholds in new markets.

The linchpin of EMC’s strategy is VMware, which simplifies storage and can make it invisible. VMware makes EMC a critical stack player for the enterprise. Many have likened VMware with Paul Maritz (former Microsoft) and EMC with Pat Gelsinger (former Intel) as the new Wintel. Like Wintel, EMC is trying to create an ecosystem with Cisco and Intel while at the same time leveraging its core IP (VMware). While HP, Oracle and IBM own IP in the OS, none of these companies has the breadth of hypervisor penetration of VMware. As such they must find new ways to add value beyond the hypervisor; while VMware essentially sits in the catbird seat and can layer in security, management, application frameworks (e.g. Spring) and even end user device support.

IBM’s angle is services led, HP attacks from both consumer markets and convergence (networking, servers and storage integration); as well as services (EDS); while Oracle is attempting to optimize the database and drive software margins– commoditizing hardware. The bottom line this market dynamic has many more implications beyond storage but ironically, a storage company is one of the best positioned to capitalize. EMC is trying to grow VMware as fast as possible and use that IP to create stacks that integrate its storage better (e.g. storage, backup, security, etc) and if it succeeds, it’s both a large player in integrated stacks and it picks up dividends in storage too. VMware is the dominant piece of the company strategically and increasingly dominant from a market value standpoint.

SocialANGLE:

EMC is heavily invested in its own social media initiatives, putting a lot of time and effort towards building and maintaining a community of users, clients and industry influencers. Chuck Hollis has been an integral part of this growth, as an EMC insider blogging regularly about the space, and EMC also has a member on the Enterprise 2.0 board. Internally, EMC’s also made some significant changes in the past 12 months or so to ensure streamlined communication amongst employees, looking to social media structures for this as well. Barry Burke and others have also made public strides in covering the cloud space, contextualizing much of what EMC’s done on his blog, The Storage Anarchist.
As far as social media support from a product perspective, however, EMC’s left out in the cold. As much as social sites like Facebook and Twitter rely on cloud services for real-time data exchanges, media storage and the like, EMC’s missing a big opportunity in not being chosen for some of these larger, more prominent social media sites. In fact, none of the major social media sites rely on EMC or VMware for storage, many turning to Intel for their storage and scaling needs.

David Vellante, David Floyer, Michael Sean Wright and Kristen Nicole contributed to this article.