The following email was sent to me by EMC's IR dept.
------------------------
The following article is from the newest issue of Fortune Magazine. The
article supports Mike Ruettgers' recent statement,
"I believe EMC's current success to be small relative to its opportunity."
(In other news today, Steve Milunovich of Merrill Lynch published a note and
held a conference call to discuss IBM strategy. The reports included some
interesting IBM perspective on their recent Shark offering. Merrill clients
might want to read this note or listen to the replay.)
----------------
FORTUNE
August 16, 1999
In the New Age Of Data, EMC Rules
Computer companies are finally realizing the importance of storage. Now
giants like HP and IBM are scrambling to catch EMC.
By David Kirkpatrick
Data storage has always been a sideshow in information technology--the main
action has been computers themselves. Now a storage-liberation movement is
afoot. New technology and customer needs are giving unexpected importance to
storage systems--the arrays of capacious disk drives that store the programs
and data that anchor the Internet, corporate intranets, and enterprise
systems. The changes are far-reaching, upending the power structure in an
already stressed-out industry. They raise a big, scary question for
computing's giants: Can they become storage giants too?
If not, forget profit margins; it'll be all about profit migraines. As the
once almighty PC has devolved into a low-cost, low-margin appliance for
accessing the Internet, Compaq, Dell, Hewlett-Packard, IBM, and Sun have
scrambled to boost profits by selling servers. Those are the high-powered,
high-priced back-office machines that PCs and other devices tap into and
that businesses depend on for running Internet and enterprise applications.
Until recently, servers, which can cost anywhere from $1,500 to $3 million,
incorporated storage and processing in one package, a little like the human
brain. But technology has taken a new evolutionary turn: Manufacturers are
marketing storage units that can sit separately on networks and supply data
to many different servers, even if they come from different producers. The
shift to "open" storage could reshape the industry. Sales of external
storage systems are more than one-fifth the size of the $42-billion-a-year
market for servers that run Unix, NT, or NetWare operating systems, says
John McArthur of International Data Corp. in Framingham, Mass. Sales of such
systems are growing faster and generating higher profits than those of
servers. As servers lose storage, computer makers lose profits.
The biggest winner so far is EMC of Hopkinton, Mass., the No. 1 storage
specialist. It takes hard drives like the one in your PC, builds them into
arrays, and adds its own software to create storage systems that work with
any number of server brands. The systems include enough intelligence to
decide for themselves where and how to store data efficiently on the
disks--traditionally a job handled by a computer's operating system. Clearly
the approach has paid off: In the past four quarters, the company earned
$967.8 million on $4.6 billion in revenue; its market cap is $63 billion,
making it as large as Compaq, Apple, and Gateway combined. "I think there
are more hardware dollars being spent on storage now than on servers," brags
EMC CEO Mike Ruettgers, who predicts storage will account for 70% of
high-end hardware sales by 2002.
One reason for soaring storage demand is that businesses just can't stop
gathering data. Everybody knows that information, especially about
customers, will be increasingly critical, but few are mining data
effectively yet. Meanwhile, data are simply piling up. Says Aron Dutta, a
consultant at e-business adviser Scient in New York City: "Companies don't
do a good job of pruning and managing information. They just collect."
Customers also have rational reasons to opt for open storage systems like
EMC's. External storage units can be managed independently and don't have to
be tossed out with an outdated server; IT managers like having their data
available to every server the company owns.
The big computer makers are only starting to sell open storage systems
rather than proprietary ones. Compaq inherited a broad product line in its
acquisition of Digital Equipment last year. Many of the big guys, like Dell,
are reselling the technology of smaller companies like Data General and
Storage Technology. Even IBM, which is renowned for major advances in
disk-drive technology, has yet to introduce a storage system comparable with
EMC's. Says IDC's McArthur: "EMC has substantial momentum, and they've
capitalized on the stumblings of their competitors."
Hewlett-Packard has made bold--and brazen--moves. For four years it resold
EMC equipment with HP servers, but executives realized they were forgoing
profits. So the company quietly began developing products with Hitachi, the
Japanese computer maker. In May, HP introduced the first product from this
joint venture, the HP SureStore E Disk Array MC256. Why the clumsy name? EMC
thought the answer seemed obvious once its execs heard the system was
nicknamed the E MC256. EMC filed suit, and in July a U.S. district court in
Boston issued a preliminary injunction barring HP from using the name. Says
HP's chief storage marketer, David Scott: "When we put the brand and product
name together, no one spotted the fact that the name contained the three
letters 'E, M, C.'"
HP and Sun argue that because they are computer companies, they have an
advantage over EMC. Sun set up a network storage division last year and put
one of its best executives, Janpieter Scheerder, in charge. Says he: "The
new storage players have to have competence in security, access control,
file systems--all good old systems stuff." For once, HP echoes its archrival
Sun. Says Scott: "Customers are increasingly taking a storage-centric view
of IT purchasing, but to minimize risk they want to buy from a total
enterprise systems company." EMC retorts that since it does not make
servers, it is free to equip its systems with better software and more
intelligence. Says Ruettgers of the computer makers: "None of those guys
have been building intelligent storage. They've wanted most of the
intelligence to continue residing in the server."
EMC executives talk boldly of becoming the "Cisco of storage"--the dominant
company that sets standards for everyone else. Morgan Stanley Dean Witter
analyst Gillian Munson doesn't pooh-pooh such talk: "It will surprise people
how many companies can do well in this business, and the computer companies
will do all right near term. But longer term could be more problematic.
That's why you sense a level of panic. Beyond a certain point, it was very
hard to compete with Cisco." The next couple of years could be crucial for
anyone who wants to contain EMC.
Vol. 140, No. 4
August 16, 1999 |
