One humbled tech giant, 4 priceless lessons
There’s a lot we can learn from the rise and fall of EMC, once the dominant player in data storage and now just another struggler.
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"One of the better yarns from the stock market bubble was the one about the guy from Massachusetts who discovered he was wildly wealthy after he stumbled upon thousands of long-forgotten EMC (EMC, news, msgs) shares in his attic.Check out your options. Record low rates could save you a bundle.
You had to marvel at the parable of a lucky soul who haplessly fattened his wallet thanks to the storage vendor’s breathtaking 119,000% advance last decade. Unfortunately, complacent investors and lazy financial journalists got sucked in by the sinister subtext to the story -- that to get wealthy, it really didn’t matter what stocks you bought, just as long as you tucked them away in the attic long enough.
Fast forward two years and that myth has been busted by an ugly ride down for EMC shareholders. While former Chief Executive Michael Reuttgers, founder Richard Egan and his family members gorged themselves on options -- selling well over $100 million worth in the past two years alone -- EMC shareholders are now left with a stock worth less than $4, down from a peak of around $105.
4 rules every tech investor should know
Aside from the idea that it pays to follow the insiders, the rise and fall of EMC offers the following tech investing lessons to keep in mind for when a new generation of tech leaders emerges.
In technology, nothing lasts forever, so there’s no such thing as buy and hold. That was a hard concept even for sober EMC bulls like Goldman Sachs strategist Abby Joseph Cohen to fathom back when the storage vendor was king of the hill.
After all, the company was clever enough to be first on the scene with its reliable storage systems to satisfy the filing needs of Corporate America. Wouldn’t it be smart enough to stay there? Investors sure thought so. During much of its heyday (which lasted well into this year), EMC was one of the 10 most widely held stocks. For a while, investors looked smart to buy the line that EMC would grow forever.
As the only game in town at a time when the dot-com boom began to fuel demand for storage, EMC had the power to name its price. Indeed, it did just that -- creating the juicy profit margins that played a key role in the company’s downfall.
Capitalism, after all, was bound to take its course. Those tasty margins drew in competitors such as IBM (IBM, news, msgs), Hitachi Data Systems and Hewlett-Packard (HPQ, news, msgs). They stole business with better pricing, despite EMC’s top-rate service teams and sales force.
“As Americans, we love you as the underdog, and we also try to kill you when you are No. 1,” says Steve Duplessie, a former EMC employee who moved on to found the Enterprise Storage Group, a storage consulting firm. “Since the world does not stand still, there is always going to be somebody coming up behind you. EMC had an amazing 10-year run, and may never see it again.”
Bail out of tech companies that don’t change quickly. Once storage hardware started to look like a commodity, the game shifted to loading storage devices with software that was open enough to work with the other storage systems from competitors. After all, when EMC lost its franchise, many companies soon found themselves with a hodgepodge of storage devices from a variety of producers. Blinded by its success, however, EMC missed this turn in the road. Instead, it focused too long on hardware, forgoing a chance to take the lead in the new storage software game.
“EMC was in denial about it,” says John Parkinson, chief technologist of Cap Gemini Ernst & Young. “The company refused to believe the next step was software that managed anyone’s environment, not just theirs. They missed the critical window where they could have been brave enough to take what they learned in their own proprietary world and apply it to everyone else’s world. They sort of knew it, but they did not do it. They did not act on it fast enough.”
Once again, EMC was a victim of its own success. Some of the biggest resistance to change came from the company’s engineering team, led by Moshe Yanai, a former Israeli artillery commander who was the genius behind the company's flagship Symmetrix storage system.
“It was a struggle between the engineering staff who were used to success with their hardware and the business guys who saw the numbers were showing weakness but did not have the power to do anything about it,” says one storage analyst. “If the sales process in a company is not well connected to engineering, it takes a long time for that message to get back.”
Watch for signs of arrogance that will impair play on a new field. Back when EMC was on top of the storage heap, its sales force was notoriously pushy and arrogant. If a technology buyer balked on a purchase, EMC sales reps would go over his head and give the sales pitch to someone higher up, making the guy below look bad. They were always demanding bigger and bigger price increases. Companies that didn’t go for a large purchase weren’t allowed to buy anything.
“So when the bubble burst, there were customers who were happy to stick it to EMC,” says John Sheaffer, chief executive of Sysix Companies, a company that sells storage products from various suppliers. There still are. “EMC recognizes that they have been arrogant and did not always have customers’ best interest at heart, and they are trying to change. But a lot of people still remember. There are still customers who are angry.”
With tech companies, past performance is rarely an indicator of future success. Unlike the Rolling Stones, who’ve managed to stay on top of their game through changing seasons, star tech teams don’t necessarily stay out front when the rules change. So it’s a long shot that EMC -- or its shares -- will ever return to their past glory.
True, a new chief executive, Joseph Tucci, earns high marks for bringing in fresh talent focused on improving share in the software. The company hopes to earn about 30% of its revenue from software sales in two years, up from about 23% today. Meanwhile, EMC has a strong enough balance sheet to stay in the game through the downturn. The company has a huge customer base, and its storage software systems command a bigger share than that of competitors.
But that’s the rub -- those competitors. With so many of them on the field, you can’t expect a return to the kind of performance seen when EMC had a lock on the storage hardware market. Aside from IBM and Hitachi Data Systems, firms such as Hewlett-Packard, Veritas Software (VRTS, news, msgs) and Fujitsu offer competing software products. "With so many highly competent competitors, it will be very difficult for any one to completely dominate," says Chris Brahm, a director at Bain & Company.
So even when demand improves, the company won’t command the pricing power behind the profitability it had in the late 1990s. "EMC does not have the technical advantage that it once had," says Mark Sorenson, the vice president of Hewlett-Packard’s storage software division.
And the company still needs to bring down costs. Despite recent cutbacks, EMC still has about twice the number of employees it had in 1998, even though revenue is roughly the same.
At least history is on EMC’s side. During the 1980s, it managed to convert from being a vendor of simple computer memory into the leader in cutting-edge storage systems. "That was like going from being a Chinese restaurant to being Aetna (AET, news, msgs)," says Duplessie, of the Enterprise Storage Group. "So they have been through these monumental transitions before and come out on top. This change is arguably just as difficult."
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. |
