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While not officially a done deal, all signs indicate the Dell acquisition of EMC -- to the tune of $67 billion -- will go through to forge a giant that will go head-to-head with the other heavyweights of the tech world. In this shifting landscape, where Microsoft finds itself competing in several areas with a more enterprise-friendly Dell, it may give Microsoft pause to consider how it goes about developing certain products and services.
Microsoft has a good relationship with Dell. This can be seen in Dell's willingness to create products around Microsoft's unlikely -- and sometimes outright failing -- various tablet and mobility products. It can also be seen in Dell's willingness to resell Microsoft's Surface line, despite these products competing with Dell's own.
Dell is the only vendor currently selling "Azure in a can." Indeed, Dell has recently released a new, smaller version of the on-premises Azure appliance for companies that might care to buy hardware in something less than two racks at a time.
Microsoft is the No. 2 public cloud builder. Clouds are built using someone's hardware. More to the point, tier 1 clouds are not homogenous: They are built using a variety of hardware from a variety of vendors to meet a diverse set of needs.
Microsoft even put forward a lot of the cash required for Dell to go private.
Despite this seemingly cozy and symbiotic connection, Dell and Microsoft compete on a number of fronts. Dell's recent acquisition of EMC has complicated matters, opening new fronts of competition between the two vendors and raising the possibility of significant friction as both entities compete fiercely for the same dollars from the same clients.
The jousting arena widens
The Dell acquisition of EMC is an even bigger player in enterprise technology than it was before. A substantial amount of the hardware that will go into Microsoft's data centers will be sourced from Dell. This alone changes the dynamic of the relationship between the two organizations.
In addition, VMware CEO Pat Gelsinger has said Michael Dell plans to retain a controlling interest in VMware. Microsoft's Hyper-V hypervisor competes directly with VMware's ESXi. VMware is also producing containerization software, which will vie with Windows containers, cloud software that competes with System Center and the various Azure on-premises offerings, as well as vCloud Air that competes directly with Azure.
Microsoft has an enterprise services arm that contends directly with Dell's own enterprise services arm. We can go up and down the list of products and services from both companies, but the crux is the new Dell has much to gain by dropping its congenial relationship with Microsoft.
The end result has the new Dell as a critical partner reselling Microsoft software, services and hardware. They are also direct competitors for many of the same software, services and hardware. Dell is a critical supplier of hardware -- and, one would presume, attendant software -- to Microsoft's data centers. They are also a direct competitor to those same data centers.
Steering customers to the cloud
Microsoft ultimately doesn't want to be in the business of licensing software for use by customers on their own premises. They would much rather have customers buy everything from the Azure cloud and pay a monthly subscription fee. Once a customer is locked in, Microsoft can just turn the knobs on the price.
On-premises software licensing doesn't really let Microsoft do that. If you don't like Microsoft's new vision -- or new licensing model -- you can choose to skip a generation. Microsoft doesn't like that. It also doesn't like handing over the customer relationship to the partners that sell the servers, desktops and so forth. Far better, for Microsoft at least, for them to deal with all customers directly.
This conflicts with Dell. Dell's entire model is about owning that customer relationship. Dell is the king of direct sales. They aren't about to become another reseller of Microsoft cloud services living off the few points of residuals Microsoft deigns to leave the channel before they kill off reseller incentives entirely.
As unrest builds between Microsoft and Dell, it will eventually become clear that only one of these two giants can have its way. Both want to be all things to customers. If a compromise cannot be reached, then the rift may change the face of IT forever.
Ultimately, Dell is going to need to build its own cloud -- something more substantial than vCloud Air. They will need to redouble their investments in their own software and services.
Does the forecast call for extreme measures?
But what of operating systems? Microsoft can effectively pick up its ball and go home at any time. If Dell gets too uppity or too effective at competing with Microsoft, they always have the nuclear option of simply not allowing Dell to ship Microsoft operating systems.
This would be an extreme schism to be sure -- but it is no longer out of the question. Microsoft's monopoly on the endpoint is broken. They are not simply a "Windows and Office" company; they are a cluster of disparate software and services offerings each operating in increasingly mature and competitive industries. Microsoft may well choose to try for vertical integration.
Dell, clearly, cannot risk this in the long term. It needs an operating system of its own. VMware's Photon Stack is a great start, but it is only a start. It would not shock me at all to see Dell buy Red Hat in the next two years. It would be the final piece of the puzzle for a fully vertically integrated play.
Microsoft doesn't want to see that happen. And after seeing the tab for the Dell acquisition of EMC, I am sure Dell doesn't want to spend the money either. Ample time and effort is going to be spent trying to find amicable solutions that allow both companies to coexist.
A lot rests on those negotiations. The direction of the entire industry could well hinge on whether Microsoft and Dell can find a way to cooperate and compete at the same time. Can they be both symbiotic and making vertically integrated plays to own the entire stack? One thing is for certain: The next 24 months will be extremely interesting.
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