For Storage, the Worst and Best of Times
Pity the poor companies that sell the disk drives and other storage systems for everything from personal computers to corporate networks. Information-technology spending has stalled, competition is fierce, prices have plunged, and profits have evaporated. Storage products have improved dramatically over the past two years in terms of the amount of data they can house at a given price, yet customers are more demanding than ever, skeptical of product claims -- and hard to please.
Pity these companies -- for about two seconds. Then, if you run a business that will soon be in need of more storage capacity -- as most corporations will be -- pick up the phone. Right now, storage is a buyer's dream. Not only are the systems far less expensive than they were only two years ago but they're much more versatile -- and can be installed in smaller, more digestible, chunks.
Service, too, is much improved: Storage suppliers, which proliferated during the dot-com boom and now find themselves in an overcrowded field, suddenly are spending plenty of time with clients to develop customized solutions that promise to pay for themselves within months, not years.
Indeed, today's storage market is a CEO's dream. For the first time in half a decade it's possible to stock up on what every company regularly needs more of -- primary storage for everything from e-mail to sales presentations, from improved disaster-recovery capability to archive capacity -- all without breaking the capital budget.
In the Internet's heyday, EMC (EMC ) was a leader in storage networking, and it specialized in $1 million-plus installations (although even then the per-megabyte cost of storage fell every year). Today, it's focusing as much on modular, midprice systems that companies can earn a quick return on. "Customers want to see their basic needs met and will do new projects as long as they have a very, very rapid return on investment," says Mark Lewis, chief technology officer at EMC.
For storage companies, the situation is a far cry from the golden years of the late 1990s, when Net mania helped fuel a boom in tech spending and the data storage industry took off. Thanks to a red-hot market for initial public offerings, venture capitalists, some of whom had earlier dubbed the sector "snorage," scrambled to fund storage-related software and networking companies -- to cash out big in an IPO.
Corporate customers had both the need and the budgets to spend massively on storage, and they typically turned to EMC for high-end systems, to Network Appliance (NTAP ) for smaller network storage gear, and to Brocade Communications for switches for their new storage-area networks (known as SANs). These companies enjoyed fat profit margins and a soaring stock prices -- for awhile.
Then, in 2000, the tech-spending slowdown arrived just as a raft of new storage players entered the market, competing for the same large customers. The strongest pressure came from hardware makers such as IBM, Hitachi Data Systems, and Sun Microsystems, all of which had earlier neglected the storage market. That competition continues to this day: Even Cisco shook up the storage switch market in August, when it purchased switch-maker Andiamo.
Too many competitors going after the same dollar leads to one thing: Prices for storage-networking equipment are falling at a rate of about 40% a year, estimates Merrill Lynch. And since corporate customers can buy more storage for less money, industry revenues will likely fall by double-digits this year, estimates research firm IDC.
Another explanation for the slowdown in storage sales: Many customers bought more than they needed during the boom times. Now, new storage-management software can help them consolidate and reallocate extra capacity throughout their companies, so they don't have to place new orders.
Oddly, despite those trends, the amount of information companies have to store is still growing significantly each year and showing no signs of slowing. IDC estimates that terabytes (1 trillion bytes) of storage capacity shipped climbed 11% in this year's second quarter vs. the first, lower than the growth rates in 1999 and 2000 but still a heady pace.
E-mail is a major driver of storage demand, since one person can send a slide presentation to 15 colleagues to review -- and fill up a small server. Attachments these days are likely, as well, to contain music files and Web pages complete with graphics and photos. "Applications are getting hungrier," says Phil Sauvageau, executive vice-president for products and services at MSI Systems Integrators in Omaha, Neb.
"A LONG WAY."
The increase in stuff to store, combined with the fall-off in prices, has made it easier for storage vendors to persuade strapped corporate tech departments that it's simpler and cheaper to buy more storage than try to limit the amount of data they store. In 1996, a leading-edge disk drive for corporate jobs from XIOtech held 4 gigabytes and cost $1,400, says company co-founder Phil Soran. Today, a comparable high-end device holds 180 gigabytes and costs $1,800, he says.
Even lowly tape storage is much improved: A $100 five-inch square cartridge holds 160 gigabytes, vs. the 40 gigabytes its $80 cousin held only two years ago. "Tape has come a long way," says Rich Gadomski, director of marketing for Maxell.
