The Federation: Tactical Evolution or Management Revolution?

Kirkpatrick: We have here the leaders of the three constituent parts of EMC, which is one of the great companies of the technology industry. It’s the first time they’ve ever appeared publicly together and we’re very excited about that. It’s an interesting time to do that because, as we’ll discuss, they have gotten some interesting reactions to their convergence, so to speak, from the stock market and investors recently. But that’s not the main thing we’re here to discuss, it certainly will come up. But I thought just to really get right down to what it is we’re dealing with each one of you should briefly describe what it is that you’re portion of the company does. I’m sorry, I didn’t introduce them before, but Pat Gelsinger who is the CEO of VMware, which is—he’ll tell you what it is. David Goulden is CEO of EMC Information Infrastructure, which constitutes sort of the historic heart of EMC, what we really used to think of as the company. Finally, Paul Maritz who’s CEO of Pivotal Software which is a newer part of the company, and in fact, is doing fundamentally an interesting set of things. Maybe just start over here Pat. Talk about what you do, then we’ll hear from David and Paul.
Gelsinger: VMware infrastructures software, we’ve taken this core idea of virtualization and now it’s expanded to cover all of infrastructure. We’re virtualizing network, storage, management, also extending that on and off premises with a private/public cloud we call the hybrid cloud, and extending that to the device. We’re managing all of the existing devices as well as mobile devices. So that infrastructure software layer to enable this agile software defined enterprise, as we would call it, we sit in the middle. Paul above, David below, and we’re sort of that middle layer of the sandwich driving what we think is one of the most disruptive periods in IT as we go from client server to mobile cloud, or in being—that’s both the technology that disrupts, as well as the technology that bridges us into that mobile cloud future.
Kirkpatrick: I want to talk about the era, having just heard that some CEO of a giant company had never even heard of cloud before, in an earlier session. David.
Goulden: I think one thing you’ll see which is common when you hear the three of us talk, there is a common vision as to where the industry’s going which is a very important part of the federation, which we’re going to come back to. Pat talked about, in terms of this move from client server or second platform to cloud Web-based third platform. Each part the company plays a key role in that. On the infrastructure side, historically our strength has been storage and still is storage. We have moved from being the storage market leaders to also the data protection market leader as well. And then increasingly people are buying infrastructure in converged environments, so we’ve become the leader in converged infrastructure, where you basically buying storage service networks together as opposed to buying the three parts. So, storage, backup, recovery, converged infrastructure, and then security is part of the EMC business and also we have an information intelligence business around document management. Those are the key parts.
Kirkpatrick: The historic would be big hardware to the degree it’s still part of your business? Is in your area?
Goulden: Yes, and we do a lot of big hardware and we’re very proud of it and the interesting thing is you can’t buy any big hardware without buying some big software attached to it. It’s really a combination of both, but those big hardware based systems that you see are very much a part of our core business.
Kirkpatrick: So you don’t think of yourselves as either a hardware or a software business. It’s a packaged product business in effect?
Goulden: We think of ourselves as a systems business. You can’t buy any hardware from EMC by itself. You can buy software without hardware, but you can’t buy hardware without software. We are an appliance company and we’re also increasingly on the storage side, also a software company.
Kirkpatrick: Whereas, like Pat, you don’t have any hardware, right? Let’s hear what you do.
Goulden: That’s the good looking one, that’s Paul on that end, the good looking one.
Kirkpatrick: I know. I said, like that.
Maritz: So, we’re the third member of the family. We were created two years ago out of the belief that enterprises, in order to drive new business value in the future they’re going to have to not only do new things, but compete with a new breed of competitors. In that context they’re going to have to learn how to do modern product development. Modern product development has a cultural aspect, has an application development aspect, and has a data aspect. We have assembled a company to speak to those three dimensions. We’re happy to use the infrastructure supplied by my colleagues here as well as others in the industry. But we’re speaking to the need of companies to essentially rediscover product development.
Kirkpatrick: That goes to the main next theme I wanted to touch on which is: why the structure of separate companies and how does it reflect the needs of the customers? You just were suggesting you don’t have to work with these guys, but it’s clearly desirable from Joe Tucci’s point of view, who’s the CEO of the overall entity, that you do so, right? But you’re referring to a new set of needs that customers, companies, the entire business world has. Can you maybe just continue, why this structure for that set of challenges?
