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EMC loses $500 million dollars on its VCE joint venture

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March 6, 2013

EMC says it has lost about $500 million dollars on its VCE joint venture, the converged server-storage-networking business it founded with Cisco, VMware and Intel four years ago.

VCE makes vBlocks, bundled Cisco servers and network switches, EMC storage and VMware's hypervisor, which are packaged as single systems instead of four separate components, thus being much easier to buy, install and operate than equivalent systems built from separate components.

Stifel Nicolaus analyst Aaron Rakers has been looking at an EMC 10-K SEC filing for 2012 and writes: "EMC has invested a cumulative $676.1 million in the VCE joint venture since its inception in 2009, as well as $13.9 million in stock-based compensation, totalling about $690 million. EMC continues to own 58 percent of VCE’s outstanding equity. EMC’s consolidated share of losses was approximately 63.2 percent in 2012 (vs. ~63.2 percent 2011 and 58 percent in 2011). EMC’s accumulated net losses from VCE have totalled $498.2 million."

That's near enough $500 million dollars. As for VCE as a whole, Rakers writes: "This would imply total VCE losses at approximately $387.5 million in 2012, up from $331 million implied total VCE losses in 2011."

He added that EMC recognized about $285.8 million in total sales from products and services to VCE in 2012 (vs. $133.9M in 2011). EMC and Cisco recently announced that the VCE partnership has reached $1 billion in annualized demand.

EMC's 10-K form further ststes: "The losses recognized from the joint venture exclude our consolidated revenues and gross margins from sales of products and services to VCE, and any additional related selling expenses. "Our 2012 other income (expense), net primarily consists of our consolidated share of the losses from our converged infrastructure joint venture, VCE Company LLC, of $244.9 million."

And it goes on to say: "So $285.8 million in sales to VCE and $244.9 million in losses from VCE in 2012, making a net $40.9 million profit or surplus."

Unless our accounting math and understanding is way off-center, VCE - cumulative losses not withstanding - looks a good business for EMC. But the question is, how long can it sustain it?

In other IT and hardware news

Microsoft has been fined US $731 million by the European Commission after it violated an agreement to offer Windows users alternative web browsers to Internet Explorer.

A new investigation was launched against Microsoft by Brussels' competition officials in mid-2012 following several complaints that the software giant was still using its Windows operating system to push people into browsing the web with Internet Explorer instead of competing browsers such as Firefox and Google's Chrome.

Microsoft signed a legally binding agreement with the commission that required the company to display a choice screen in Windows that allowed customers in Europe to pick between using IE, Firefox, Chrome and other browsers on the market.

The dialogue box was supposed to remain in the operating system until 2014. But in February 2011, when Microsoft issued its first Windows 7 service pack, the selection screen suddenly vanished from the software.

Last year, Microsoft told competition commissioner Joaquin Almunia that it hadn't noticed the browser choice screen had been missing from its operating system for 17 months. This meant that 15 million customers were not offered a range of browsers to run on their PCs.

The EU commission said today that it was imposing a half-a-billion-euro fine on Microsoft for failing to comply with its commitment.

Almunia said in a statement: "Legally binding commitments reached in antitrust decisions play a very important role in our enforcement policy because they allow for rapid solutions to competition problems in Europe. Of course, such decisions require strict compliance. A failure to comply is a very serious infringement that must be sanctioned accordingly."

But Microsoft could have been slapped with a much bigger monetary penalty as the commission can demand anything up to 10 percent of a company's annual revenue. That means Redmond could have faced an enourmous €7.4 billion fine.

In working out how to penalise Microsoft, the EU commission added that it took into account the gravity and duration of the infringement. It also considered imposing a fine large enough to grab the company's attention so that it would prevent itself from making the same mistake again.

But Microsoft's cooperation with Almunia's office proved to be a mitigating circumstance that helped keep the fine low in relative terms.

In other IT and software news

Flash storage maker Violin Memory is pushing out a new line of PCIe server flash cards and strengthening its relationship with one of its investor, Toshiba, which owns NAND chip fabrication plants.

The company ships 3000 and 6000 models of its networked all-flash array technology. They can have PCIe connections but the array's primary function is to be shared between multiple servers.

Lately, Violin has been building its data management for these arrays, signing deals with Symantec and it has an agreement as well with VMware to run vSphere inside its arrays.

PCIe flash card market leader Fusion-io is run by CEO and co-founder David Flynn - but its former chief exec Don Basile is now the CEO of Violin Memory.

Basile appears to be squaring off with his old team at Fusion-io in its PCIe flash card heartland. The new Velocity cards come in 1.37, 2.75, 5.5 and 11 TB raw capacity versions at a list price cost of $6 per GB for all of them except the entry-level 1.37 TB card which lists at $3 per GB.

We calculated the full list prices to be $4,200, $16,900, $33,800 and $67,500 for the four capacity levels respectively. Violin said these are third-generation cards, and claimed that the prices, together with the card's performance, provide a two to four-times price/performance advantage over Fusion-io.

Source: EMC.

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