EMC and Data Domain: It was the best of times, it was the worst of times

I was surprised when NetApp offered $1.5B for Data Domain and was even more surprised when EMC countered with an all cash offer of $1.8B. NetApp has since upped their offer to $1.9B of cash and stock. It is in the context of this uncertainty that I wanted to comment on a possible EMC/Data Domain acquisition.

What about EMC’s DL3D product line?
EMC sells target deduplication solutions (DL3D product line) through a partnership with Quantum. These products compete directly with those from Data Domain and rely on similar technology. (Data Domain disclosed that it had licensed Quantum’s deduplication patents in their own IPO documents.) Even though EMC strengthened their commitment to Quantum by providing a $100 million loan back in March, the Data Domain announcement raises serious questions about EMC’s commitment to Quantum. If Quantum’s technology was really good, then why bid almost $2B for a competing technology especially since they could buy Quantum for less than half of this amount.

Some have suggested that EMC is bidding on Data Domain because they want to hurt NetApp. This is certainly a possibility. However, EMC provided a very strong counter-offer and has to recognize that they may own Data Domain in the end.

What about Dell?
Dell OEMs many of EMC’s storage solutions and the relationship between EMC and Dell has historically been very close. Clearly, Dell’s acquisition of EqualLogic put a strain on the relationship, but Dell and EMC are still partners. As you would expect, Dell also partnered with Quantum for deduplication technology.

Some hypothesize that Dell could be a bidder for Data Domain since the technology could fit nicely into their indirect sales model. If EMC purchases Data Domain, you can easily imagine Dell OEMing Data Domain from EMC just as they do with the CLARiiON product line. This would put more strain on Quantum who would be losing their second (and only remaining) DXi OEM.

What about the enterprise?
EMC provides a range of products to address different market segments. They have a substantial footprint in large enterprise environments with their DMX/V-Max and high-end CLARiiONs. These customers have stringent data protection needs and today EMC addresses them with the Rube Goldberg DL3D 4000. If EMC purchases Data Domain, they will need to revisit their strategy for large scale data protection.

EMC states that their DL3D 4000 is the solution for this segment. However, if they acquire Data Domain and replace all their Quantum solutions with Data Domain systems, they will have to re-architect the DL3D 4000 to use Data Domain’s smaller systems. It will become even more of a headache and bottleneck! Of course, they could keep the current DL3D, but does it make sense to have an all Data Domain deduplication line except for one product? Clearly not and so EMC will migrate from Quantum and will be left without a solid offer for the enterprise market.

Are they going to drive up system prices?
EMC’s goal has always been to sell disk systems. Their potential acquisition of Data Domain is no different. It reminds me of what they did with ADIC a few years ago. ADIC sold a line of VTLs called the Pathlight, which used Adaptec disk technology. EMC partnered with ADIC for physical tape and ADIC agreed to move the Pathlight platform to CLARiiON. The result: they doubled their system price. Data Domain uses Xyratex disk in their platforms. If EMC acquires Data Domain, how long will it take them to replace Xyratex with CLARiiON? If ADIC is any lesson, we will see a dramatic increase in price. It will also leave Xyratex-based Data Domain users with a limited upgrade path.

What does Data Domain want?
It is clear from Data Domain’s actions that they do not want to be acquired by EMC. Tucci’s note implied that Data Domain neglected to speak with EMC while in M&A discussions with NetApp. As a CEO, your job is to get the best valuation for your company and if an acquisition is being considered, you would want to engage with every possible acquirer. In this case, it appears that Data Domain did not engage with EMC, which suggests that they were only interested in being acquired by NetApp.

EMC has an expansive sales force selling Quantum-based solutions. If they buy Data Domain, the products will fit into the existing product catalogue replacing Quantum. This would result in a smooth product transition (except for the DL3D 4000), but would likely result in most of Data Domain’s salesforce being let go. It is not clear what will happen to Data Domain’s management, but it is doubtful that EMC will run Data Domain as a separate entity for an extended period of time given the obvious overlap with the existing products and solutions. The end outcome of this is not ideal if you are a Data Domain employee and value your job.

