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Cost-conscious enterprise IT buyers' preference for all-inclusive observability platforms culminated in a set of private equity deals for two vendors this year that experts believe will be combined in an effort to catch up with market leaders.
Observability vendor New Relic, best known for application performance management (APM), was taken private this week for $6.5 billion by Francisco Partners and TPG. Francisco Partners also took log analytics and monitoring vendor Sumo Logic private in May for $1.7 billion. Both deals underscore the importance of comprehensive observability platforms as enterprises look to streamline the number of IT vendors they work with and reduce observability costs, according to analysts.
Further, multiple industry analysts predicted that New Relic and Sumo Logic will be fused under their new owners to create a broader set of products to better compete with vendors such as Datadog and Splunk.
Andy ThuraiAnalyst, Constellation Research
"[Francisco Partners and TPG] could combine Sumo and New Relic to create a more powerful observability solution and sell it to someone for a sum that is bigger than [its] individual components," said Andy Thurai, an analyst at Constellation Research. "Given that Sumo's strong point is logs, a combination of New Relic and Sumo might make a lot of sense and would appeal to a bigger buyer [such as] Dell, which is seriously looking into this area with their acquisition of AIOps company Moogsoft, or even IBM or HPE, which are struggling to make a foothold in the observability area."
Such an integration would keep with a trend toward consolidation among products from the APM, log monitoring, distributed tracing and AIOps markets under the umbrella of observability. That practice calls for the combination of previously separate stores of metric, event, log and trace data into a single platform for queries.
"It's the first thing I thought, too: that a New Relic/Sumo combination would make sense," said Nancy Gohring, an analyst at IDC. "It's a continuation of the platform trend, where observability vendors want to offer everything under one roof."
This shift has also created opportunities for newer vendors such as Honeycomb, Chronosphere and Observe, as well as M&A by existing companies. Such acquisitions took off with Splunk's purchase of SignalFx in 2019 and continued with ServiceNow's acquisition of cloud-native observability player LightStep in 2021. Other observability vendors such as Datadog and Dynatrace have diversified their products' features through smaller acquisitions and internal product development. All of these vendors offered observability features for application and infrastructure performance combined with security monitoring and automation prior to New Relic's venture into that area last year.
New Relic vs. Datadog: A tale of two observability companies
Problems for New Relic began with product packaging and pricing before January 2021, when Bill Staples took over as CEO from founder Lew Cirne, according to IDC analyst Stephen Elliot. Staples made sweeping changes to the company's product lines, combining what had been eight separate SKUs into three and cutting list prices.
These changes were helpful, according to Elliot, but the product and organizational revamp delayed New Relic features, specifically effective Kubernetes infrastructure monitoring that would improve its appeal to cloud-native companies.
"Prior to [Staples taking over], New Relic lost its focus on products, particularly for cloud-native apps," Elliot said. "And the observability space is hyper-competitive, without a lot of margin for error."
New Relic's pricing changes didn't go far enough to help it compete with the likes of Datadog and Splunk, according to Thurai.
"The transition from a subscription-based [enterprise license agreement] model to a consumption-based model is almost complete," Thurai said. "However, some of the customers have complained about the higher cost of observability for the New Relic solution in the consumption-based model, as well the sticker shock of prices at the end of the year."
Gohring said she's heard similar complaints about Datadog, and such critiques of Splunk are also common in the industry. But she and the other analysts all said that Datadog has made more timely investments in broadening its platform and offering customers a broad set of features for the price it charges.
"I'm not saying that the complaints about the expense of Datadog aren't valid, and I do hear from competitors and end users with stories about customers switching from Datadog because of the cost," Gohring said. "But I would also note that Datadog clearly has enough customers that are satisfied and that they have continued to attract new customers, despite those cost concerns. Datadog has a wide portfolio of products that are typically relatively easy to get started using."
Datadog may have had an early advantage because it started with infrastructure monitoring, while New Relic broke new ground in SaaS for APM, Elliot said.
"Fifteen years ago, a lot of companies, particularly in the Global 2000, didn't want to let application data out [of their own data centers]," he said. "Infrastructure monitoring as SaaS was an easier market to crack at the time."
Datadog got a jump on combining logs with APM data in 2018, something that took APM competitors including Dynatrace and New Relic until much more recently to complete. After multiple efforts, Dynatrace fully integrated log data with the launch of its Grail platform in late 2022; New Relic added logs collection to its APM agents in May 2022, and fleshed out the correlation between APM and log data in May 2023.
Datadog also began signing customers to broad-based platform deals as early as 2021, and more recent converts said Datadog's support for a broad set of features makes them more cost-effective overall.
"Datadog is expensive for individual solutions, but the bundles have saved us money," said one CIO at a healthcare company, speaking on condition of anonymity to discuss specific vendors. "We've cut costs on everything we've moved to Datadog, and it has been a better technical solution for us. I'm looking for other things I can consolidate onto Datadog and will probably use the promise of a longer-term contract to cut my costs with them further."
Big PE deals good news for New Relic, Sumo users
New Relic's challenges were no secret, but it also continued to grow. In a press release this week, New Relic reported its revenue grew 12% compared with the same quarter a year ago, and consumption-based pricing revenue was up 39% for the same time period. A hefty $6.5 billion investment will give its new private equity owners incentive to improve the company's execution and product features, according to IDC's Elliot.
"There's a lot riding on both these deals," Elliot said of the New Relic and Sumo Logic acquisitions. "New Relic, in particular -- that's the value of being private. You can aggressively improve the product and identify customer segments to focus on."
While New Relic had continued to grow, Sumo Logic was a different story. The private equity buyout and potential combination with New Relic presents a brighter outlook for users than if it had continued on its own, Thurai said.
"They were also hemorrhaging customers and losing revenue before they got taken out," he said. "They didn't have a mature tracing or application monitoring solution in place. Compared to them, New Relic is miles ahead when it comes to total observability."
Beth Pariseau, senior news writer at TechTarget, is an award-winning veteran of IT journalism. She can be reached at [email protected] or on Twitter @PariseauTT.