A couple of weeks ago, Robin Harris at Storagemojo blogged that he thought it would be a smart move for NetApp to acquire Quantum. I do not agree and think that a Quantum (QTM) and NetApp combination would create major competitive and business challenges and would not be successful in the long-term.
By purchasing Data Domain, EMC indicated that they have had little confidence in Quantum technology. Remember, they could buy QTM for a fraction of what they paid for Data Domain. EMC’s vote of no confidence is particularly troubling since their engineering team probably knows more about QTM’s technology than anyone outside QTM. Additionally, EMC has real world experience selling the QTM solutions and understands the strengths and weaknesses. The fact that EMC is ditching QTM in favor of Data Domain is a strong negative signal and makes me wonder why NetApp would be more successful with QTM technology than EMC. EMC’s salesforce has sold hundreds of VTL and data protection solutions since 2004 while NetApp’s has had limited success with the NearStore VTL. Is it realistic to suggest that NetApp’s team will be more successful selling QTM’s solutions than EMC?
NetApp would also have a difficult time competing with EMC and their intimate knowledge of the QTM products. EMC could provide their sales teams with details of the QTM solution and its weaknesses. EMC’s field reps could use this to their advantage to attack the NetApp/QTM solutions. I believe that NetApp (or anyone else selling QTM products) would have a very difficult time overcoming the EMC competitive onslaught.
The recent excitement about the Data Domain bidding war has shined a spotlight on Quantum because they are (were?) partnered with EMC for deduplication, and are at risk of being replaced. Given the excitement, you might wrongly think that deduplication represents the majority of QTM’s business. According to QTM’s 10K, they generated $809 million in total revenue in FY09 (ended March 2009) while revenues from “disk-based backup systems and software solutions” was just $88 million. This equates to 10.8% of revenue from DXi, software and EMC. However, the $88 million grew from $49 million in 2008 and Quantum says that the growth was “primarily due to the addition of OEM software license revenue from EMC.” If we assume that EMC was 50% of the growth and we back out the EMC contribution in 2009, we find that the DXi and software provided about 8.7% of revenue. This final number still includes software revenue and so DXi actually represents less.
The point of this analysis is that Quantum is a tape company that has a small business selling deduplication appliances. Tape technology provides good margins, but is a declining business for Quantum (25% decline 2009 vs 2008). If you are a disk company like NetApp, do you really want to be in the tape business? Do you want the burden of developing, supporting and selling tape solutions? Additionally, from a revenue standpoint, do you want to add a business that is declining by 25% annually? It is hard enough to meet earnings numbers with a growing business. Adding a shrinking tape business will not make it any easier. (Of course, NetApp could sell the tape business, but that becomes complex and costly.)
In summary, NetApp may want to add deduplication technology. If they decided to take the M&A path, a purchase of Quantum seems unlikely. On the surface QTM may have interesting technology, but an acquisition can create more challenges than it solves.