The $20 Billion Dollar Mid-Market Deduplication Opportunity; Interview with ExaGrid Systems’ CEO Bill Andrews

It’s time to start thinking ahead. Over the next 60 – 120 days someone is going to acquire Data Domain – be it EMC, NetApp or some other suitor that may yet emerge. That means Data Domain, today’s leading mid-market deduplicating disk-based appliance player, will be changing its colors. While that occurs, it presents a unique opportunity for ExaGrid Systems, the #2 player in the mid-market deduplication space, to exploit and grow its presence. To discuss how and if ExaGrid can take advantage of this opportunity, I recently met with ExaGrid’s CEO, Bill Andrews, to discuss this development, his perspective on the deduplication market  as a whole and how ExaGrid stands to benefit (or lose) from Data Domain’s acquisition.

Jerome: How do you see Data Domain’s pending acquisition by EMC, NetApp or whoever affecting the industry?

Bill: The biggest thing that this acquisition signals to me is that the deduplication technology that EMC and NetApp are using right now for the mid-market to small enterprise isn’t competitive. Why else would they be willing to pay $2 billion for Data Domain’s deduplication technology? But as this situation over who acquires Data Domain plays out, there is a lot going on in the background.

This acquisition is going to make HP and HDS very nervous. HDS is exposed for letting Diligent Technologies slip through its hands and get purchased by IBM. Then, once it let that one get away, HDS retrained its entire staff on Data Domain and started selling that. Now Data Domain is off the market. I predict that the likelihood exists that SEPATON will be acquired by HDS within 90 days as former SEPATON employees such as CTO, Miki Sandorfi, have already found a new home at HDS.

HP is harder to predict. They are using SEPATON at the high end but do not have a really good answer for the mid-market. HP has its own deduplication solution but we rarely if ever encounter it and it seems best suited for the low end of the market (1 TB or less of data). Another negative is that it only offers a VTL interface which we find that no one in the mid-market, much less in the low end of the market, wants.

Jerome: What defines the mid-market deduplication space and makes it so special?

Bill: Environments with less than 1 TB of data are better suited for a service play, low cost disk or backup applications with built in deduplication as the amount of data and retention is low. Conversely environments with 60 TBs or more of production data generally already have FC SANs and will want VTL.

Mid-market to small enterprise disk-based deduplication appliances are specifically targeted for environments with 1 – 60 TBs of primary data which is where ExaGrid plays and wants to remain. Further, the mid-market is anti-VTL.

Any time a customer inquires about a VTL and ExaGrid starts to explain the labor associated with setting up virtual tape drives and tape cartridges and then managing them, they don’t want that much complexity in their backup environment. So ExaGrid only offers a NAS interface because that is what the mid-market to small enterprises wants because they understand NAS and it is plug-and-play to their existing backup application.

Jerome: Assuming only EMC and NetApp remain in the bidding for Data Domain, who would you prefer wins?

Bill: On previous earnings conference calls, Data Domain had already intimated it was starting to leave the mid-market and go upstream to the enterprise which ExaGrid has detected in the field. So when I heard that NetApp was acquiring Data Domain, I popped the cork on a bottle of champagne and started cheering.

NetApp lives in the Fortune 2000 zone and that is where it primarily focuses. So if NetApp acquires Data Domain, ExaGrid expects NetApp will take about 6 months to figure out how to best position Data Domain within the organization, re-arrange Data Domain accordingly and then make the appropriate changes to sales and product management internally within Data Domain.

Once those changes occur, I expect NetApp to be much more focused on the Fortune 2000 accounts which leaves the door wide open for ExaGrid in the mid-market to small enterprise as ExaGrid focuses mostly on the Fortune 2000 down. ExaGrid now goes toe-to-toe with Data Domain about 50% of the time that ExaGrid is involved in a competitive situation which largely goes away after NetApp acquires Data Domain. Bottom line, I would love to compete with NetApp.

However once EMC entered the fray, I put the cork back in the champagne bottle. EMC has a much broader reach than NetApp by as much as 4-5x and ExaGrid sees EMC in many more deals now. While we almost always beat EMC, I can see that changing if EMC acquires Data Domain.  However, ExaGrid’s win rate against Data Domain is over 70% so I suspect that ExaGrid can continue to win against EMC.

What further concerns me is EMC’s long standing relationship with Dell. I don’t know that Dell would resell an EMC-branded Data Domain appliance but it only makes sense that Dell would.

On the upside, ExaGrid has been anticipating this battle for a few years and we already knew the final battleground would involve Dell and HP. ExaGrid is preparing for that battle in 2010 with a very differentiated product and price leadership.

Jerome: It is DCIG’s opinion that EMC was preparing to acquire Data Domain but that the NetApp offer forced EMC to move more quickly than it anticipated. What have you heard?

Bill: Rumor has it that NetApp started talking to Data Domain last year about acquiring Data Domain and the more NetApp talked to Data Domain, the more it liked of what it saw. I believe NetApp especially saw a culture that was compatible with NetApp. So eventually the first deal you saw announced was the one crafted by NetApp and Data Domain.

The minute it was announced, however, EMC had an ‘Oh my God!’ moment as I believe it may have caught EMC completely flatfooted. EMC could not afford to be left without a viable offering in the mid-market deduplication space as it stands to be a $20 billion market and here is how I arrived at that number.

The average sale size for a deduplication appliance is $50,000. Assuming there are 400,000 opportunities out there that converts to $20 billion in sales over the next 6 – 7 years. So let’s just consider this year a wash in terms of sales if EMC acquires Data Domain and it incorporates its product line into its sales pipe line. I can easily see it attaining sales in year one (2010) of $1 billion; year two could result in $2 billion dollars in sales; and every year thereafter $3 billion in sales or more. That’s over $20 billion in sales in the next 7 years.

Bottom line, if EMC acquires Data Domain, the
mid-market deduplication space will turn
overnight. Paying $2 billion for Data Domain is a drop in the bucket considering the market opportunity that is in front of EMC right now.

Jerome: So where does ExaGrid go from here?

Bill: Midsize to small enterprise organizations are under tremendous pressure to switch from tape to disk. The problem is they do not have a lot of answers from which to choose.

When you look at enterprises with over 60 TBs of data and small organizations that have less than1 TB of data, they have lots of answers. But the mid-size market has very few answers since its problems are symptomatic of both large and small organizations.Midsize companies have relatively large amounts of data (typically ranging from  5TBs to 30 TBs and beyond) and insufficient staff to manage tape which is why they are looking to use disk.

ExaGrid already has over 350 customers and even if ExaGrid had only 3% market share, by 2011 it would have $100 million in revenue and be well positioned for a public offering. ExaGrid plans to keep its head down and stay entirely focused on the mid-market to grow its presence there.

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