Everybody Has More to Store
During the economic downturn, Northwestern University in Evanston, Ill., has postponed many purchases -- but not of computer storage. Lately, many of its students have been using Northwestern's network to watch cable TV via their desktops. And faculty and staff read their campus e-mail from anywhere in the world. To run these Web-based applications, says Mort Rahimi, vice-president for information systems and technology, the university has had to double its storage capacity over just the past 12 months. He adds that it'll have to do so again within the year.
As they've moved to Web-based computing, built heftier networks, and begun using more electronics products, businesses, schools, and other organizations have started to crank up their storage purchases. Some of the impetus comes from new government rules such as the Sarbanes-Oxley financial-disclosure law that requires corporations to keep data and e-mail much longer.
Mostly, it's a logical outcome in a society that's becoming digitized to the hilt. In the 1990s, the amount of information that companies stored digitally increased by 65% to 75% annually. Steve Duplessie, founder of consultancy Enterprise Storage Group in Milford, Mass., estimates that over the past two years, that growth rate accelerated to 85% to 90% -- a trend that's likely to continue.
MECCA FOR TECHS.
As the economy stagnated starting in 2001, many businesses initially made do without more storage. They began to relent as the technology became more powerful even as its price fell significantly. And now, with corporate tech budgets starting to expand, sales of storage hardware and software have become one of the first big tech markets to recover, according to a Goldman Sachs survey in August of 100 chief information officers from among the country's 1,000 largest companies. That should presage a boom for many storage suppliers and their stocks.
The potential for fast growth has made this $20 billion-plus business a mecca for nearly every player in computing. Storage has long been a mainstay for veterans such as EMC (EMC ), Hewlett-Packard (HPQ ), IBM (IBM ) and Sun Microsystems (SUNW ). In the past five years, other major players, such as Dell (DELL ), have jumped in. And since 2000, nearly 300 super-aggressive, well-funded storage startups have entered the game to sell advanced technologies, such as new types of memory, not just to the corporate market but to makers of consumer products that are built around tinier but heftier storage devices.
Staffed by experienced techies laid off during the downturn, at least some of these startups have a decent chance to succeed as their innovations revolutionize the once-stodgy storage business, says Jeremy Burton, chief marketing officer at the largest independent storage-software outfit, Veritas Software (VRTS ). They've also helped spark a competitive battle that routinely gives customers more for their money and that's forcing the merger of concerns seeking safety -- or prosperity -- in size.
Until recently, storage was predominantly a hardware business -- boxes big and small (including so-called flash memory cards) still account for about $14 billion in annual revenue. But software that extends the life of such hardware is where the growth is now. Veritas says in each of the past four quarters its revenues have set records -- not bad, considering the three-year tech slump. Market researcher IDC forecasts that the $5.7 billion software segment of the storage biz will grow at a 12% compound annual growth rate through 2007, vs. 4% for the more competitive hardware market.
Seagate Technology's (STX ) announcement on Oct. 22 showed just how competitive the hardware business can be. It said falling prices for its hard drives, which are used to store files in everything from PCs to consumer-electronics devices, had caused it to lower its sales outlook for the fourth quarter. That despite an estimate from consultancy Gartner that worldwide sales of removable solid-state storage increased 73%, to $2.13 billion in 2002 vs. the prior year as consumer-electronic devices such as digital music players and digital cameras proliferated.
The storage industry's evolution is forcing some critical changes that customers have demanded for years. The first industrywide technical standard governing software interfaces should debut next year, says Ray Dunn, a member of the Storage Networking Industry Assn. (SNIA), a trade group with more than 300 members. The new standard will make it easier for customers to mix and match hardware from different manufacturers -- and to manage it with software from any supplier.
"THE HOLY GRAIL."
The first storage boxes for the corporate market that are based on this standard are due out this fall. Every supplier should benefit as storage becomes easier to install and use -- but chief among the winners will be the sellers of storage software which, more than hardware, can deliver efficiencies in a flash.
By making software development easier, the new standard should also fuel innovation. The greatest potential for that may be in what's already the hottest corporate segment: Storage resource management (SRM) software, which is used to control an organization's entire storage operation. When a storage device becomes 80% full, for instance, this software can automatically delete certain files or move them elsewhere. Because of the potential savings in labor costs, "comprehensive storage management is the holy grail," says Bill North, a research director at IDC.
