As Need for Data Storage Grows, A Dull Industry Gets an Upgrade
With Stuff Easier to Hoard, Sector Sees Wave of Deals And Attracts Unlikely Fans Keeping Tabs on Toll Collectors
By CHARLES FORELLE
Staff Reporter of THE WALL STREET JOURNAL
October 14, 2005; Page A1
Tollbooth attendants on Mexico's federal highways handle nearly $2 billion in cash a year. Luis Gómez is watching them.
Mr. Gómez, the toll authority's technology chief, has outfitted 800 tollbooths with a video system that records clerks who might skim from the till or take a bribe to let an 18-wheeler pass at automobile rates. Only partly deployed, the system has already deterred enough "voluntary and involuntary mistakes" to raise toll revenue by $200,000, Mr. Gómez says.
The system has also been a boon for EMC Corp., of Hopkinton, Mass. That's because Mr. Gómez's tollbooth videos are stored digitally, recorded onto the spinning hard drives of 27 machines housed in refrigerator-sized cabinets. The agency paid EMC $4.5 million for the gear, related software, and services to set it all up.
Like Mr. Gómez, computer users all over the world are becoming digital pack rats on a colossal new scale, overflowing their files with data and saving them for a long time. That's creating a bonanza for the $23 billion data-storage hardware business, long a dull backwater of the computer industry.
Corporate data-storage capacity is expanding by 60% a year, analysts broadly agree. The combined revenues of the two largest storage-specialty companies, EMC and Network Appliance Inc., of Sunnyvale, Calif., grew 26% in their latest four quarters. By comparison, the two biggest broad line computer companies, International Business Machines Corp. and Hewlett-Packard Co., had combined revenue gains of 6%.
Though still a drop in the bucket in the sprawling information technology world, storage sales were up 9.9% in the second quarter to $5.6 billion, according to market researcher IDC. That outpaced the 5.6% growth in sales of "server" computers, the office workhorses that crunch numbers and run programs such as payroll systems or Web sites. The boom is driving a wave of storage-company deals even as equipment prices fall fast.
"There is no more safe bet in the industry than you will need more storage next year," says Jonathan Schwartz, president of Sun Microsystems Inc. In August, Sun spent $4.1 billion to buy Louisville, Colo.-based Storage Technology Corp., which makes giant machines to archive business data on magnetic storage tapes.
In a digital age, the global appetite for archived information is growing: from high-tech body scans in hospitals to giant databases at retail chains, and even endless camera angles from a single ballgame. Once it's stored, the information can be kept indefinitely in case it has future value.
Fueling the storage boom are new regulatory requirements, the proliferation of capacity-hogging video records, and high-speed Internet lines that let an emailer attach a dozen pictures of his or her new baby. "Storage is just at the beginning of an explosion of things to soak it up," says Chris Stakutis, an IBM engineer and co-author of the book "Inescapable Data."
To understand the storage boom, it helps to know that in digital terms, a picture is worth far more than a thousand words. In fact, one good-quality digital photo occupies the storage space of about 400,000 words. A 90-minute movie chews up about 1,500 times that amount. If it were holding books instead of videos, Mr. Gómez's 350-terabyte system (that's roughly 350,000 gigabytes or 350 trillion bytes) could hold 40 million copies of Proust's seven-volume "In Search of Lost Time" -- with enough space left over for 10 million editions of Tolstoy's "War and Peace."
The spread of speedy Web lines has boosted the size of emails, which often come megasized with attached images, videos and spreadsheets. At the same time, the Sarbanes-Oxley Act and other government edicts have forced businesses to retain more emails and electronic documents. Scientific advances in genetics, meteorology, geology and other fields that like to send and store vast databases are also stoking demand.
The depositories for all this digital data are industrial-strength machines made by the likes of EMC, H-P, IBM and Hitachi Ltd. Sales of these devices fell further in the 2001-2002 tech slump than other varieties of computer gear, as dot-com customers with big storage needs flamed out. But lately, the trend has reversed.
Cisco Systems Inc., the computer networking giant, last year spent $750 million to complete its purchase of Andiamo Systems Inc., a maker of specialized switches that route traffic on storage networks. Oracle Corp. founder Larry Ellison's personal investment fund has poured $150 million into Pillar Data Systems, a California storage start-up.
Many companies have begun storing data not merely as a matter of recordkeeping, but to exploit it for competitive advantage. First American Corp., a big title insurer, has been building a gigantic database on residential home sales. Every time a house is bought or sold, or a mortgage refinanced, the Santa Ana, Calif., company scans the available records of the event and adds them to its database. Then it sells the material to real-estate agents, analysts and appraisers who need comparative data.
