Battle of the Network Stars
March 10, 2001 8:30 AM (ET)
<<Believe it or not, the most recent incarnation of the data storage industry is less than five years old.
In 1997, data storage giant EMC Corp. (EMC, Trade), a Magic 25 component, transformed the concept of enterprise storage networks into a reality.
These networks offer data management with superior reliability and retrieval capabilities. In addition, the systems are highly scalable for capacity additions, which could be accomplished without any network downtime.
The company's SANs, or storage area networks, are connected using Fibre Channel, a technology that acts as the medium between servers and storage.
The revolution has spawned a number of companies dedicated solely to supplying Fibre Channel connectivity solutions, including Brocade Communications (BRCD, Trade), Emulex (EMLX, Trade), and McDATA Corp. (MCDT, Trade) - formerly owned by EMC and publicly traded since last August.
The three companies collectively generated revenues of about $900 million in 2000, and currently sport market caps totaling over $8 billion, despite the recent tech bloodletting.
QLogic (QLGC, Trade) also recognized the area's growth potential when it spent a whopping $1.7 billion last May to acquire Ancor Communications for its Fibre Channel switch business.
Network Appliance (NTAP, Trade) entered the ring as merely a blip on the radar screen (less than $50 million in annual revenues) when it made its public debut in 1995. It now takes in $2 billion in annual revenues through sales of Network Attached Storage (NAS) products and access devices called "filers".
Whereas SAN technology primarily solves the physical configuration challenges of servers and storage networks, NAS architecture optimizes file sharing and access between users on a network.
Network Appliance's growth took off during the explosion of "dot-com" businesses onto the scene, as its Ethernet-based NAS solutions provided the quickest way to be up and running at a modest cost. In many cases, the company's products were enough to satisfy a small start-up's computing demands, without the need for a larger SAN infrastructure.For the most part, though, SAN and NAS systems have peacefully co-existed until recently. Even now, the two technologies are often interconnected and perform complementary functions.
This was what the storage landscape looked like when the economy was humming along at a fever pitch. There was enough business to go around for everyone.
Then the dot-com bubble burst. Companies that were spending on storage products from Network Appliance and others faster than they could print new stock certificates began to hit the brakes, or in some cases, were forced to close their doors entirely.
The broader economic slowdown has affected more established companies as well. Information technology (IT) budgets have been slashed and deferred across the board -- putting the squeeze on EMC's high-ticket SAN products.
That's not to say that growth in the network storage industry is dying. Far from it.
If there's one area where IT managers still must spend - and spend heavily - it's data storage.
Dataquest, a leading research firm, estimates the total market for data storage will reach $72 billion in 2004, at a compound annual growth rate (CAGR) of 24%. The market for NAS products is expected to be one of the fastest-growing segments, with estimates ranging as high as $15 billion by 2004 (75% CAGR), from a small base of just $2.1 billion in 2000.
It even appears that IT spending will shift further toward storage products going forward. "Approximately 45 cents out of every IT dollar is going to external storage today, going to an excess of 80 cents per every IT dollar," Greg Reyes, Brocade's President and CEO, stated in a recent interview.
The trouble is, most of the IT dollar shift is expected to come at the expense of servers and desktop PCs - two once-hot industries whose participants are looking for new avenues of growth.
That's where things get interesting.
Sun Microsystems (SUNW, Trade), Compaq (CPQ, Trade), Hewlett-Packard (HWP, Trade), Dell (DELL, Trade), Hitachi (HIT, Trade) and others want a piece of the action.
IBM (IBM, Trade) has probably made the strongest effort to penetrate the data storage market. Big Blue already has 3,000 Shark enterprise storage servers out in the marketplace, and offers a complete SAN solution, including software, along with a line of TotalStorage NAS products.
Even EMC, realizing the potential growth in the NAS subsector of its market, has introduced Chameleon, a product that will compete with Network Appliance's NetApp filer and should eat into the company's 60% share of the NAS segment.
Meanwhile, Network Appliance's high-end filers can now be scaled to hold 12 terabytes (or 12 trillion bytes) of data, which may satisfy the needs of some larger businesses without the use of EMC's SAN products.
In addition, the two technologies may ultimately be destined to merge as one. Dan Warmenhoven, CEO of Network Appliance, has stated, "Over time, the two will be less and less distinguishable. I think they will converge over the next year or two into a single market."
If that scenario emerges, look for Network Appliance to mount a worthy challenge.
But for now, who's still the heavyweight champ? The numbers don't lie.
The most recent market share research offered by Dataquest shows that EMC still holds the undisputed crown.
It leads hands-down in all segments of the market, including storage products for the UNIX, Microsoft (MSFT, Trade) Windows NT, and mainframe system environments.
In the area of networked information storage, in which Dataquest combines SAN and NAS product sales, EMC's market share leapt to over 30%, while Network Appliance's share fell slightly, to 13.7%.
In the overall storage market, EMC gained 170 basis points, to 26.1%, further distancing itself from Compaq, Hewlett-Packard and IBM.
EMC expects revenue growth of 25% to 35% for 2001 -- between $11 billion and $12 billion. This guidance angered the frothing momentum traders. But long-term holders should understand that it takes place off of a much larger sales base than its competitors.
Surely, the stock has taken a horrific beating in recent weeks, in concert with the Nasdaq bludgeoning. It's also more reasonably valued than it's been in years. EMC is certainly a stock worth holding and adding to when the Nasdaq finally begins to build a new base. (P.S. We are not there yet).
In short, the list of industry contenders is getting longer. They're hungry. And they want what EMC's got.
But, as the old boxing adage goes, rarely do you wrest the title belt away from the champion on your performance alone. The champ has to lose it.
And that doesn't appear to be happening anytime soon to EMC.>> |
