EMC competition article that doesn't mention NTAP.
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Hopkinton's EMC still dominates the data storage business, but Web-based competition looms
By Ross Kerber, Globe Staff, 4/10/2000
Can EMC Corp. keep all its disks spinning in the Internet age?
That's the question for the Hopkinton-based maker of computer-data storage devices, one of the region's biggest success stories. EMC has long kept several steps ahead of competitors, but it now faces a new set of challenges posed by the growth of the Web and changes in storage technology.
The company designs and sells refrigerator-size cabinets stuffed with disk drives. EMC's devices have become the industry standard for business customers, ranging from large banks and airlines to small e-commerce start-ups, that need to keep track of vast amounts of computer data.
Orders have boomed as these companies scramble to do business on the Web, and EMC has gained market share at the expense of such rivals as IBM and Compaq Computer Corp.
Investors understand and like EMC's business model - a supplier akin to the outfitters who sold pans and shovels to prospectors during the Gold Rush. EMC's share price has more than doubled since last year to give it a market value of nearly $150 billion, the most of any public company in Massachusetts.
But the online forces that have benefited EMC also are shifting the competitive landscape.
For one thing, EMC's fastest-growing customers today include many small dot-com start-ups rather than major corporations, and EMC may have a difficult time retaining their loyalty against competitors offering cheaper devices.
The expansion of the Web also has given rise to a new generation of companies that sell data-storage online. Their service enables customers to store data remotely, potentially eliminating the need for companies to own storage devices themselves. EMC has investments in a few of these new storage providers, but some analysts regard them as a long-term threat nonetheless.
All this, plus a pair of recent high-level departures, has created a new round of strategic hurdles for EMC chief executive Michael Ruettgers and Joseph Tucci, the former Wang Global chief executive named EMC's president in January. They must prove EMC can dominate the dot-com market and sort out relations with the online storage providers.
EMC also needs to maintain its hard-driving sales culture even as it roughly doubles its work force in two years. By December, it will have 21,500 employees, including 8,000 in Massachusetts. Much of the increase stems from EMC's $1 billion purchase of Data General Corp. of Westborough last year, which gave EMC a line of storage devices to sell to smaller customers.
Ruettgers said the company is focused on the opportunities emerging in the storage market. He said dot-com companies accounted for 14 percent of EMC's revenue last quarter, up from 2 percent a year earlier, and he expects that percentage to increase as new companies start to build computer systems from scratch.
Broadly, he said, EMC is not only on track but will substantially grow its revenue to $12 billion next year from $6.7 billion in 1999, with profits increasing proportionally. The total storage market could grow to as much as $80 billion by next year, from around $35 million today, he projected, an increase chiefly driven by the demands of the Internet.
EMC's heavy research and development spending - $1.7 billion this year and next - also will create new software to make EMC's disk-drive assemblies more flexible and reliable for all sorts of tasks for customers, he said.
'It's a market that may not have any limits, and we're certainly in the sweet spot as far as the technology is concerned,' Ruettgers said, referring to the new software.
But skeptics question whether EMC can continue its string of successful quarters indefinitely.
Storage analyst Gary Helmig of SoundView Technology Group thinks EMC could suffer as the battle for market share intensifies. 'Storage will be one of the cornerstones of the Internet, and everybody wants a piece of it' Helmig said.
Doubters also point to the exit of some high-level managers. Last week Robert Dutkowsky stepped down from his job heading the Data General division to join another company.
In January, EMC's top sales executive, Harry Dixon, also left amid disagreements about his ownership of shares in one of the new online-storage companies, according to several people familiar with the dispute. In a statement, EMC called that description an 'oversimplification' but declined to elaborate. Dixon, now a director at StorageNetworks Inc. in Waltham, didn' return telephone calls seeking comment.
Despite these departures, others note EMC has overcome plenty of challenges in the past year. It has gained market share despite the vows by IBM, Compaq, and Hewlett-Packard to catch up with new products and marketing alliances.
'The competition just underestimated the difficulty of bringing out the kind of product and features that EMC can provide,' said Phil Rueppel, analyst for Deutsche Banc Alex. Brown.
Rueppel said much will depend on the reception EMC gets for new software it plans to roll out later this month designed to make it easier for companies to copy databases and retrieve information across big computer networks.
EMC was founded by Richard Egan and Roger Marino in 1979 as a maker of memory boards for minicomputers. Egan was the E, and Marino the M, in the company's name (Egan remains chairman); the C was a third partner, whom they won't identify, who dropped out just as the company was getting started.
Ruettgers got the top job in 1988 as the company was suffering from slowing sales and losing money. Two years later, he restored the company's profitability by turning it into a supplier of storage devices.
At the time, storage accounted for a small fraction, less than 5 percent, of the total spending on information technology at most large companies. The balance went to buy ever-faster mainframe and server computers and networks to link them.
Computer processing speeds advanced rapidly as a result, allowing companies to collect far more information. Companies then had to spend more to keep track of it. Forrester Research estimates that storage accounted for around half of the total cost of major corporate computer purchases last year, and that could rise to nearly 75 percent by 2003.
