Analysis: What's Behind Dell's Wyse Acquisition?

Dell raised a few questions among virtual desktop infrastructure (VDI) analysts this week with its announcement that it plans to acquire Wyse Technology.

In a Monday conference call with executives from both companies, financial analysts wondered why a hardware-centric company like Dell wanted to buy a company like Wyse, which is known for its hardware thin clients and "zero clients" (zero clients have no operating system) for VDI scenarios. Industry watchers speculated whether further consolidation may be expected.

The answer seems to be that Dell is planning to broaden its own VDI portfolio to provide complete end-to-end solutions for its customers, plus Dell will get hold of Wyse's patent portfolio. Wyse has more than 182 patents in cloud client computing, according to Tarkan Maner, CEO at Wyse Technology.

Wyse is viewed as either the No. 1 or No. 2 thin-client provider. With the acquisition, Dell will be able to offer a complete VDI solution.

"To date, Dell has relied on shared IP solutions to serve its thin client customers," commented Jeff Clarke, Dell's vice chairman of global operations and end user computing solutions, according to a Dell conference call transcript. "With this transaction, we are moving to a more profitable industry leading and complete end to end solutions with Dell owned IP and the associated R&D capabilities with it."

Another key reason that emerged from the talk is that Dell will gain access to software engineering expertise. Of Wyse's 150 engineers, 140 are specialized in software, Clarke said. Dell already has all of the hardware expertise it needs, he explained.

Virtualization Review contributor Elias Khnaser noted that Dell also will gain access to mobile device management solutions that Wyse acquired from Trellia. Wyse announced the acquisition of Trellia back in November.

Maner explained that Wyse's work extends beyond thin clients to other mobility and cloud computing marketing segments. He cited Wyse's moves into the unified communications space, supporting voice, video and data from the cloud. He also said that Wyse was involved with "infrastructure and content management as a service solution from the cloud for large enterprises, for small and medium businesses, as well as consumers." One of Wyse's upcoming software solutions is called "Wyse Stratus," which will be a cloud-based management interface for handling multiple mobile devices, which will support employee "bring-your-own-device"-type scenarios in companies.

Dell will build on top of the thin-client technology it acquires. Clarke noted that "for every thin client hardware dollar that exists in our industry, there's $5 of enterprise servers, storage, networking services that go along with that." However, he admitted that at this point, "adoption rates are still relatively low for desktop virtualization." Maner indicated that the thin-client market was about evenly split between public and private sector adoption, with "50 percent large enterprise, 50 percent midmarket/small business" adoption.

The need to have the right datacenter and backend infrastructure potentially can be a problem for VDI adoption, Maner noted.

"And from a bigger perspective, we see from time to time, some companies do not have the right level of datacenter portfolio and datacenter ecosystem," Maner said. "Sometimes we see certain customers in certain -- in vertical industries or geographies -- complain about the fact they don't have the right networking systems in the backend."

Maner added that Wyse's close partnership with Microsoft, as well as its work with Citrix and VMware, will continue when the company is integrated with Dell.

Signs of More To Come?
IDC analysts, in examining Dell's bid for Wyse, wonder if the additional consolidation might be coming in the thin-client hardware space. In an opinion piece (PDF), IDC analysts Brett Waldman, Steven Buehler and Tom Mainelli explained that Hewlett-Packard had already gone down this road when it acquired Neoware in 2007. They speculated that HP might be interested in acquiring NComputing because of its strength in emerging markets.

NComputing recently announced a new VDI client that works with Windows Server 2008 R2 or Windows 7 on the back end. Company officials claim to have the No. 1 marketshare in Latin America and Asia in terms of desktop virtualization. NComputing uses its own remote protocol to support VDI, but it is also contemplating a partnership with Microsoft on its RemoteFX technology, which Microsoft claims enables three-dimensional graphics programs to run on thin-client devices.

The IDC analysts also wondered if Lenovo, which doesn't have thin-client hardware offerings, would the next computer maker to seek a thin-client acquisition.

IDC's analysts estimate that the "enterprise client devices hardware market" (which includes terminals and thin clients) had sales of $1.49 billion last year. The majority (86.7 percent) of those sales were thin clients. Over five years' time, IDC expects to see a 16.4 percent growth in thin-client unit shipments, with 12.6 percent growth in revenue. Overall, it will be a $3 billion-plus industry by 2015, according to the analyst and consulting firm.

"IDC research shows that the virtual client computing market will grow from $2.3 billion in 2011 to over $3 billion by 2015, with nearly a third of that coming from the centralized virtual desktop market (also called VDI)," the analysts stated.

The top thin-client hardware provider currently is HP, with 26.2 percent of the market, followed by Wyse (25.4 percent) and NComputing (16.1 percent), according to IDC.

Partner Expansion Possibilities
Wyse will bring more than 3,000 channel partners to Dell, should the deal be approved. That likely will buttress Dell's own sales channels. Anecdotally, Forrester Research analyst Clarence Villanueva has noted that customer inquiries to channel partners about client virtualization have showed "explosive growth." He spoke with partners in the fourth quarter of last year about the prospects.

"One systems integrator we spoke to has experienced a 40% annual increase in the number of VDI inquiries, while another reseller experienced a 55% YoY increase in thin client sales," Villanueva wrote in a blog post.

He also noted interest by companies in supporting bring-your-own-device and thin-client scenarios. A Forrester survey found that half of companies in its sample were looking for ways to support smartphones and tablets in the enterprise.

Hardware makers like Dell are moving into cloud-based services, according to Villanueva.

"Traditional PC manufacturers like Dell agree and see the writing on the wall: The future of enterprise IT is within cloud enablement and services," he wrote.

On top of the proposed acquisition of San Jose, Calif.-based Wyse, Dell announced late last month that it is rolling out three VDI appliance solutions. The appliances are bundled software and hardware, and Dell is working in partnership with Citrix, VMware and Desktone on the devices.

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