It is sometimes very useful to boil complex computer (especially computer software) initiatives down to the essence of the economics behind the strategies and the essence of the economics behind the initiatives. Before going down this path, there are a few basic principles of economics that need to be remembered and pointed out:
- Firms (especially publicly traded corporations like EMC, Cisco, and VMware) exist primarily to maximize value to their owners, who are the shareholders in the business.
- Shareholder value is maximized by delivering growth in earnings per share at a rate above what investors can get by investing their money in “safer” investments like bonds and certificates of deposit.
- Management teams that fail to deliver returns to the investors ultimately get replaced by the Board of Directors who are supposed to represent the interests of the shareholders.
- Growth in revenue, market share, number of customers, penetration of new markets, etc., are all just really intermediate goals towards satisfying the real goal of delivering value to the shareholders.
- Nothing is free. Everything has either or both a real and tangible cost associated with pursuing it, or at the minimum an “opportunity cost” of pursuing it which is the forgone benefits of the thing that you did not pursue when you decided to pursue the thing you did decide to pursue.
- When given a choice between purchasing product A and product B, if there is not relevant (to the buyer) differentiation between product A and product B, the buyer will purchase the less expensive of the two.
- Given that buyers of technology strongly consider price when making a purchase, vendors have to make a trade-off between selling fewer units of something at a higher price and more units of something at lower price in order to maximize their profits.
So from an economists perspective, there is really one and only one simple question. How will the vBlock initiative make earnings per share at EMC, Cisco, and VMware grow faster than they would have had the companies not done this partnership or faster than if they had of done something else with the resources that they are putting into this partnership?
The answers to this question come in the following forms:
- Faster growth in earnings per share at all three companies from this initiative will only come from accelerating the growth of virtualization.
- This acceleration can come from causing virtualization to grow more rapidly in customer accounts that are already familiar with the concept and the technologies and/or it can come from causing virtualization to penetrate accounts (perhaps entire markets like SMB/SME accounts) much more quickly than would have been the case otherwise.
- If vBlock is not cheaper than the alternatives, then it can only accelerate the growth in virtualization by being sufficiently differentiated from competing offerings so that customers are willing to pay a higher price for the differentiation.
- Since vBlocks are bundles of existing products, it is reasonable to argue that substantial differentiation is not newly created by the existence of these bundles.
- If new differentiation is not being crated then vBlocks can only accelerate the growth of virtualization by reducing its cost. Either the up front cost of purchasing the solution, or the ongoing cost of managing the solution needs to be reduced in order for vBlocks to cause growth in revenue and profits that would otherwise not have occurred.
- Therefore in order for vBlock to accelerate the growth of virtualization, it must either be cheaper to initially purchase, and/or cheaper and simpler to own and manage on an ongoing basis.
Now, how are vBlocks going to be cheaper to purchase and operate than the exact same products purchased on a line by line basis and integrated by a solutions provider for the customer? In order for this to be true, costs need to be squeezed out of the vBlock solution relative to the service provider assembled solution. How can vBlocks be cheaper?
- EMC, Cisco and VMware could all agree to sell their products when they are a part of vBlock for a lower price than they would charge when they sell the exact same products to a solution provider or VAR who integrates them at a customer site. Cisco, EMC and VMware are not known for cutting price and making it up on volume, and even if they were to pursue this approach it would create havoc with their respective solution provider channel partners. Therefore this is not going to be the reason why vBlocks are less expensive.
- If vBlocks are not going to be priced lower from their manufacturers, then how can they be cheaper to the customer?
- Well the answer is that the Acadia joint venture is tasked with providing unified pre-sales support, unified post sales support, and pre-integration and testing of the products that comprise the vBlock. These are in fact services that VARs and solution providers have typically charged for.
- The clear answer is that EMC, Cisco, and VMware have concluded that Acadia can provide these services in a leverageable, repeatable, and scalable manner at a lower cost than VARs and service providers have been able to attain and deliver to their customers.
- So vBlocks are going to be cheaper to buy because Arcadia is going to shift some services costs from service provides to itself, and provide those services for less money than the customer would have paid the service provider for those services.
- This has a profound implication for the VMware service provider channel, as it takes some of the premium from services away, and replaces it with a premium upon selling enough vBlocks so that vBlock product margin makes up for the lost services margin to the VAR.
- As for the cheaper to own piece, this will all come down to the management stack that gets used to manage vBlock systems. EMC Ionix UIM is being positioned as the preferred management platform for the entire vBlock (The Cisco and the EMC components). This clearly opens the door to the rest of the Ionix stack management stack being pushed by the EMC sales force. If so, what does that say about the role of VMware’s own management stack in the vBlock and Acadia initiatives?
The effect of Acadia executing packaged support and integration services is depicted in the demand analysis below.
In summary while there may be initial acquisition cost savings associated with purchasing a vBlock, enterprise customers should fully sort out the management stack requirements and strategies before going down this path. Consulting with their service providers would probably be a really good move as the service provider at least stands a chance of being able to provide objective and vendor neutral advice as to which combinations of management products on top of a vBlock would best meet the customer’s needs. Staying up to date on how third party management tools are positioned in the market (per the white paper below) would also be a good move.[dm]1[/dm]