Last week’s acquisition of Engenio, LSI’s external storage unit, by NetApp caught a lot of people by surprise. While NetApp’s desire to continue to grow through acquisition was no great secret, its decision to grow by acquiring Engenio did not on the surface initially make a lot of sense to me. After all, why would NetApp, who consistently pokes EMC in the eye for having multiple storage platforms, now head down that same path and open itself up to that same type of criticism?

In a blog entry last week I briefly touched on NetApp’s announcement to acquire Engenio but wanted to reserve comment until I had a chance to check with some of my sources around the industry as well as do some research on my own. However my initial reaction upon hearing the news was that this was a questionable move by NetApp.

This sentiment was echoed by some of the NetApp account representatives that I know and spoke with out in the field. While they did not necessarily feel it was a bad decision, they just did not understand what its upside was.

One would think from reading the NetApp announcement that the benefits of the Engenio acquisition would be obvious. In its press release NetApp states:

Engenio will enable NetApp to address emerging and fast-growing market segments such as video, including full-motion video capture and digital video surveillance, as well as high performance computing applications, such as genomics sequencing and scientific research.

The only reason that I can think of why people are not intuitively coming to that conclusion is that when I think of storing full-motion video capture, digital video surveillance and high performance computing applications, Engenio is not a name that immediately comes to mind as a provider of those storage services.

In my case, Engenio was not a name that came to mind at all. The primary context in which I viewed Engenio was as a manufacturer of storage for providers such as Dell, IBM, Oracle/Sun and others who then resold Engenio storage gear with their own brand name on them. It certainly was not in the context such as what NetApp stated in its press release.

But setting those issues aside for a moment what I found more amazing was NetApp’s decision to buy another storage company and display an apparent willingness to go to market with this line of storage without first integrating and making it part of Netapp’s current FAS Series line.

So despite NetApp’s statements in its conference call, this acquisition seems to contradict NetApp’s long held operating philosophy that it does not want to own multiple lines of storage. This dilutes Netapp’s ability to cost-effectively do research and development as it would have to support comparable features on multiple products.

So did NetApp just make a $480 million misstep? Or are there forces at work behind the scenes that would suggest NetApp may have “stole” Engenio? At this point, I would say that both outcomes are distinct possibilities and it really comes down to how NetApp executes on the Engenio acquisition.

Two points strongly argue in favor of NetApp’s acquisition of Engenio.

  1. NetApp’s current CEO, Tom Georgens, used to be Engenio’s President and CEO. In July 2005 Chris Mellor (then with Techworld) interviewed then-Engenio President and CEO Tom Georgens and published a subsequent article that discussed LSI’s reasons for shelving an Engenio IPO at that time. So if nothing else Georgans should have some sense of what NetApp is getting itself into with the Engenio acquisition. Further, it appears that Engenio was already structured in whole or in part as a separate entity from LSI.
  2. NetApp does not sabotage the value proposition of its Data ONTAP OS. NetApp clearly wants to get into the fast growing video surveillance space and high performance computing space. However the factors that influence buying decisions in those areas have more to do with price and scalability and less to do with manageability and consolidation.

This is not to imply that NetApp’s current platform is not scalable. It is. But it certainly is not the lowest cost storage offering on a per GB basis. So since buyers in this space care primarily about scalability and raw storage costs, NetApp gets access to that market without having to drop the price on its FAS systems or first needing to port its Data ONTAP OS in order to do so.

So what could go wrong? Here are a couple of possibilities:

  • Current Engenio resellers could go shopping for another OEM. I really don’t see IBM abandoning Engenio as it already resells other NetApp storage. But it remains to be seen if Dell, Oracle/Sun and others will be comfortable continuing to resell storage when NetApp is the manufacturer. Dell has certainly shown a willingness to change course and already owns Compellent and EqualLogic so it’s possible that Dell’s relationship with Engenio was going away anyway.

It is also my understanding that BlueArc, one of NetApp’s chief NAS competitors, sells Engenio as part of its storage solutions. So I can’t see NetApp being amenable to keeping that agreement in place nor do I see BlueArc wanting to add any revenue to NetApp’s bottom line. Georgans almost suggested as much that agreements like this one will come to an end when he stated on the conference call, “We will keep a large portion of the OEM business but not every single dollar.

  • Engenio? When EMC bought Isilon for over $2 billion, Isilon already had momentum and was well known. Conversely, Engenio is not exactly a name brand to end-users and while Engenio cost NetApp $1.5 billion less to acquire than Isilon, will pasting the NetApp brand name over Engenio alone be enough to convince buyers in the video surveillance and high computing market to part with their dollars to buy it? My gut feeling is that in competitive deals if EMC is bidding Isilon and NetApp is bidding an unknown brand name for the same price, EMC gets the business unless NetApp starts to discount heavily.

All in all, this is an interesting move by NetApp and it certainly reflects a departure from its past acquisition philosophy. While it is hard to say how this will play out in the long term, the only thing I am certain of in the near term is that EMC might be seeing much better without NetApp consistently poking it in the eye. In fact, EMC may even have the satisfaction of saying to NetApp, “See, we told you so. You can’t grow your business in every way the market demands with only one line of storage products.”

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