When Dell Technologies completed it acquisition of EMC in 2016, it gained a sweetheart of an asset: VMware. More precisely, it gained 80% of VMware, making the software dynamo a mostly autonomous company in the Dell Technologies family of companies. Dell Technologies just announced the expected spin-out of that 80% ownership, making VMware a fully independent company. This move is good for investors, but we analyze if it is good for customers.
While VMware freely partnered with Dell competitors, the Dell-VMware pair had some tighter synergies, as the companies telegraphed in its "better together" message. However, many of these benefits never fully materialized. Since the relationship is loose (i.e., Dell doesn't completely own VMware), it cannot dictate much.
VMware customers will benefit as VMware can spread its wings more
Although VMware operates independently, partners that also compete with Dell have been somewhat reticent to get too close. Such partners can soon cozy up tighter with VMware, so customer options will get richer.
Liberating VMware in this way allows it to pursue a more aggressive market strategy, building tighter partnerships with other vendors, especially in cases where customers want more flexibility, such as unified endpoint management (UEM), a market in which VMware's Workspace ONE product leads. The separation from Dell will enable VMware to expand its device management footprint to meet the needs of increasingly heterogeneous end-user computing environments, especially with other Windows OEM manufacturers. It will also give the company room to address the challenges that open-source virtualization, containerization, and Kubernetes has created.
VMware built a huge business by embracing cloud providers rather than fighting them. This delicate balance poses more opportunities for customers, but some potentially big risks to VMware. The cloud providers are VMware partners, but they will cannibalize some of the VMware footprint with their native offerings.
Of course, a lot of VMware's future depends on its next CEO. CFO Zane Rowe is serving as interim CEO while the company seeks a permanent leader after Pat Gelsinger left to take the helm at Intel. The next CEO will enjoy some additional freedom, but also some notable challenges. Cloud providers and open-source software are gaining momentum. Maintaining VMware's growth streak will be tough, but certainly doable. Strong vendor financials benefit customers – as long as such growth does not come at the expense of customer experience.
Dell customers will benefit but software needs more focus
In his letter to customers, Michael Dell assured everyone that the tight partnership would remain unchanged. However, Dell's major software assets sat within VMware and software is crucial to the future of Dell. It needs to double down on its R&D in software, specifically to leverage infrastructure automation in the "infrastructure as code" movement and in composable hardware. It also needs an all-out assault on edge computing. Here, a continued relationship with a separate VMware will work, but it also needs to add its own software IP.
One important benefit to Dell customers will be Dell's improved debt position. Dell assumed a huge debt load of roughly $50B when it acquired EMC. It's been paying down several billion organically each year but spinning out VMware will give Dell an immediate cash infusion of up to $9.7B to pay down its debt.
Finally, Dell is aggressively building out its Apex program to deliver its products as a service. This is a huge pivot for the company, and it needs to focus its energy on this transformation. This is consuming everyone and everything in Dell as it ramps. The new business model needs a lot of software under the covers. VMware will still supply some of this, but Dell needs its own baked-in. Expect – and demand – more of this organic software from Dell.
Not much changes for customers in the next two years
Michael Dell is correct in the sense that customers will see little real impact – at least for the next two years. Impact beyond that depends on many factors and it is hard to predict. The software DNA is essential to succeed in its mission to deliver long-term customer value. This software IP needs to be baked into Dell's hardware products to facilitate automation and security as natural built-in capabilities.
This spin of VMware is a big event for investors; less so for the rest of us. Billionaires rejoice while customers can largely ignore the hype. Keep pressure on both Dell and VMware to deliver what you need – as you have done in the past. Forrester will be here to help you in that quest – as we have done in the past.
Take IT to the edge with both Dell and VMware
Forrester sees edge computing as the next "gold rush" in the tech world. Dell and VMware each play a key role in this future but different forms. Dell should be a key player in the embedded hardware – often packaged inside industrial products from the likes of ABB, Johnson Controls, and Siemens. VMware's software can bridge your cloud, on-premises data center, and edge systems to simplify how your own software will transform your business. Note the "potential" language we use – they will do this only if the community steers them in the right direction.
This post was written by VP and Research Director Glenn O'Donnell, and it originally appeared here.