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Microsoft Acquires Appliance Vendor DATAllegro: The Beginning of a Trend?

In a surprise move today, Microsoft announced they are acquiring data warehouse appliance vendor DATAllegro. No purchase price was disclosed.

Stuart Frost, CEO of DATAllegro, had some interesting things to say about the acquisition on his blog immediately after the announcement. Here are some excerpts:

"... just as the VC community started to recover from the Internet ‘bubble’ in 2003, I came up with the vision for DATAllegro. Since that time, we’ve raised just under $65m in venture capital and created a hugely successful exit for my investors, my great team and last, but not least, me!"

"As soon as the acquisition closes, we'll start the work of moving our technology from Ingres & Linux to SQL Server and Windows. Our feasibility studies over the last few months indicate that SQL Server is a significant improvement in terms of performance - especially in key areas such as star joins, I/O throughput and in-memory operations. The engineering team here at DATAllegro is VERY excited about the next version of the product."

"Over the last few years, it's been incredibly frustrating to have prospects tell us that we have the best technology, vision and people, but that they can't buy from a startup - I think that will change radically under the Microsoft brand! As a result, I'm starting to think that it could be a long term home for me. It will certainly make a nice change from having to raise VC money every few months!"

"It will be interesting to see the impact this acquisition has on the rest of the market. My guess is that the other incumbents will scramble to respond to Microsoft's pre-emptive strike and that this could lead to a few of the other startups being acquired. The ones left out will find life very hard over the next few years."

There are a few interesting points to note in these quotes. The first is that DATAllegro will move from using an open source DBMS to SQL Server. Microsoft wants to move SQL Server up market to compete with the high-end DBMSs for data warehousing such as IBM DB2, Oracle and Teradata. It is interesting to note that at a Teradata analyst meeting this week, Teradata talked about how it is moving in the opposite direction of providing lower-cost and smaller appliances for data marts. Teradata hopes that this strategy will introduce Teradata to companies outside of the Fortune 2000 who will then hopefully move gradually to an enterprise data warehouse environment based on Teradata.

Before the acquisition, DATAllegro was clearly targeting Teradata customers by suggesting that they could offload some of their Teradata workloads to a lower-cost DATAllegro solution, i.e., DATAllegro was selling coexistence, rather than rip and replace. Obviously this strategy will change now that Microsoft is driving the marketing program.

The second point to note is that DATAllegro had burned though nearly $65 million in VC funding. Like many of startups they were achieving visibility, but not sales. In fact, it was difficult to find good DATAllegro case studies. To be fair, this is true for several of the other appliance vendors as well. Netezza, who has been in this market longer, is an exception here. I wonder if Microsoft perhaps took advantage of the VCs getting nervous about the viability of DATAllegro. We may get some insight into this when the purchase price is leaked.

I think Stuart's comments about other startups being acquired is correct. There are simply too many appliance vendors out in the market. The question is who is likely to acquire them? Leading DW DBMS vendors such as IBM, Oracle, and Teradata are unlikely candidates. One possibility is HP who are struggling to get NeoView off the ground. Another is Sun who have relationships with several appliance vendors. There is no question, however, that several of the appliance vendors are likely to go out of business. History shows that selling price/performance is not a good longterm strategy. Success may come for those appliance vendors that move toward selling more application-focused solutions.

Regardless, the DBMS and DW markets continue to be exciting!

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