From the March 27, 2000 issue of Barron's:
Offerings in the Offing by Bill Alpert
Cyberspace Attic
A company's solution to data-storage woes
Like a flash flood, the Internet threatens to drown the world in data. All that stuff - MP3 files, videos, consumer-credit profiles either begins or ends up on a disc drive. By the lights of Forrester Research, the data stored online are growing more than 75% a year. Someone must pay for those disc drives, and a proposed stock offering by StorageNetworks aims to raise $270 million to finish building the first "global data storage network."
No offering price or date has been set for the initial public offering, which will be led by Goldman Sachs, Credit Suisse First Boston, Thomas Weisel Partners and Wit SoundView. Goldman venture funds, by the way, are StorageNetwork's largest existing shareholders, with 11.5 million of the firm's 79 million current shares.
"We're a storage telco model," said the company's 35-year-old chief executive, Peter W. Bell, in a February visit to Barron's before his firm went into its IPO quiet period. The Waltham, Massachusetts-based company prices its services like a utility. For a combination of monthly and usage-based fees, customers can draw upon virtually unlimited storage - in much the same way they draw electric power. Like cell-phone users, StorageNetworks' customers sign a service contract for a period that averages just over three years.
Customers then plug their computers into the company's fiberoptic networks and put data on StorageNetworks's disc drives and tape drive - just as if those drives were inside the customer's own computers. The company's scheme became plausible with the glut of fiberoptic lines and the emergence of computer-industry standards for storage area networks, of SANs. Investors have already embraced such SANs gear suppliers as Brocade Communications.
The company began operations in October 1998, founded by Bell and his chief technical officer, William D. Miller, both veterans of a computer integration firm, Andataco, Inc., specializing in data storage. Bell also spent 10 years at EMC, the dominant supplier of storage systems and a key supplier of StorageNetworks. Dell Computer recently became an investor in the company and is supplying StorageNetworks with gear tuned for Microsoft's Windows NT operating system.
Big businesses spend half their hardware budget on storage these days, and Bell figures he'll save his customers money through StorageNetworks' volume-purchasing power and concessions from suppliers who also own his company's stock, including Global Crossing and Dell. So far, his large customers include Merrill Lynch and Yahoo. Bell said that hesitant sales prospects worry about putting precious data offsite. But Bell hopes that over time such holdouts will be at a competitive disadvantage to his clients, like savers who keep cash stuffed in their mattresses.
Like most Internet plays, the proof's not yet in the pudding. StorageNetworks's sales are modest, and its losses large. In 1999, half of StorageNetworks' $6.3 million in revenues came from consulting services and about one-third from equipment sales. Managed storage services - the ongoing "utility" revenue source - were all of $720,000. On the year, StorageNetworks had a $23.6 million operating loss, or about $16 million exclusive of noncash items.
At any rate, the success of this proposed $270 million offering should be very good news for anyone with shares of StorageNetworks' big suppliers, like Veritas Software and EMC. |
