EMC Plots Its Storage Comeback
By Faith Keenan
The tech downturn has been humbling for data-storage company EMC. Not only has its stock lost 93% of its value, but once-stumbling competitors have finally caught up and stolen share in the high end of the storage market that EMC used to own -- and where it made all its money.
Now, EMC (EMC ) is fighting back. On Feb. 3, it will launch the first major overhaul in its high-end storage line in more than 10 years. The unveiling at New York's Grand Hyatt Hotel will be more than a product launch, though. It's a bold, bet-the-company move to help EMC regain share in the high end -- and eventually dominate data centers around the globe again.
A bigger hardware footprint would in turn make it easier for EMC to sell higher-margin software to manage the boxes. "It's going to put them back in the running from a hardware standpoint," says Gary Helmig, a research consultant with SoundView Technology Group.
WINDOW OF OPPORTUNITY.
It will take more than big iron to do that. So EMC is offering a sweetener to help move its new products: great prices. Like partner Dell (DELL ), EMC -- once known for gouging customers -- is planning to cut prices to regain market share and make rivals like Hitachi Data Systems and IBM (IBM ) bleed.
Unlike Dell, though, EMC isn't selling low-end gear that anyone can make. With new innards that speed up data movement and new disks that allow more info to be stored, EMC is offering a premium product. Some tech analysts predict it'll be at least 18 months before rivals can come out with a better product. That window not only allows EMC to play catch-up but to potentially kick storage competitors out of data centers.
EMC isn't used to waging uphill battles. Until 2001, it ruled the storage world with a 75% share in the high end, according to IDC. If a customer needed storage, EMC had one answer: a Symmetrix box, which started at around $3 million. Many customers bought because they couldn't afford not to run EMC's virtually fail-safe system. Offerings from competitors weren't up to snuff.
Then the tables turned. Better devices from archrivals Hitachi Data Systems and IBM set off a brutal price war in 2001. Prices declined by as much as 60% that year and continue to fall at a 40% annual clip, analysts say. The impact floored EMC, which in the past has counted on high-end hardware for the bulk of its sales. Revenue for 2002 was $5.4 billion, down 39% from a peak of $8.9 billion in 2000. EMC lost $119 million last year, after making $1.8 billion in 2000. Its stock hovers under $8, down 93% from its late 2000 peak.
Hitachi delivered another body blow last year when it introduced a device that moved more data faster than EMC's best offering. That helped boost Hitachi's share of the high-end market to 43% in the third quarter of 2002, from 35% in the previous quarter, while EMC's fell to 41%, from 52%, according to Sanford Bernstein. "There's no question they caught us on the hardware technology" says EMC CEO Joe Tucci.
Part of the fault for the market-share erosion lies with EMC. It had originally planned to introduce its new line last year. But Tucci, who joined as COO in 2000 and became CEO a year later, wanted changes to make the design more market-friendly. He eventually had to move aside Moshe Yanai, EMC's longtime chief engineer, to get it done. The delay left Hitachi with an eight-month window to sell its boxes with little competition.
STRADDLING THE MARKETS.
EMC thinks customers will consider its new line worth the wait. Called Symmetrix DMX, it includes three models that EMC says will do more for much less than what competitors -- and EMC -- are currently charging. Better yet, they'll be compatible with EMC devices in the mid- and low-end of the market, something competitors don't offer, tech analysts say. Buyers can virtually plug in EMC's boxes with minimal fuss or training and go.
Better yet, the changes that Tucci introduced could help slow or even reverse the shrinkage of the high-end storage market according to some analysts, including SoundView's Helmig. IDC projects that boxes costing more than $300,000 will make up 18.1% of the storage market in 2005, down from 26.8% in 2001. But the midtier price range of $50,000 to $300,000 will rise to 43.8%, from 33.1.%. Gartner estimates that the high-end market will total $8 billion by 2006 and the middle market $9 billion.
EMC hopes to straddle both markets with one of the three new boxes -- the DMX 800. Following the rack-and-stack approach of servers, the 800 has a modular design that allows customers to buy storage in pieces, rather than splurge for a big, refrigerator-sized box with all the trimmings.Its starting price of about $500,000 is about a third less than the entry point for EMC's current Symmetrix model, according to tech analysts.
The lower price tag for a souped-up machine could draw more customers from the midrange market dominated by Hewlett-Packard (HPQ ), buyers who until now have been spending no more than about $300,000 for a storage box. "Not only did they build the next biggest box, but they're packaging it so little guys can buy it," says Steve Duplessie, founder and senior analyst at Enterprise Storage Group in Milford, Mass.
Price isn't the only attraction. In addition to three low- and midrange devices introduced last year, the new premium models will give EMC a full product line for the first time in its history. The company is betting that the new mix-and-match line will make EMC a one-stop shop for storage. "We plan on gaining share in all segments," says David Donatelli, executive vice-president for EMC's storage-platforms operations.
Competitors won't go quietly. IBM contends that customers really want integrated solutions -- where they can buy servers, storage, and networking gear in one package -- rather than piece together parts from niche competitors like EMC. "We're the only company that has a view of the larger picture," says Bob Samson, vice-president of worldwide systems sales for IBM's systems group "[Customers] are tired of being quilt makers, having to stitch together all these different components."
Hitachi, which declined a request for comment, has announced an upgrade for its system, and IBM plans to do the same soon. Plus, Samson vows that IBM will fight back on price.
Will the lower prices hurt EMC's margins? Tucci says no, thanks to cost cuts reaped from manufacturing efficiencies. Components are now shared across EMC's entire product line. Instead of using 10 different disk drives, the company sources three. Likewise, it now uses three power supplies instead of seven. Sanford Bernstein analyst Toni Sacconaghi predicts that EMC can cut prices by 20% without hurting the bottom line.
That's provided the strategy works, of course. Some analysts wonder whether the improved low-cost boxes that EMC introduced last year in the midrange will cannibalize its new premium offerings. Burton Snowboards, in Burlington, Vt., is a case in point. The private company started leasing a Symmetrix six years ago from EMC. Today, Burton might prefer to buy EMC's much-improved, midrange Clariion line. "It has a lot of the same features as Symmetrix," says Scott Koerner, computer operations manager at Burton.
EMC contends that its products have enough difference in functionality and performance to prevent cannibalization. Some analysts agree. "I don't call it cannibalization. I call it progress," says Robert Passmore, a research director with Gartner. "Having a broad product line and selling it to match the customer's requirements and getting a close fit, that's real progress."
It'll be up to EMC's direct-sales team to make that case. They'll launch a blitzkrieg on Feb. 3, visiting the company's top 1,000 customers within 72 hours of the product unveiling in New York. Whether they can smoothly shoulder a full bag of hardware and software products -- a dramatic departure from the old one-size-fits-all approach -- remains to be seen.
Perhaps a bigger question is: Will miserly info-tech managers be willing to open their wallets for new equipment this year? If they do, storage should benefit since it ranks as a top priority for spending on several IT and Wall Street surveys. Then again, if war with Iraq comes soon, any new IT spending will likely be pushed into the second half. But with an estimated 18-month technological lead over its competitors, that could still be time for EMC to grab back share.
Keenan is a correspondent in BusinessWeek's Boston bureau
Edited by Douglas Harbrecht