Over 18 months ago, when EMC and Cisco created a joint venture (with some involvement from VMware and Intel), there was talk of hardware (the Vblock which includes Cisco’s then new UCS server), management software and even the joint support; but the purpose of the endeavor was to deliver new ITaaS solutions for both enterprises and service providers. Over the first year, there were a number of changes made to the business model, switching from what was essentially a reference model that could be assembled by VARs and SIs to single-SKU offerings that would be shipped from The VCE Company. A services option, “Acadia”, that would build, operate and transfer the solution was dropped, reducing potential competitive friction with service providers who are a primary customer base. Now at over 900 employees, the significant investment in the VCE model has come under question by some. The investments by EMC and Cisco in VCE are a bet on the future of IT that is high stakes/high return. This is not a little 3-month project, but a strategic move to pivot toward the next transformation of IT that will deliver billions of dollars of hardware and services.
EMC and Cisco are both have robust balance sheets with billions in cash. According to company 10Q forms, Cisco (May ’11) owns approximately 35% outstanding equity of VCE with $100M invested and EMC (Aug ’11) owns approximately 58% outstanding equity of VCE with $173.5M invested. The companies are not disclosing revenue of the venture, except that it passed $100M in revenue in about 6 months and as of December 2010 had 65 “major customers” and was growing that number rapidly. In July 2011, EMC reported that VCE YTD revenue had surpassed all of 2010 revenue and CEO Joe Tucci stated that the companies “expect Vblock sales to hit the $1 billion run rate mark in a next several quarters.” EMC sees the VCE investment as strategic to increasing its importance (and revenue) in a changing IT landscape.
When VCE launched, many questioned whether Cisco’s new UCS server line would limit sales of Vblocks. Cisco UCS has been doing well in the marketplace, posting 129% YoY in Cisco’s Q4 (ended July ’11) while adding 2000 new customers in the quarter, up to 7400 total. UCS is now the #3 bladeserver (behind HP and IBM) thanks in part to the help of EMC and NetApp sales force helping to sell the server into converged environments.
While competitors are fast to attack VCE for “lock-in” or dismiss the joint venture as a lot of paper and words, the reality is that in many ways, the competition is following in Vblock’s path towards convergence. NetApp’s positions its FlexPod solution as giving customers more options than Vblocks. A challenge with this method is that it is the availability of limitless options that is partially to blame for the heterogeneous mess that has IT organizations spending over 70% of budgets on keeping the lights on. VCE’s engineering efforts are working to allow customers to squeeze higher efficiencies out of infrastructure utilized across multiple workloads. Vblocks and FlexPods share many of the same Cisco channel partners. Cisco strongly discourages conflict between the two solutions and the strategy seems to be rewarding both EMC and NetApp who both claim a high percentage of net-new accounts with competitive wins against HP, IBM and Oracle.
While different stacks may look similar at a component level, VCE’s mission is to accelerate change in the IT industry and has invested a significant amount of money and people to assist enterprises, service providers and partners down the “journey to the cloud”. While many early deployments of Vblock were looking for virtualized infrastructure to reduce costs (77% as of January compared to 23% deploying for Private Cloud according to VCE), traction in repeat-customers and service providers are good signs that the business model is attractive.
So the bottom line question – does VCE = “virtual cash erosion” as Chris Mellor wrote or are Vblocks the leading edge of a new breed of logical blocks of infrastructure? Changing customer habits is a long and difficult process, but it does appear that VCE is moving the needle. While VCE may be currently running a negative cash flow, the accelerated investment from EMC points towards positive momentum. Cisco (Andiamo and Nuova spin-ins) and EMC (VMware IPO) have both had successful moves using creative financial vehicles. VCE is not a typical start-up, the revenue from the company flows to the parent companies and there is no exit strategy to IPO the venture or spin it in or out. While VCE does not yet have the revenue to call it a success, it is also clear from competitors following the path and customer adoption that the joint venture is making headway in its journey of bringing customers to the new cloud model.