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Summary:

The $1.5 billion offer for de-duplication leader Data Domain from NetApp, which has its own de-duplication technology, was an indicator of just how far ahead of the game Data Domain is. And now rival EMC, sensing blood, is outbidding NetApp with its own cash offer. So what is it that makes Data Domain so hot?

datadomain_logoEMC Corp. announced yesterday its desire to buy Data Domain, a data backup company, for $30 a share, or roughly $1.8 billion in cash. That’s a 20 percent premium over a $1.5 billion cash-and-stock offer from NetApp, EMC’s bitter rival, unveiled two weeks earlier. Not bad for a company whose shares were trading at around $17 a share a mere month ago.

datadomainstockThe question on everyone’s mind is, what makes Data Domain so hot? As Gary Orenstein pointed out last week, the Santa Clara, Calif.-based company is a leader in the storage category know as de-duplication, a process by which only new files are stored at each backup and duplicates are removed upon each back-up. De-duplication allows for faster backups by cutting down the amount of information processed, transferred and stored. As Gary explained:

By “de-duplicating” corporate data, particularly those terabytes destined for backup, Data Domain provided compression ratios that made its disk-based product a compelling choice over tape. It also made the integration model simple: Connect to your backup server where you used to have your tape library. Boom. Value delivered.

That NetApp, which has developed its own de-duplication technology, wants Data Domain is a good indicator of just how far ahead of the game Data Domain is. Indeed, Data Domain has done three things right:

  1. It correctly bet on the rise of multicore processors, which make the arduous task of de-duplication a breeze.
  2. It correctly bet that one could use drive-based storage media instead of tapes for backup purposes. Data Domain’s Domain’s belief is that since you’re backing up data sequentially and not actively reading those drives, they perform relatively well compared to, say, a drive containing a database that’s under a heavy transactional load. (A detailed explanation of how DD works can be found here.)
  3. Most importantly, it built a de-duplication business model that is no different from selling tape-based systems (except for lower prices). It’s a model that both EMC and NetApp can plug into their existing operations.

As Storage Mojo’s Robin Harris notes, maybe it’s time for a third bidder to emerge:

DD makes a good backup appliance with some advanced features in deduplicated data protection, something that isn’t easy. They’ve got a nifty growth rate, but $2B cash in a de-leveraging economy seems rich. On the other hand this is a company that Dell could put to very good use. Willing to make that $2.5B Michael?

In his post about the NetApp bid for Data Domain, Gary wrote that:

…with this deal, the battle for storage leadership is heating up once again. Not only does it give NetApp access to a winning product line in a growth area of the storage market, but it signals the company might be taking a new approach to its acquisition strategy, one that could make them more competitive with EMC.

The aggressive $1.5 billion offer by NetApp was a sign that the company, after long playing second fiddle to EMC, was ready to start buying as a way to regain its storage mojo.

NetApp has been losing both mind and market share to the more aggressive EMC, which has partnered with Cisco. With Oracle having acquired Sun (and with it, Sun’s storage business) and HP expected to start building its own storage systems, there are few takers for NetApp. As a result, the company’s only option was to start buying up smaller but fast-growing players such as Data Domain.

For the longest time the knock on NetApp was that it wasn’t able to buy and digest companies, as best evidenced by its struggles with its Decru and Spinnaker acquisitions. Now it’s being straight-up outbid by EMC, which is offering cash. EMC, sensing blood, wants to run NetApp out of town.

These are tough times for NetApp. In a report earlier this year, Collin Stewart analyst Ashok Kumar wrote:

Over the years NetApp has followed a product strategy that integrates most of the company’s diverse technology into its flagship Filer product line. This helps the company optimize the potential of every Filer customer they have, but it exposes them to the risk that their product platform could fall out of favor and that the company wouldn’t have other products to sell. If recent history is any indication, NetApp Filers are being phased out as strategic products in enterprise accounts. It’s possible that NetApp is simply an economic indicator for the recession’s impact on enterprise storage, but it seems somewhat likely that NetApp’s product weaknesses have been exposed by the recession and that the company will continue to have problems executing.

So what does NetApp do next? Maybe try and make a bid to buy Compellent Technologies or 3PAR, two companies with fresh approaches to Storage Area Networking. They seem to be gaining traction in the current recessionary economy. The big question then becomes, who would sell to NetApp, which is said to be losing influence in the storage market.