Maritz: I say the advantage of the structure are twofold. One is it allows us to, in a very real sense, offer choice to the customers. We can set it up so that each of our solutions can work together, but can be used independently. In addition we can work with others in the industry, because there’s very clear lines of demarcation. As you know Pat and VMware continue to work on the level playing field with many others in the industry, including some of the EMC’s fiercest storage competitors. We need to know that they’re going to be other people who supply infrastructure out there. So, we don’t want to have to require a customer to believe that all three bets are right for them. We offer really meaningful choice. Now, when we come together we can really work very effectively together, so we can give that complete end-to-end solution.
The second main reason is actually attraction of talent. We found that good people want to work in very focused missions. This allows us to create those missions and attract those people who really want to step up to and get the satisfaction by driving one of those missions. Those are the two big benefits, I think, of our structure.
Gelsinger: And I would add a third, speed. Because in this world every, each of the three companies is independently executing its strategy while coordinating it all. It allows us to move faster, simply put. You take a top talent, like Paul was just describing, and you aim them at problems, you move fast. We’re able to get things done this way as opposed to necessarily everything being fully aligned every day of the week, as might be the case in a single integrated structure.
Kirkpatrick: Your company is a public company in its own right and of course there’s been a lot of pressure that should become more of an independent company in its own right. Talk about why you don’t want that to happen and help us understand the future of this kind of model and why this stability and necessity from your point of view for this structure?
Gelsinger: Sure, I’ll start and maybe David can answer that. We’ve described broadly that there’s three areas of value that we see. One is, customers want it to be better aligned. We see in many cases go-to-market and market leverage benefits by the three companies being able to be aligned. Clearly our top global accounts say, “Work together. Be aligned.” So, we see go-to-market benefits. We also see product benefits or technology leverage points where one party can benefit from the other. Where’s the place that more Cloud Foundry from Pivotal gets hosted? On VMware, both on and off-premises. We just launched, for instance, our object service for our Vcloud air service. The source of that technology was David’s group. We leveraged a product prospective.
Finally, business and structure. There’s a lot of countries in the world where I just live inside of the legal entities of EMC. We’re able to leverage the business structure or costs of capital, other elements, to allow us to move forward more effectively together.
Goulden: I think what we find often happens, David, is people look at this as a financial strategy and it’s not. The Federation is a business strategy which has some financial aspects to it. As Paul said, we’re competing in a land of giants, competing where customers are making drastic shifts in what they want to do with IT: They want to enable their businesses to work differently being powered by a new class of IT, the whole concept of your conference here, and how are we best able to innovate around that model? So, the federation structure, we believe, is an innovative business strategy to focus in these areas that we talked about with agility and speed and come together to produce solutions faster than our competition. Part of that strategy is to have a financial structure that also innovates. The fact that we’ve taken a piece of VMware public helps us with the focus, helps us with the retention, which helps us with value creation. We’ve set Pivotal up in a way that we can do that same approach as when it is the appropriate time. I think people get confused. It is a business strategy supported by a financial decision plan as opposed to a financial strategy around a holding company.
Gelsinger: Maybe one simple way of describing it: It allows EMC to be positioned as more strategic, right, as the results of VMware and Pivotal. And allows Pivotal and VMware to be seen as much larger than we’d otherwise be through very tumultuous seas and […] industry structure.
Kirkpatrick: Would the same logic apply to the information infrastructure business? That it might be at some point advantageous for you also to have a separate free-floating stock?
Goulden: That would perhaps would add a little complexity. At the moment with the EMC stock and the VMware stock, people have the ability to create their investment vehicle if they want to, and they actually do that through various forms of synthetic trades. With EMC being essentially the company that owns the majority of VMware and the majority of Pivotal, it doesn’t make a whole lot of sense to put yet a fourth stock out there. That could really confuse people. I think the approach that we’re on right now makes sense.
Kirkpatrick: In a sense, Paul, you’re business is enabling other companies to create their own businesses to improve the structure and efficiency of their business and to build, effectively, new businesses because you’re a development tool business. And then you kind of enable those newly developed capabilities to be operated efficiently and you give a home for it. Is that sort of a simple way of thinking about the taxonomy?
