NetApp and Data Domain: ‘Til death or a better offer from EMC do we part

I recently blogged with my thoughts about EMC acquiring Data Domain, and wanted follow-up with a post discussing some key points about a NetApp/Data Domain merger. Since that last post there have been numerous changes including EMC suggesting that they might up their offer; the inevitable threat of a class action lawsuit, Data Domain endorsing the second NetApp offer and the government initiating an antitrust review. In this context I want to dissect some key points to consider regarding this acquisition.

Why does NetApp want Data Domain?
In my opinion, NetApp’s goal is to jump start their backup and recovery business. Today NetApp mainly sells NAS, block-based storage and related applications. Their primary strategy for backup and recovery is array-based applications such as SnapVault or SnapMirror which replicate data from one site to a DR site. They also offer a VTL with deduplication, but it is typically sold as a last resort when snapshoting and replication are not options. The deduplication technology in their VTL is new and does not rely on any of NetApp’s core ONTAP software. The bid for Data Domain makes you wonder how confident NetApp is in their own technology.

By acquiring Data Domain, NetApp will become a player in the backup and recovery market and will gain control of the market share leader in SMB data deduplication. They will also gain a sales force that focuses on data protection. However, NetApp has historically focused on larger enterprises while Data Domain’s strength is in small companies. This creates a potential mismatch between their product and sales strategies.

Why does Data Domain want NetApp?
Given that Data Domain’s stated goal is to get the highest value for their shareholders. They have a hard decision to make. NetApp is currently offering $100 million more than EMC, but NetApp is offering cash and stock versus EMC’s cash only. Since cash is king in these turbulent market times, the question of which company ultimately prevails will depend on the outcome of the shareholder vote.  However, Data Domain’s recently endorsement of NetApp’s increased offer shows that they are favoring a NetApp acquisition.

From a job security standpoint, Data Domain should prefer NetApp. NetApp wants to enhance their data protection practice and run Data Domain as a separate entity. You can easily imagine a storage team selling NAS and block storage (NetApp) and a backup team (Data Domain) selling NAS-based backup solutions. This is much cleaner than the EMC alternative since they have one sales team focused on block, NAS and deduplication solutions thus making the Data Domain sales team redundant. The result is improved job security and corporate positioning for Data Domain post NetApp acquisition. Of course NetApp still has to address the fact that Data Domain tends to focus on smaller environments.

What about the NearStore VTL with deduplication?
NetApp currently sells a family of deduplication-enabled VTL products based on software acquired from Alacritus and deduplication technology developed internally. The potential acquisition of Data Domain brings into question the viability of the NearStore VTL platform. Why would you develop and support two entirely separate, incompatible and competing deduplication platforms? (NearStore & Data Domain) Not to mention the added pressure of having just spent about $2B! If the acquisition occurs, I would expect NetApp to end-of-life the NearStore VTL in favor of the Data Domain solutions.

What about dedupe pricing?
NetApp has positioned deduplication as a free option on their filers (A-SIS) and VTL. This is unusual since most vendors charge a premium. Is it a reflection of their lack of confidence in deduplication? (at least deduplication for the VTL.)

The addition of Data Domain will change the economics of deduplication pricing for NetApp. Data Domain’s business is deduplication; if NetApp really thinks that deduplication has such little value then they just burned $2B on a commodity disk platform. Clearly this is not the case, and NetApp will charge a premium for deduplication technology like Data Domain does today. It will be an interesting change for them and you wonder how it will translate back to their existing deduplication solutions.

What about ONTAP?
ONTAP is NetApp’s core filer software that enables their advanced features (snapshots, replication, etc.). NetApp promotes a common software and application architecture across their filer product line. The NearStore VTL bypasses ONTAP in favor of Alacritus technology. Data Domain uses a proprietary OS and filesystem and will not use ONTAP either. The addition of Data Domain would weaken NetApp’s message of ONTAP everywhere. It also means that you can forget about replication interoperability between Data Domain and NetApp solutions. If you want to replicate data on a NetApp filer, the target must be another filer and likewise you can only replicate from Data Domain to Data Domain. I imagine that this may change at some point, but we have been waiting over 5 years for NetApp to integrate technology acquired from Spinnaker (scalable NAS) and so I would not expect any Data Domain integration for a long time.

In looking at the ongoing discussions between NetApp, EMC and Data Domain, I believe that NetApp has a stronger business need to acquire Data Domain than EMC does. They want to jump start their backup and recovery business and the addition of Data Domain would create immediate credibility in SMB/SME environments. Data Domain prefers this option as well since it dramatically improves job security. However, Data Domain’s management will be judged on their ability to create value for their shareholders and the shareholders do not really care about the synergy between NetApp and Data Domain; they just want to maximize their return on their Data Domain investment. It is in this greater context of financial value where NetApp will struggle against EMC. As previously posted, NetApp is financially weaker than EMC and cannot effectively compete if EMC continues to up the offer.

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2 Responses to “NetApp and Data Domain: ‘Til death or a better offer from EMC do we part”

  1. Great points. It is not clear to me though that the Data Domain sales staff will be jettisoned if they are acquired by EMC. When Legato was acquired, the sales staff was retained although many chose to leave. It would probably depend on if EMC plans to run Data Domain as a separate division/subsidiary or fold them in.

    I have a much less insightful post than yours about this subject on my blog that someone may find of interest; comments welcomed.

    http://storage-sense.blogspot.com/2009/06/1000000th-post-on-data-domain.html

  2. Hi and thank you for your comment,

    I understand your point about EMC keeping the Legato (and RSA, Documentum and VMware) sales teams and running those businesses as separate entities. Those companies represent non-core businesses that can easily be justified as standalone entities.

    Data Domain is a different beast than the previous acquisitions. Data Domain-like solutions are a core part of EMC’s product line and EMC has a large and accomplished team selling systems that compete with DDUP. If they acquire DDUP, I have a hard time believing that they would tell their existing reps that they could not sell Data Domain solutions. It makes no sense since they already have the expertise and experience. If they keep DDUP reps, they will have a large sales overlap.

    In the end, EMC is a sales driven organization and I believe that EMC’s sales team will not want the DDUP team. They will protect turf and the DDUP sales team will be jettisoned.

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