EMC, VMware Fire Shot Across AWS Bow With New Cloud Services Business Unit

EMC is aiming to take some steam out of the $7.5 billion Amazon Web Services juggernaut with a new cloud services business jointly owned by the storage market leader and its VMware subsidiary.

The centerpiece of the new business is Virtustream, the enterprise-grade cloud services business EMC acquired for $1.2 billion in July. The new 50-50 EMC–VMware owned business will be run by Virtustream CEO Rodney Rogers.

The moves comes just one week after Dell entered into an agreement to acquire EMC and VMware for $67 Billion, a deal that will be the largest in the history of the IT business.

The new venture will have its own board of directors comprised of executives from both companies with EMC CEO Joe Tucci as the chairman.

VMware CEO Pat Gelsinger, who will also be a board member of the new cloud services business, Tuesday told Wall Street analysts during a conference call to discuss the company's third-quarter earnings that the new cloud services unit will become one of the top five global cloud service providers. By VMware's estimates, of the 145 million corporate workloads, 130 million run on-premise.

"We are looking forward to talking to our customers about what we believe will be the industry's broadest portfolio of hybrid cloud offerings, enabling them to move all their applications to cloud-based IT environments and seamlessly manage their on-premises and off-premises environments," said Gelsinger.

Jamie Shepard, senior vice president for health care and strategy at Lumenate, No. 145 on the CRN SP500, said the new cloud services business will finally give corporate customers running VMware a solid alternative to AWS.

"EMC has just cast a big shadow over the AWS 'shadow IT' that has been creeping into corporations," he said. "This is a huge win for IT departments and the solution providers working with VMware. This helps eliminate the sprawl of AWS shadow IT. With Virtustream, IT departments can be their own internal cloud services department. This gives the IT department new life."

The game-changer with EMC-VMware-Virtustream is "true cloud integration, not API integration," said Shepard, predicting offerings from the new business unit will be big money-makers for EMC-VMware solution providers. "This will stall Amazon Web Services' ability to go into IT departments and take on production workloads that are highly virtualized with VMware. Amazon lives and dies by the API. EMC-VMware-Virtustream provides true cloud integration."

VMware's cloud services offensive has suffered because its vCloud Air hybrid cloud service is still "18 months away from having large production corporate workloads on it," said Shepard.

With the new cloud services business unit, Lumenate will work closely with internal IT to provide portals that businesses can use to quickly spin up workloads. "What you are going to see is corporate IT reaching out to their business users faster than AWS can get in there to grab that business," he said.

Under the new cloud services business unit model, Virtustream's results will be consolidated into VMware's financial statements beginning in the first quarter of 2016.

Even with EMC-VMware predicting that the new business will drive multiple hundreds of millions of dollars in recurring revenue in 2016 growing at a double-digit clip, VMware said the new business will post an operating loss of $200 million to $300 million in 2016.

EMC said it will account for its 50 percent stake below the operating income line which will result in an after tax $100 million positive impact on 2016 earnings per share.

Besides Virtustream, the new business unit will include VMware's vCloud Air hybrid cloud offering and other VMware cloud management offerings and VIrtustream software assets including the xStream cloud management platform.

VMware said it expects the new cloud business services unit to grow into a profitable multi-billion business over the next several years.

PUBLISHED OCT. 20, 2015