Network Appliance's Big Blue Bet

The data-storage giant expects its alliance with IBM to propel sales growth. But the deal is far from risk-proof

By Olga Kharif

When execs at data-storage gear maker Network Appliance announced a partnership with IBM on Apr. 6, Wall Street cheered. The deal will allow IBM to resell Network Appliance's gear under the IBM brand as both companies battle for market share with rival EMC (EMC ).

At first glance, the IBM partnership holds a wealth of possibilities for Network Appliance (NTAP ), which has been growing 35% to 40% a year for the last few years thanks to its line of so-called network-attached storage products. IBM's (IBM ) global reach could dramatically boost the smaller company's sales and drive growth for years to come. Network Appliance's stock price surged 4.6%, to $28.45, on the day of the news.

But the IBM deal also carries risks. It could erode Network Appliance's brand and margins, and the sales goose Wall Street wants is far from guaranteed. This may be a contrarian view, but there's plenty to think about as Network Appliance gets cozier with Big Blue:

Why would this damage Network Appliance's brand?

The Network Appliance boxes that IBM will resell will look and feel -- down to the company logo on the front -- like IBM gear. Perhaps it sounds like a stretch right now, but over time, Network Appliance runs the risk of turning into the equivalent of a PC white-box manufacturer, a lesser-known quantity as far as buyers are concerned.

Could that weaken Network Appliance's hand in future dealings with IBM?

Yes. Network Appliance CEO Dan Warmenhoven says that operating margins his company will generate through IBM will be comparable to margins on its own -- typically in the range of 16%. But there's no guarantee of that margin over the long run. If Network Appliance gets hooked on the IBM sales, its far bigger partner could threaten to go to another storage gear maker unless Network Appliance agrees to concessions when the deal comes up for renewal -- though neither company will say when that is.

Does IBM have viable alternatives?

Sure, Network Appliance isn't the only game in town. IBM could go to another supplier like ONStor, says Arun Taneja, founder of storage consulting company Taneja Group in Hopkinton, Mass. The agreement between IBM and Network Appliance is not exclusive.

So IBM can always resell products from other companies. Or it could introduce its own line of storage products, as former Network Appliance reseller Hitachi Data Systems has done. In January, IBM announced its own network-attached storage device -- albeit a low-end one -- and it's still committed to that product line, says Barry Rudolph, IBM's vice-president for storage systems.

But IBM will certainly boost Network Appliance's unit sales, right?

Probably, but it's unclear by how much. IBM will help Network Appliance get into burgeoning markets such as China, where it has no presence. But IBM can also sell this gear as IBM-branded boxes around the rest of the world. Network Appliance could end up competing against its own products.

Plus, the gear IBM sells means more services revenue goes to Big Blue, not Network Appliance. And additional disk-drive sales would likely go to IBM.

Has Network Appliance managed to put together strong partnerships like this before?

The results of Network Appliance's previous reseller partnerships were less than stellar. Companies such as Dell (DELL ) and Hitachi Data Systems have tried to resell Network Appliance boxes, but they didn't get much traction. Eventually, Dell teamed up with EMC. And in April, Hitachi effectively ended its partnership with Network Appliance when it introduced its own line of network-storage products.

So this deal is a lemon?

No. The two companies will collaborate on research and development, and tighter integration with IBM's other products could appeal to a lot of customers. "It takes two to tango," says Warmenhoven. "[IBM] is the ideal partner."

But this dance may not go smoothly.  As aficionados know, the tango can be almost as much a battle of two competing wills as it is a duet. The Network Appliance-IBM partnership likely will be no exception.

Kharif is a reporter for BusinessWeek Online in Portland, Ore.

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