Seagate purchase of Dot Hill has minimal channel implications

Seagate’s acquisition of Dot Hill last week is intriguing in several ways, but for the channel, it’s pretty much a non-issue. Seagate’s focus is on Dot Hill’s OEM business, and their branded channel business, which had already been outsourced to Quantum, is unlikely to be affected at all.

seagate_logo 300Last week’s purchase by Seagate Technology of Dot Hill Systems was a big deal for several of those involved. For Seagate, it’s a critical step forward in their storage business. For Dot Hill, it was a financial windfall because of the consensus that Seagate paid a significant premium to acquire them. But for the channel, whether it be solution providers who sell the Dot Hill branded gear or those who are selling Seagate – not so much. In fact, the deal is really all about Dot Hill’s OEM business, and its branded business isn’t directly affected by the deal.

First, the nuts and bolts. Seagate is paying $9.75 per share – approximately $694 million total – for Dot Hill. Even with Dot Hill’s $49 million in cash added to the assets acquired, Seagate is acknowledging that it paid a 50 per cent premium over the preceding three month stock price average.

“Seagate clearly paid a premium, and a significant one,” said George Crump, President and Founder of independent storage analyst firm Storage Switzerland. “Dot Hill had some good technology that it was bringing to market. It wasn’t the number one technology in its space, but it was getting there, clearly moving in the right direction. Seagate wants to use their technology to fill a gap, to provide OEM hardware for storage software makers.”

Dot Hill’s OEM business was the large majority of its business. In fact, for two decades it was their only business. The company’s name was not well known in the channel because their products were sold with other companies’ names on the bezel. HP was their most significant OEM partner.

The problem here is that several years back, Dot Hill became concerned about the long-term health of the OEM business, as some companies began to place more emphasis on developing their own IP in-house. As a result, they started to supplement the OEM business by selling their own branded products with a 100 per cent channel go-to-market strategy, covering the SMB space through to the lower part of the enterprise with their AssuredSAN product line, and its highly efficient autonomic tiering.

The catch – and it’s a big one – is that this April, Dot Hill inked a deal with fellow storage vendor Quantum where Quantum would resell Dot Hill’s branded products. At the time, it was presented as extending Dot Hill’s market footprint by leveraging Quantum’s channel, sales and marketing resources, and global service and support. In fact, it was rather more than that. Dot Hill essentially outsourced its entire branded business to Quantum, with Dot Hill’s channel teams changing hats and becoming Quantum employees, which Quantum acknowledges. That deal with Quantum is not impacted by the Seagate deal. So for solution providers reselling the Dot Hill branded products, absolutely nothing is likely to change.

“The only difference now is that Seagate becomes Quantum’s partner,” Crump said.

Dothilll 150Crump stressed that Seagate’s only real interest in Dot Hill was with the OEM business. While Seagate did not go into detail about their motives – and unusually for a significant transaction, held no formal media and analyst briefing to explain their move – Crump thinks their motive lies in becoming a big OEM to all the new storage software companies that are hitting the market.

“All these new storage companies are software, but at some point, you really need to put it on somebody’s hardware,” Crump said. “Most data center users don’t have the time or inclination to put it all together. They want some kind of turnkey appliance. Seagate wants to be the OEM to all those software-defined companies out there.”

While there certainly are established players in that market – SuperMicro and Dell to name two – Crump thinks it’s a very realistic prospect that Seagate can enter it successfully.

“The days when there were three or four major storage vendors dominating the market are over,” Crump said. “Thanks to the software-defined companies, there are now around 35. There is no reason at all Seagate couldn’t be an alternative there, and I think this is the most realistic opportunity.”

Other possible strategic options for Seagate would be trying to be a supplier to Google and the other hyperscale vendors out there, who buy most of their hardware from Asian ODMs, and even competing head to head against EMC and the other Tier One storage vendors, although Crump considers both options less likely than targeting the software-defined vendors as an OEM partner.

“The Dot Hill OEM business today is good, and more than kept the lights on for them,” Crump said. “It is not as significant as four or five years ago, but that reflects those broad trends of the Tier One vendors using OEMs less, as well as a lot of competition.”