The current bidding war is an unprecedented situation. Data Domain has multiple suitors include a rumored third potential bidder. It is unclear who will prevail; however, EMC appears to have a strong offer and strong motivation. Only time will tell how this ends up, but it appears that Data Domain is focused on partnering with NetApp while EMC is playing the spoiler role. Either way, Quantum is in a difficult situation. If EMC acquires Data Domain, Quantum is out; if they do not, they are still in trouble because EMC has shown a complete lack of confidence in their technology.

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3 Responses to “EMC and Data Domain: It was the best of times, it was the worst of times”

  1. Interesting and thoughtful analysis, thanks for that. One thing, you repeatedly mention doesn’t make sense, though… Data Domain uses Quantum’s de-dupe technology, as you mentioned. This means that, if EMC is bidding on Data Domain, they are, in a sense, demonstrating their faith in Quantum technology in a simple, appliance-grade product.

    You keep mentioning that if EMC buys Data Domain, they are demonstrating a lack of confidence in the Quantum de-dupe technology. Well, which is it?

    In reality, EMC seems to be demonstrating a lack of faith in their IMPLEMENTATION of Quantum technology, since they’ve offered $1.8B for a different, simpler implementation of Quantum de-dupe technology than they apparently find in their own CDL/VTL line.

    What I actually find most odd in all this is that EMC is not simply buying SEPATON, rather than battling for DD. Sepaton is MUCH more aligned with EMC’s Enterprise-level offerings, due to its scale, capacity, and much higher availability offering. And I have to guess it would be less expensive overall, although I might be wrong about that. DD is public, and Sepaton is still private, and still looking for VC money to ramp it into the big time. EMC could do tht at a stroke, by buying Sepaton and making that line-up and architecture its high-end de-dupe VTL for its biggest pickiest customers.

    Very odd to fight over DD who plays primarily in the low end, when EMC has such inroads into the high and extreme high end.

    Anyway, thanks again for the insightful commentary (or was that inciteful?)

  2. Brian, thank you for your comment. I appreciate your questions and commentary and let me clarify what I was saying about Quantum and Data Domain. (I will tweak the post to clarify the point.)

    Data Domain licensed Quantum’s patents so at a high level their technology must be similar; however, they have taken different approaches in implementation. Data Domain offers smaller chunk sizes and Quantum offers a combined post-process/inline solution. (There are many more architectural differences; I cite these two as obvious examples.)

    EMC is not showing a lack of confidence in hash-based technology (or they would not bid on Data Domain), but rather in Quantum’s implementation of it. Note that the DL3D and DXi products are very similar and so this is really a referendum on Quantum’s technology. Essentially EMC is saying that Data Domain’s implementation of Quantum’s hash patents are better than Quantum’s! Obviously, this puts Quantum in a tough spot.

    I cannot really comment on EMC’s acquisition plans except to say that they do have a large commercial business that focuses on smaller customers and Data Domain is a nice fit there. However, they still need a strategy for the high end and I think that everyone will agree that the current DL3D 4000 is not a long-term solution.

  3. Thanks Jay, that’s pretty much what I had concluded. I know that DDUP is all in-line, and that Quantum has an interesting hybrid “in-line or post-process or both” approach. I also know that DDUP recently reved its OS/SecretSauce and claimed to have doubled their ingestion rate for each given appliance, purely through SW tweaks.

    Regardless, it’s still a credit to the DDUP team(s) and their “smart people” that EMC and Netapp both want what they’ve got, even though the underlying hash methodologies and algorithms are common among many solutions out there.

    And it’s still time for Netapp and EMC to both eat boatloads of crow, for claiming/pretending for years that they had anything approaching an optimal solution in this space. I suggest Jack Daniels BBQ sauce to make the yucky bird taste better…

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