Maritz: Yes, I think so. At the end of the day we can operate independently or we can come together to provide a complete end-to-end solution for customers and we see that happening with increasing frequency. But just going back to your question before that, one of the advantages of this structure, I’m directly experiencing that because in Pivotal we’ve taken on a very ambitious mission, probably the one you couldn’t do through a traditional VC approach. The length of the investments needed and the scale of the investment needed wouldn’t traditionally fit into a normal startup approach. But we have parents who are willing to make that investment because they see the strategic play. As David said, this is not a one-year pump the stock strategy. It’s a five-, ten-year strategy to really shift to the front, to speak to the fundamental shifts in the marketplace. But it allows us to do it in a way where we can position ourselves as having many of the attributes that attract great people that come to startups in the Valley.
Kirkpatrick: So, you’re able to give them options in eventually a public Pivotal forward for example?
Maritz: Right. We’re able to give them a clear mission, a startup culture, and the promise that if we do well they’ll be able to benefit from that, while working with partners who give us an incredibly patient capital and leverage in the marketplace.
Kirkpatrick: This is for any of you, but are there other examples of companies that you see operating in a similar manner or precedents that you sort of think of as you’re crafting the future relationship among yourselves, and do you think that this model is something that others should emulate?
Goulden: We actually don’t see any directly comparable—people will say, “What about a conglomerate model?” A conglomerate model is very different. A conglomerate model is more a holding company with different segments focused on different customers. In this case we’re innovating around a strategy where we’re often selling to a similar customer. What’s really fascinating is that whilst we’ve talked about this from an internal point of view and the benefits which it give us, from a customer’s point of view it gives the ability to present a company that can help them with this big IT transformation journey in two or three different phases. Most customers are trying to take their existing client server environments and migrate them into some form of a private or hybrid cloud and we can do that across the axis of the company. And then you want to start talking about building new business models, taking advantage of software-defined enterprises, etcetera, which we again do through what Paul’s doing, supported by the infrastructure from both of our companies. So, from a customer point of view we can and actually are working on making it very seamless. A lot of the innovation we’re talking around in the business model the financial structure is kind of behind the scenes, but it’s a cause and effect. One thing we keep pointing out is, whilst there’s a little complexity in having this company, which, “Why don’t you only have one stock? You’ve got two, and you’ve maybe got a third coming,” and then we turn around and say, “Look at how each part of the business is growing. Each part of the business is outgrowing all of its peer groups in its sector.” We think that’s not by accident. We think it’s actually some cause and effect from the business model which we’re creating here.
Gelsinger: To your question, other companies doing it, not directly. Some of the chaebol or keiretsu models are somewhat close, but still pretty far away from what we’re doing. I challenge business school professors, I say, “Look, the success rate of this model vis-à-vis others. Why aren’t others doing it?” when I meet with them. They haven’t given good answers yet, but I keep probing on them in that respect because in contrast we see very poor acquisition records right on the part of many of the high tech companies. I believe that having this model as one of the options has enabled EMC to be much more effective in its acquisition model over a long period of time.
Kirkpatrick: There’s certainly are analogs, including a company I know well, I mean when Facebook bought WhatsApp and Instagram, there keeping them both as completely—they’re not floating their stock, but those companies have a lot of autonomy so there’s a little bit of that happening. But I think it’s interesting, given you’re saying you’re all three growing faster than your industry, it would seem logical others would want to copy. Who has a question or a comment? Anybody? Anybody want to chime in here? Okay. Over here? Can we get a mike? Do we have mikes? Okay, please let’s get it there fast. Thank you. Identify yourself please.
Tucker: Lou Tucker, CEO of cloud computing in Cisco. I think we all know each other here. Many of the leading IT companies now are participating in open stack and you guys, with Pivotal we open source with Pivotal. How is open source technology now being used by our large companies, and how do we then differentiate at the same time as we’re working in this larger community of other companies on these common projects?
Maritz: I’ll jump in there. As the newest member of the federation we’ve embraced open source and it’s our belief that on a going forward basis everyone is going to have to live in a world that’s increasingly affected by open source. I believe that the important thing about open source is not actually that it’s, quote unquote, “free.” The important thing about open source is it’s proven to be an incredibly effective way, if done right of building communities and building ecosystems. As Pat likes to say, a well-functioning ecosystem is an incredibly powerful force, more powerful than any one single company, even the very largest ones. I believe increasingly you either have to create an open source ecosystem, or if you can’t do that, align yourself with an open source ecosystem. Which is why, as you know, we’ve gone out of our way to do that with Cloud Foundry and are actually, any day now, will put that formally into the intellectual property, into the hands of a nonprofit foundation, going forward. Just to quickly add a thought to that. I don’t think we could have done that if we’d all been—or done it as effectively if we’d all been one monolithic company. The fact that we had that degree of separation from EMC and VMware at Pivotal, allowed us to engage much more effectively, and with much less debate with our partners, like IBM and SAP, and HP, and others, and thirty other companies who come together to create the Cloud Foundry foundation.
