Acquisitions, Innovation and the Economics of the Invisible Hand

28 08 2010

“HP raises offer for 3PAR again – to $2 billion” – This headline reminds me of a similar one in the year 2000, the peak year of the Internet bubble when another over-valued acquisitions was touted as a strategic move.

“Nortel Networks to Acquire Alteon WebSystems for US$7.8 Billion – Will Establish Leadership Position in Delivering High-Performance Internet Data Centers for the New Networked Economy”

The acquisition was to “enable Nortel Networks to build the next generation Internet data center – capable of delivering content at unprecedented levels of speed, efficiency and reliability. Nortel Networks will be in a position to offer a complete Internet data center solution by integrating Alteon WebSystems’ content aware switching products with Nortel Networks’ service offerings in storage, gigabit switches, professional services, hosted application management/delivery and caching.”

A decade later, Nortel, a $78 stock company in 2000 is struggling to survive today as a penny stock company.  Lucent, once known for the famous Bell Labs innovation is no more.  Sun Microsystems suffered a similar fate after the acquisition of Storage Tek until it was acquired by Oracle.

Today, most successful cloud operators Amazon, Google and Microsoft do not use 3PAR storage solutions.  In fact the cloud provider storage strategy, to meet the scaling and cost constraints that are demanded by wildly fluctuating consumer market, abandons the expensive storage appliance solutions that are management intensive albeit through a single console.  Resource centric storage solutions from EMC, HDS, SUN are being abandoned by these cloud providers with a preference to simpler application specific management solutions using commercially off-the-shelf storage. Andrew Reichman from Forrester Research argues that application centric management really makes SAN and storage solutions of yester year obsolete.  Companies such as Amazon, Microsoft, RightScale and Sclr are delivering the application centric reliability, availability, performance and security management to meet the need of even mission critical applications on public clouds.  Many enterprises are mimicking the success of public cloud providers in their own private clouds.

It is interesting to note that the HP EVA storage product line directly competes with 3PAR products.  Does it mean that EVA storage is not good enough for the market?  or HP wants to block DELL from acquiring competitive storage? Also perhaps, 3PAR’s single console management solution may assist DELL in complimenting their solutions more than HP with their redundant systems both home-grown and acquired.  But is it worth the cost for a company that is alleged to be not profitable since it went public?  

The new Intel and AMD multi-core, multi-CPU chips with hardware assisted virtualization add another level of  disruption that will transform the way we compute on a massive scale using the cloud.  One server from Seamicro with 512 CPUs inside will alter the economics drastically with space and energy savings.  Same chips will provide virtualization both in data centers and mobile devices.  These new innovations make the special purpose expensive custom chip designed storage appliances obsolete pretty soon.  As storage, networking and computing become commodity, the cloud providers will migrate to commercially off-the-shelf hardware which will drastically curtail the services business that HP, DELL and 3PAR depend upon today.  Server virtualization makes storage clusters and point to point replication obsolete using application-centric live migration.  What the big companies with cash can do to improve the economy is to invest in future innovation following Intel and Apple instead of buying old technology from Palm and 3PAR. In the meanwhile, the next generation Internet Data Center will continue to evolve leaving many casualties in its wake and rewarding companies that invest wisely to foster innovation instead of indulging in financial gymnastics that add no value.  Will the companies that invest in technology innovation with paradigm shifts such as Apple always survive and companies that invest their cash in Greek Bonds or acquisitions at any cost, follow the path of Nortel?