A new system announced by IBM on Oct. 13 takes this idea to a higher level. It's a common file system for all the storage elements within an organization (in place of the current arrangement, in which every supplier's storage box uses its own system for storing files). To make the system work, IBM's new software can manage extraordinarily high volumes -- petabytes -- of data, says Bob Samson, IBM vice-president for worldwide systems sales. (One petabyte, equal to 1 million gigabytes, contains as much information as 1.5 million CDs. All of the books in the Library of Congress contain about 20 petabytes of text.) The software is already being used by the European Organization for Nuclear Research, better known as CERN, to help physicists model the first moments of the Big Bang.
Even as software innovation sped up, advances in storage hardware slowed during the tech downturn, since customers began replacing their storage boxes every four to five years vs. every three years in the 1990s, says Phil Goodwin, senior program director at technology consultancy Meta Group. Hardware makers are thus trying to resuscitate demand by experimenting with different configurations, creating a source of considerable debate in storage circles.
One camp -- notably, Dell -- advocates building storage farms of cheap servers (a so-called modular approach). "You pay as you grow," says Bruce Kornfeld, director of Dell's enterprise marketing business. The opposition, headed by IBM, argues for a monolithic architecture, in which a customer buys a big, expensive box and grows into it.
The modular approach ruled in the penny-pinching days of the downturn -- but is no longer a given. This year, big high-end boxes could increase their share of the overall market vs. last year's 31.9%, predicts Charlotte Rancourt, a research director at tech consultancy IDC in Framingham, Mass. After all, one big box might allow for better network performance by storing all mission-critical files.
Some players claim they offer a middle solution. EMC sells a storage box that can work as either a modular or a monolithic device, says Ken Steinhardt, EMC's director of technology analysis. It can be loaded with enough horsepower to serve as a stand-alone machine or slimmed down enough to be an element in a storage farm.
One thing both camps do agree on is the attractiveness of on-demand pricing. Over the past two months, HP says, it has begun seeing more interest in its pay-per-use service, in which customers buy storage from farms housed either at HP or the customer, paying only for the amount they use. That's a sensible approach for outfits that test new drugs or develop new software, tasks for which storage needs fluctuate wildly, says HP's Schultz. IBM makes similar arrangements, says Samson.
Some of the newest storage entrants are finding a niche in helping customers with big, expensive systems moderate their costs without doing a sweeping upgrade. For instance, Storage Tek (STK ) in Louisville, Colo., sells what it calls a serial Advanced Technology Attachment -- multiple cheap hard drives strung together. Companies use them in place of high-priced boxes to store older data they use less often -- and don't mind retrieving more slowly. "Customers want to increase their storage capacity while staying within their budgets," declares Patrick Martin, StorageTek's chairman, president, and CEO.
RATHER NOT SWITCH.
Competition is also mounting in services -- another major part of the incumbents' business. Revenues of GlassHouse Technologies, a privately held Framingham (Mass.) storage consultancy, have been growing 70% quarter-over-quarter this year. About 80% of GlassHouse's business comes from devising ways to make whatever storage equipment and software corporations already have work more efficiently, says President and CEO Mark Shirman. For instance, a customer's existing practices might result in 200 copies of the same document being stored indefinitely -- leading to unnecessary expense, Shirman explains. His solution is to revise corporate policies so that fewer copies of each document are stored.
With an estimated 80% of the storage business, the top five companies in the industry are too powerful to displace. Their big corporate customers are so familiar with their systems as to have a bias against switching, says Anders Lofgren, an analyst at tech consultancy Forrester Research. The industry leaders also aren't standing still: HP now designs its storage software in consultation with its network-server team -- so that a customer can pluck a disk drive from its MSA1000 storage device and put it into a server, giving customers more flexibility in how to use their resources, says Schultz. Like StorageTek, HP also offers cheaper products for storing older data.
Many of the big players are also strengthening their product lines, particularly in software, through acquisitions. On Oct. 14, EMC announced that it would acquire content-management-software maker Documentum (DCTM ) for $1.7 billion in stock. And in July, EMC bought Legato, a maker of backup and recovery software.
In short, the competition in storage is leading to an impressive array of enhancements. And no matter who delivers them, buyers are bound to benefit.
By Olga Kharif in Portland, Ore.