All storage has come so far that businesses lacking sophisticated, high-capacity storage, may be grossly inefficient. For example, some companies limit network storage for e-mails to levels that require employees -- from the lowest to the highest paid -- to spend 15 minutes a day deleting old messages. Think about how much that time costs a company over the course of a year, when simply adding 250 gigabytes of low-end disk storage might well solve the problem -- at a cost of about $15,000. Even better, the newest storage-management software automates the deletion of old e-mail from a network -- at a cost of $100 or so per user.
In another classic case, plenty of companies simply send reminders to executives to back up their laptops or PCs to the network -- a haphazard and insecure way of preserving crucial data. "Most people don't try to do it until it's too late," says Larry Zulch, CEO of Dantz Development, which makes backup software for small and midsize businesses.
The problem is easy to fix. One of Dantz's software packages that retails for $1,099 will automatically back up 100 to 200 desktops. "A surprising percentage of business-critical data resides on laptops and desktops, yet this is a neglected area," asserts Zulch.
For large companies, the main problem isn't so much the cost of storage but the fact that storage subsystems have proliferated across departments -- which need some way to manage that capacity with less staff. "Operational costs are becoming a major headache," says James Wei, co-founder of venture-capital firm Worldview Technology Partners. "It's not about a cheaper box, it's how do you reduce my headcount requirement?" Virtually every storage company, from huge suppliers such as EMC to VC-funded startups, is developing software to help companies manage storage more efficiently.
Technology consultants are finding plenty of quick and easy solutions. One approach is consolidating farms of application servers so unused buckets of storage can be reallocated, says Bryan Ackermann, a partner at PwC Consulting. "I've seen situations where there's a payback just on the floor space alone," says Peter Smith, CEO of Neartek, which makes backup and media-management software.
Such "quick hit" networked storage solutions make way for future spending, at least in theory. "Often, near-term savings can be used to fund bigger efforts and protect scarce capital resources," Ackermann says.
Indeed, even in a tight economy, companies can still find the justification to build high-end storage systems that can cost $1.5 million -- the kind needed to make lots of data available to millions of customers. Probably the classic example is FedEx' system for letting anyone shipping a package to track it themselves, which not only saves money on customer service but also boosts satisfaction. "Clearly, information can be used as a competitive advantage," says Mike Gustafson, senior vice-president of global marketing at switch-maker McData (MCDT ).
Such high spending isn't in the cards for most large companies this year, with the emphasis on cutting costs and repairing bloated balance sheets. John Roy, storage analyst for Merrill Lynch, thinks that solid earnings gains for companies in the Standard & Poors 500-stock index -- and a subsequent rebound in capital spending -- is a prerequisite for rebuilding demand for sophisticated storage networks.
That alone may not do the trick, however. The industry is still suffering from lingering customer dissatisfaction with the initial round of big-budget networked storage systems installed in the late 1990s. These early networks got a bad rap because they cost more and delivered fewer benefits than advertised.
Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray, believes that problems with the technology are still too numerous. He thinks most companies won't install these networks, with their proprietary standards, until the storage products are recongifgured to work with more ubiquitous and easier-to-manage corporate Ethernet and TCP/IP networks.
"TROUGH OF DISILLUSIONMENT."
True, satisfaction with storage networks has increased as the technology has improved over the past two years: An Aberdeen Group report released in January found that 80% of corporate buyers surveyed called their implementation a "success," and 70% said they had a high level of satisfaction with their new systems.
Storage networks didn't get all As, however. Nearly 50% of respondents reported challenges in getting different systems to work together -- and said that it took longer than they expected to put a system in place. About 35% of tech managers also said their systems cost more than they had anticipated.
"We've gone from a period of raised expectations through a trough of disillusionment as the hype wore off," says Tom Clark, director of technical marketing for software firm Nishan Systems. "Hopefully, we're now at the level of productive deployments."
LIKE THE DOS DAYS.
Clearly, storage technology has lots of room to improve, especially when it comes to making data easier to retrieve. For now, it's still far more complex and labor-intensive for IT managers to get data than it should be, almost everyone in the industry agrees. "Storage is still in its infancy when it comes to the elegance of how people use and manage it," says XIOtech co-founder Soran, who recently got $9 million in funding for a startup in the storage-management market. He compares the industry's current state to the early days of PC operating systems. "It's as if we're coming out of DOS and moving into early Windows," he says.
For now, the slow economy and weak IT spending will inhibit the development of new solutions to storage problems, says Merrill Lynch's Roy. Long-term, that could be a problem for the industry, as well as for technology buyers. But near-term, cash-strapped corporate technology departments can call the shots, and probably the price, when they're in the market for a little more storage.
By Amey Stone in New York