Kirkpatrick: Before you say what you were going to say I just have to make note that that’s so interesting coming from the guy who ran the world’s most successful proprietary software, Windows during the period of its greatest growth. Paul did a great job building the most closed, most successful software that ever existed.
[LAUGHTER]
Maritz: I have to tell you a funny story about that because in the later days of my tenure at Microsoft in the late 1990s, when Linux was starting to come up as a real factor, there was a debate internally about whether we should, quote unquote, God forbid, open source Windows. I was actually eventually in favor and said if we did that we’d set our competition back by years because we could hardly build the damn thing ourselves, let alone anyone else.
[LAUGHTER]
Gelsinger: Maybe just a two points to add to Lou’s question because I think it is a good question in this context where we see so much innovation and bubbling activity in the open source community. There’s been exactly one company that has successfully directly monetized open source. Only one. Everyone else has essentially augmented their strategy in some form with open source. I’m not saying there’s only going to be one and there will only be one into the future. But I think it is very important to realize that there are few successful meaningful monetization models solely around an open source at this point. I think everybody in the industry is grappling with the implications of that against their strategy. What we’ve done at VMware, specifically with regard to open stack is we said, “We’re going to embrace open stack and combine it with our unique intellectual property and deliver that complete open stack solution VMware open integrated stack which we’ll release in Q1 of this year.” In no small part to say, let’s benefit from this innovative cauldron out here while still bringing our best technologies into that segment and presenting that entirety into the marketplace as a complete solution.
Goulden: And just to wrap up it might surprise you to hear from the EMC side, we also believe that open source or open stack are very important initiatives and movements, and we’ll be playing in those spaces as well. We just bought a company called Cloud Scaling, which is a leading contributor too, so we have our window in to the open source movement. I think, as Paul said, it’s interesting to see that we all recognize that it’s very important to play and the federation structure actually allows us to play at slightly different speeds, but everybody needs to play very aggressively.
Gelsinger: One of the things I might add as follow up, the developer community is what’s driving a lot of this and I think that having been very active in that community we see developers from all of our different companies working together on a common project and I think, Pat to your point, that is the challenge on our own individual companies to find, how do monetize that? Because there’s no issue in terms of we can hire developers, they all want to work on it, they become famous in the community. In fact they don’t even stay very long at the individual companies and tend to move around. But then we still have the responsibility from the business side to say, how do we actually then make money that can support that kind of ongoing development?
Kirkpatrick: Anybody else out there have a comment or question? Over here?
Damm: Hi, my name is Darlene Damm from Ashoka. Earlier this morning we had a talk about the death of industries or if we’re going to have industries in the future. What I’m hearing the three of you talk about by engaging us in collaborative entrepreneurship and sharing some of the almost infrastructure costs that any one company couldn’t do alone, you’re actually reducing the amount of time it takes to create an industry from probably 10 or 15 years down to just a few years. I was wondering, is that what you also see?
Maritz: I can jump in there. One of the fascinating things that we see going on is this, as I like to say, the three big forces at work in enterprise IT today: frustration, fear, and hope. In other words, there’re a lot of business are frustrated by the complexity of the environment that they find. There’s a lot of fear because they see new entrants coming into their industries with new business models. Just ask the taxi industry about Uber, etcetera, etcetera. But there’s also hope. There are businesses who realize that if they re-conceptualize what they’re doing and if they have right platform to do that on, they can really do some really interesting things. There’s my good college Bill Ruh in the audience here from GE and—is Bill going to speak here at the conference? You are? Anyway, they have a fascinating story at GE of how they went through fear to hope. In other words they realized how that in the future all the machines that they build will get connected to the Internet. Rather than viewing that as a threat to their business, just like when all the consumers in the world got connected it threatened the bricks and mortars guys, if they re-conceptualize that and view that as an opportunity to take all that telemetry from the machines, they can do amazing things, not only for themselves, but for the world. We’re starting to see more and more businesses, it’s a minority still, tiny minority, but a significant minority of businesses, see their way through to hope, realizing that they now have access to modern technology platforms that allow them to re-conceptualize themselves and do very interesting things going forward.