The company is adding more storage-hungry stuff: aerial maps of neighborhoods and digital photos of houses. Computer-accessible imagery also means its own appraisers make fewer trips to the field.
Six Different Cameras
The San Francisco Giants used to store films of games on videotapes and DVDs. But in the 2002 season, Chief Information Officer Bill Schlough moved the video onto a hard-disk storage system that he purchased from H-P. The team now stores video from six different cameras at each home game, plus the broadcast feed from away games. A lineup of TiVos records contests of coming opponents.
A player can quickly pull together the video he wants -- say, his last five at-bats against certain pitchers -- from computers in the clubhouse. Jason Schmidt, a veteran right-hander, studies video of opposing batters. Slugger Barry Bonds whips through clips of home-plate umpires, trying to improve his eye by divining their strike zones. Laptop-toting staffers packing more than a terabyte of storage can indulge player requests on the road.
"They want more camera angles. They want to scout more advance games," says Mr. Schlough, who has doubled the system's storage capacity over the past two years. "They want to save every clip we've ever done. Nobody wants to throw anything away," Mr. Schlough says.
Scientists, meanwhile increasingly rely on simulations that require collecting vast amounts of numbers. One example is a database at Colorado State University, where researcher Patrick Burns is studying how mad-cow disease might spread among the state's two million cattle. To make his predictions, he first enumerated all the places in the state a cow might be. He found 19,031 such locales. He also is trying to discern all the "events" -- including slaughters, births, deaths, moves from barn to feedlot -- that might place one cow in close proximity to another. He's up to 7.7 million events.
The virtual barn for all the cow data is a network of data-storage machines made by Hitachi with a capacity of 2.5 terabytes. The U.S. Department of Agriculture has called for a tracking system like Mr. Burns's to be in place for every cow in the country by 2009.
Oil and gas companies draw reams of data from seismic sensors that probe conditions miles below the earth's surface. The data are used to construct models of oil fields, so engineers can decide which are promising, and how they can be drilled with the fewest number of holes.
Anadarko Petroleum Corp. has about 200 terabytes of storage from Network Appliance, says Mario Coll, chief information officer. Mr. Coll says that figure is growing 40% to 50% a year. Ten years ago, survey equipment gathered data along a line across an oil field, penetrating 15,000 feet. Modern equipment goes down 30,000 feet. A survey can now consume perhaps 50 times as much disk space as it did a decade ago, Mr. Coll estimates. The improved imaging technology offered a clearer view of oil and gas reservoirs deep below the Gulf of Mexico. The payoff: The company recently located four large deposits that might have otherwise gone undetected.
Storage faces many of the same woes as computer equipment does generally -- especially falling prices as hardware becomes a commodity. The basic technology of most large-scale storage machines is the same -- large numbers of disk drives banded together with software and circuitry. Vendors say they see price declines for their equipment of about 35% a year.
But so far storage vendors have stayed ahead of the curve by adding special features. At the Mexican highway authority, Mr. Gómez needs to be able to introduce videos as evidence, meaning he has to overcome any doubts of tampering. So EMC sold him machines that can calculate a digital fingerprint for each snippet of video that's stored. If the video is later modified, it will display a different fingerprint, making it easy to both detect tampering and authenticate genuine videos in court.
Though prices are declining in the industry, profit has remained healthy. EMC expects 2005 net income to hit about $1.2 billion, for a roughly 38% increase over 2004. The company estimates it will post revenue of about $9.6 billion, the highest in its history. Network Appliance reported profit of $226 million in the fiscal year ended April 30, up 49%, on revenue of $1.6 billion. EMC shares have more than tripled from their 2002 low. Network Appliance shares, which gained more than 50% in 2004, have been roughly flat over the past 12 months.
Another Leap
Industry executives say a coming technology called perpendicular recording promises another leap in drive capacity -- and likely another steep drop in price per gigabyte. A sudden slip in already-declining disk prices could crimp the storage makers' growth, since customers would need to buy fewer machines to store the same amount of information.
In perpendicular recording, the magnetic bits of a digital file are arranged standing up on the disk surface, like soldiers in a marching formation. In traditional hard disks, the bits are lying down, a configuration that eats up more surface area. Toshiba Corp. says its new perpendicular disk, which began shipping in August, squeezes 133 billion bits into each square inch of disk surface.
But those disks, too, are likely to fill up fast. As broadcasting moves to high-definition television, for example, more storage expansion appears inevitable. Fox Broadcasting Co. says a typical National Football League game in high-definition eats up 115 gigabytes of storage, more than three times what conventional TV takes.
And each time digital camera makers upgrade to higher-resolution pictures, they add millions of pixels -- or dots of color -- to each picture. "More pixels means more storage," says Joe Tucci, EMC's chief executive.
Write to Charles Forelle at charles.forelle@wsj.com1
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