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  1. Om,
    There is an even higher level business trend at work that is driving the value of DataDomain (and other companies). DataDomain is one of what I call the Three Horsemen of IT ROI Improvement: VMWare, Riverbed and DataDomain. All three of these companies’ primary value proposition lies in making existing IT more efficient/disrupting inefficient historical paradigms. VMWare – better server utilization, Riverbed – better bandwidth utilization & DataDomain – better storage efficiency. In short, these companies exemplify the strength of technologies that improve “the ROI of IT”. If you look at their growth rates and valuations, it’s clear that this is the strongest trend in the technology markets today.
    If you view the technology market from this perspective, it starts to explain most of the valuation and growth trends from the last 5 years.

    1. Jake

      I couldn’t agree more. Over last few years, I have come to believe that commoditization of technology hardware offers amazing opportunities for folks to build a big “software-service-experience” businesses on top of those. I wrote about this in 2004 and since then I have been following these companies. (My stuff at B2 was all about this trend.) So it has taken 5 years for us to come to this future. :-)

      I am glad you “tied a bow” around such a big trend. Thanks/

  2. Om,
    one does not get this type of analysis too often in today’s short snippet content world. nice post.
    p

  3. Dell already has a strategic alliance with EMC, which has been extended to 2013:
    http://www1.ca.dell.com/content/topics/topic.aspx/ca/corporate/pressoffice/en/2008/2008_12_09_tor_000?c=ca&l=en&s=corp

    I think it is in Dell’s best interest to let EMC do what they do best… my 2 cents.

  4. EMC doesn’t want Data Domain for its technology, or its people. DD is full of ex-EMC people who hate EMC. EMC wants DD for exactly one reason: to keep NetApp out of all the EMC shops who have bought DD equipment. EMC needs yet another de-duplication technology like it needs a hole in Joe Tucci’s head.

  5. As a customer of EMC’s (acquired) Avamar de-duped B2D solution, I fail to see what DataDomain can bring to the table here. In our bake-off, we found Avamar to be a superior solution. I see no explanation for EMC’s bid other than to ruthlessly buy, scavenge and kill a competitive product. They don’t want DD, they just don’t want NetApp to have them.

    http://www.emc.com/products/detail/software/avamar.htm

    1. Avamar and Data Domain are not competitors, they are in 2 different spaces. Avamar is Client level, Data domain target, EMC has no real solution for target dedupe, that is why they would go after Data Domain. Data Domain crushes the Quantum solution in a “bake-off”. For mid-sized and large customers, target is the only way to go. The infrastructure required for client level solutions is crazy to maintain when you get over 50TB.

      1. I agree with Mike K.

        1) They compete
        2) Source side de-duplication is a technical winner every time. DD solves one problem, less disk on the back end. Products that do it on the source like Avamar solve many, less disk, shorter backup windows, and the ability to remove tape/disk at remote sites for backup.

        The only problem is Avamar requires and investment and change of software solutions, while DD works with any; however I’ve never heard a customer get 1/2 the reduction that DD claims.

  6. NetApp to EMC: That Deal Is Mine Wednesday, June 3, 2009

    [...] Om pointed out, Data Domain’s de-duplication technology is hot. EMC may want Data Domain for its technology, but it is also trying to keep its bitter rival from [...]

  7. Technical blogs with pictures and videos » NetApp to EMC: That Deal Is Mine Wednesday, June 3, 2009

    [...] Om pointed out, Data Domain’s de-duplication technology is hot. EMC may want Data Domain for its technology, but it is also trying to keep its bitter rival from [...]

  8. mikes’ guy Friday, June 5, 2009

    I am sure you did a bakeoff Mike. You sound like a very insecure EMC guy, who is still attempting to sell the virtues of a failed technology. If the money involved in these deals from both NetApp and EMC doesn’t tell that neither company has a viable alternative, then nothing will. No company has EVER paid over a billion dollars for a product they don’t need, just to keep a competitor from getting it.

  9. Battle for Data Domain Getting Hostile, Nasty Tuesday, June 9, 2009

    [...] Tucci argues that marriage to EMC makes sense because it’s offering more money, has experience integrating companies, and is simply a fantastic place to work.  The letter may be window dressing for the employees while EMC attempts to win over Data Domain’s shareholders. Data Domain’s board’s quick acceptance of the NetApp offer will still have to be approved by shareholders, which may prefer an all-cash deal. With this letter, Tucci shows EMC isn’t ready to give up. For a sense of why everyone’s fighting over Data Domain, check out Om’s story on its de-duplication technology. [...]

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    [...] for about 22 percent of CommVault’s sales in the last nine months of calendar 2008. With the fight over Data Domain, de-duplication is hot. And storage is clearly an area where Dell wants to buy [...]

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