Kirkpatrick: That relates to one of the things I wanted to ask you guys which I obliquely referred to before, this idea that there are still some companies, giant companies that are your customers, who are way behind on what’s possible now. I’m curious if you guys encounter that kind of people who don’t even know what cloud is, kind of problem? How do you respond to it? How serious is it? How big of a threat is it to the ability of big companies to stay agile and stay to survive?
Gelsinger: I loosely couple, and we meet lots of CIOs, IT professionals, tens a week, and I loosely put them in one of three buckets. One is, they become the business innovation driver for the companies. There are others, they’re embracing IT really as a service model to really embrace external and internal IT to really embrace a new model. Then the third bucket is what I call the DIH model, “deer in headlights” which is sort of the last bucket where they’re really still, don’t even quite know what’s hit them in their business areas. Every one of them, they’re customers. You’re always trying to take them from where they are in the next phase of that journey, but with some of them in that third bucket, you really fear for their companies, their employees, their customers in the long run.
Kirkpatrick: What’s the percentage that are stuck in the headlights?
Gelsinger: Without being too scientific I think it’s about a third each.
Kirkpatrick: A third. That’s a lot.
Maritz: I think the other interesting thing is what we’re increasingly seeing companies becoming concerned about is they’re realizing it’s not just about being able to operate IT as a service, it’s that the whole company, not just the IT part, that needs to rediscover product development.
Gelsinger: That’s the first bucket, right?
Maritz: In other words they look and say the era of spending huge amounts of money on advertising to drive customers to you is passing. Instead the new competitors are building compelling digital experiences that reach out to the customer and pull them in. Innovative companies like Uber and Tesla don’t spend a lot of money on advertising. Instead they spend their money, and time, and effort in building these experiences for their customers. I think the problem is you’ve got a large swathe of IT that have spent the last 15 or 20 years basically, paradoxically, the first thing they did was outsource all their product development. Secondly, they trained themselves to be good managers and runners of package software. Businesses are increasingly realizing that there’s no amount of package software that’s going to give you a compelling differentiated digital experience for your customers. What we’re seeing is an increasing number of customers almost becoming desperate around the fact that when they look at themselves they say, “We don’t have anybody in our ranks who knows how to do modern product development.” And then they have to address that as the first issue and ideally do that on top of a modern platform.
Kirkpatrick: Isn’t it another one of the scary things, though, that it also has gigantic implications for the very structure of the company? These tools enable a completely different shape of the enterprise.
Maritz: The answer is maybe. But the first order of business is to address what I would say, rather than structure—same thing, the culture of the company that you really have got to understand to do product development you need a type of culture that’s supports that, and it’s not a loosey-goosey, anything goes. It’s in fact a very highly disciplined culture. But it’s a different culture.
Goulden: We find that the digital innovators here, they have two things in common. One is, there’s a top-down commitment to leveraging this technology. Secondly, there is a company-wide view as to how it’s going to be done, not in silos. Related to that, what we find, that Pat mentioned, that in some cases that means their existing IT department is not the department that’s going to lead the transformation. When you say maybe in a third of cases, companies are saying, “I’m going to bring IT in, but IT’s not going to get me to the Promised Land by themselves.” and then they connect the dots later on, which is very disruptive if you’re a CIO of a company. You want to make sure you’re in that two thirds, not in the one third.
Kirkpatrick: Well it’s disruptive to you because you selling to somebody different too in many cases I would assume, in all three of your cases.
Maritz: You’ve got to come with a different proposition value and that’s, going back to the original discussion, having set ourselves up this way I think what’s interesting about EMC Federation is we can come with a value proposition that speaks both to the innovation and the need to continue to run the trains while you’re doing that innovation, that it gives us the flexibility to have those conversations as opposed to being focused on only one dimension.
Goulden: Because often the money to pay for the innovation comes from deriving efficiencies out of your existing IT real estate. Customers aren’t getting these brand new budgets from nowhere to go build breakthrough platform things, they’re got to basically save their way in to creating investment pools for the new areas.
Kirkpatrick: Thank you so much. Great conversation. I can see why the companies are growing. Thanks so much.