Cloudera, Hortonworks, and the Big Data “Game of Thrones”

Two of the most powerful houses in the big data world have long been Cloudera and Hortonworks. Once fierce adversaries, you can think of them as the Starks and Targaryens of the market. In a surprising announcement several weeks ago, these two rivals joined forces to take on their own “Army of the Dead.” In this case, the fiercer and greater adversary is the ongoing innovation in the data space that is changing market dynamics and decelerating demand for Hadoop and associated solutions. Let us explain . . .

In the first week of October, Cloudera and Hortonworks, competing commercial providers of software and services based on the Hadoop big data open-source project, announced that they would merge. The new company is estimated to be worth ~$5.2 billion (based on closing prices on October 2nd) and the transaction is expected to close in the first quarter of 2019. Under the terms of the agreement, Cloudera’s and Hortonworks’ stockholders will own 60% and 40% of the merged company’s equity, respectively. For each share of Hortonworks stock, its owners will receive 1.305 common shares of Cloudera stock. (1)

Mike Olson, Chief Strategy Officer of Cloudera, published a blog post on the day of the announcement detailing the rationale behind the merger. He describes the history of both companies – both realizing very early on the transformative power of big data and becoming pioneering forces of innovation in the space.

Olson went on to describe the underlying commonality of their products, “While we’ve each worked hard to create differentiation, we share an enormous amount of code in our products. Our development teams have collaborated on the original Hadoop software, and on newer entrants to the ecosystem like Apache Hive, Apache Spark, and more.” The overarching goal of the merger will be to accelerate innovation for customers, extend the Hadoop ecosystem with containerization and orchestration, and ultimately, deliver “the first enterprise data cloud, from the edge to AI.” (2) The teams at Cloudera and Hortonworks both believe that they are better positioned to attack the opportunity of enterprise data cloud innovation as one unit.

It is a grand vision, particularly in a tremendously competitive and quickly changing ecosystem with powerhouse players such as Amazon, Google, and Microsoft in the mix, and specialized cloud platforms such as Snowflake and Databricks shaking things up as well. Olson added, “Today, the market includes a growing collection of companies who recognize what we both knew early — big data is a big deal. In the data center and in the cloud, there’s a proliferation of players, often building on technology we’ve created or contributed to, battling for share.” (2)

In many ways, this merger rings as a defensive play rather than a proactive one. Recent trends in big data, such as the rise of the public cloud, the relative costliness of Hadoop storage fees compared to storage provided by AWS S3, Azure Blob Storage, and Google Cloud Storage, “the advent of ‘server-less’ cloud services that completely eliminate the need to run Hadoop or Spark at all,” and a shift in “data gravity” away from large Hadoop/Spark clusters, (3) underscore this comment on the increasing competitiveness in the industry.

Mathew Lodge, SVP of Products and Marketing at Anaconda, says “Hadoop has been synonymous with big data for years, but the market — and customer needs — have moved on.”(3) The Hadoop market may no longer be able to carry two large companies – forcing the enterprises to merge and face the on-going evolution of cloud and big data as one.

The combined company is expected to generate approximately $720mm in revenue, have more than 2,500 customers, and save nearly $125mm in annual cost synergies. (4) Five days post-announcement, a report was published on Seeking Alpha purporting that the market is still ignoring the potential of the merger. Historically, Cloudera’s and Hortonworks’ negative operating margins have created some investor trepidation. With the aforementioned cost synergies, however, the estimated losses are significantly reduced post-merger. (5)

With post-announcement Cloudera stock continuing to trade below its peers’ EV/Sales multiples, the question the market seems to be grappling with is less about low-to-negative profitability, and more about the true growth potential of Cloudera and Hortonworks in an increasingly competitive landscape. Avalon Consulting, LLC, a firm that has been involved in creating distributed computing and big data architectures for over 10 years, recently released a great article that contemplates just this.

Much like Westeros, big data is in the early stages of rapid transformation. We anticipate that the leadership of the metaphorical Seven Kingdoms will change frequently as new upstarts vie to capture the throne, and powerful, wealthy houses (let’s call Amazon the Lannisters in this scenario) continue their warpath. We look forward to seeing the next chapter in these two innovators’ histories as they try to find efficiency, optimize their sales force, battle the “White Walkers,” and fight for the throne together.

Sources

(1) Zacks, “Cloudera, Hortonworks to merge & Create $5.2B Data Company”
(2) Mike Olson, Cloudera, “Cloudera + Hortonworks, from the Edge to AI”
(3) Venture Beat, “Cloudera and Hortonworks Merger means Hadoop’s Influence is Declining”
(4) Data Center Knowledge, “Cloudera and Hortonworks Merge and Roll Out End-to-End Data Platform”
(5) Seeking Alpha, “Cloudera: Market Still Ignores Potential” [requires free registration]