EMC's expertise lies in packaging hundreds of disk drives with proprietary circuits and fiber-optic cables. The assemblies can locate and transmit data seconds faster than other formats, such as the magnetic tape drives that were previously used to store computer data.
A few seconds may not seem important, but it matters greatly to Internet companies that have found users grow impatient if it takes eight seconds or longer for a Web page to download.
Reliability is also a key concern. 'We needed something that goes down very little and has fantastic support, and that's what EMC is well-known for,' said Ajay Joseph, director of network architecture for iBasis Inc., an EMC customer in Burlington that provides Internet telephony services.
EMC doesn't manufacture drives itself. It buys millions of them each year from vendors such as IBM and Seagate. As a result, EMC for years was seen as a supporting player in the storage industry. But its revenues took off as its products gained a reputation for reliability and performance. Profits rose, too; last year, EMC's net income rose 50 percent to $1.18 billion.
The increase shows that customers have stuck with EMC even though they say EMC typically charges 30 percent or even more than its competitors for systems that store similar amounts of data.
The size of its systems is measured in units called 'terabytes.' One terabyte is the equivalent of a library of a million books. A typical EMC customer is Gelco Information Network in Minneapolis, which manages travel and expense accounts for other companies. Recently, it spent $1.5 billion for a system that can manage up to three terabytes of information.
Larry Peterson, a Gelco technology planner, said he considered a system from IBM that would have cost around $1.2 million, but chose EMC because it offered better software to back up and copy databases.
EMC says its prices are comparable to its competitors when services and software are factored in. But analysts try to track the premiums that EMC can get for its equipment as indication of the company's technical advantages.
'EMC is almost always significantly more expensive than their competitors,' said Gartner Group analyst Stan Zaffos. 'But if you look at EMC as a company, they've got focus and they invest in their vision. And people like that.'
Competitors insist its prices make EMC vulnerable. 'We can live on much lower margins' said Mark Lewis, a Compaq vice president. IBM recently said it would hire 1,000 new sales specialists to tout the cost advantages of its own equipment.
IBM also points to such customers as Peter Flaherty, a technology manager at a Bayer Corp. division in Medfield. Flaherty recently bought an IBM storage system partly for its lower price and partly because the IBM servers he already owned 'sometimes get confused' by data stored on EMC machines. 'Sometimes it's simpler to go with all from the same vendor,' Flaherty said.
EMC hopes to end such talk with software that makes it easier for customers to use their data for tasks such as duplicating databases full of payroll or purchase records. It will spend $1.3 billion on software research this year and next. Software accounted for about 11 percent of its revenue last year.
In addition to its traditional competitors, EMC also must come to terms with a new set of virtual storage sellers.
These are the companies known as 'storage services providers,' such as StorageNetworksInc. in Waltham and Driveway.com in San Francisco. These companies buy storage equipment from a variety of vendors and lease access to other companies, either through high-speed telecommunciations lines or the Web.
Most of these companies say they aren't specifically targeting EMC, but some observers think they could pose a threat by draining away the customer base.
'This could displace a lot of the capacity that EMC might have sold directly' at a greater profit, said John Webster, storage analyst at Illuminata group in Nashua.
EMC executives say they don't regard the storage services providers as competition, and point out that EMC already has sold the start-ups millions of dollars worth of equipment.
Hedging its bets, EMC also has made investments of its own in the storage providers, buying a minority stake in Driveway.com and holding discussions with X:drive in Santa Monica, Calif., and zDisk.com in Seattle.
In the long run, the new storage providers will 'become a sales channel for us' and increase overall demand for storage, said Ruettgers.
Peter Bell, chief executive of StorageNetworks and a former EMC employee, agrees. Bell notes that EMC salespeople still receive commissions when they convince customers such as Merrill Lynch to specify EMC equipment when ordering space in StorageNetworks' data centers. 'I can't think of how we'd be competitors,' he said.
Still, EMC and StorageNetworks have a complex relationship. Investors in StorageNetworks include EMC rival Dell Computer Corp., and executives from Compaq and Sun Microsystems, two other competitors, serve as technical advisers. EMC cofounder Marino is a StorageNetworks board member, as is Harry Dixon, the former EMC sales chief who left in January. (Like Dixon, Marino didn't return telephone calls seeking comment.)
Some customers say they have signed up to use StorageNetworks to avoid the cost and attention needed to own storage devices themselves.
'It's one less thing we have on our plate,' said Greg Strakosch, chief executive of TechTarget.com in Dedham. The company operates a series of e-commerce Web sites devoted to technical topics.
Ruettgers says many companies that start out with StorageNetworks might eventually buy their own gear instead - and EMC would be happy to supply it. Because they are building systems from scratch, these companies' demands can be extremely large. 'Suddenly you have these little companies buying more storage than the major banks,' Ruettgers said.
'The Internet all comes down to access to information,' he said. 'We want to be the company that can provide it.'
This story ran on page C1 of the Boston Globe on 4/10/2000.
¸ Copyright 2000 Globe Newspaper Company.
boston.com
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Almost tempted to call and ask an EMC IR person who is their main competitor. I am continually amazed at how many tech investors I deal with never heard of NTAP.
Jack |
