semiOT:Data-Storage Vendors Have High Demand,But Fierce Competition Is Sapping Strength
By JERRY GUIDERA
Staff Reporter of THE WALL STREET JOURNAL
A quiet pricing war is buffeting the storage sector, taking the shine off this once-golden industry.
For years, providers of data-storage systems enjoyed fat profit margins and seemingly insatiable demand, as businesses had to pay top dollar to warehouse the reams of data they gathered daily. Even as the rest of the technology sector suffered a slowdown, storage companies seemed immune. Last year, industry leader EMC Corp. racked up 32% revenue growth and even faster profit growth.
But the reality of the economic slowdown is beginning to take its toll, just as competition among storage vendors has ratcheted up. The result: Customers say they are back in the driver's seat and are paying lower prices than expected.
"Pricing is getting hammered," said Dane Lewis, analyst at Robertson Stephens & Co., saying he has seen "more competition for fewer deals" in recent months.
The average price for a single terabyte of storage capacity -- enough to hold 20,000 music CDs -- has dropped 24% in the last three months to $100,000, according to Enterprise Storage Group, a Milford, Mass., research firm. That compares with a drop of just 12% in the prior quarter. Overall, prices for raw storage capacity have been halved in the last 15 months, but software and other attachments often add to the final cost of storage capacity. Tony Prigmore, an analyst with the firm, attributes the accelerated decline to "more diligence and negotiating" by customers.
Software company GS XXI Inc. took advantage of the industry climate when it recently sought bids for a 1.5-terabyte storage system. Mike Wilf, technology manager for the closely held Jericho, N.Y., company, says he had EMC and Hewlett-Packard Co. sales representatives trading ever-lower price quotes for several weeks. He eventually paid $630,000 for H-P's new machine, at a price 30% below the original offers. "We got a big discount on this one," he says.
Although storage demand is predicted to keep growing at a rapid clip, concerns about the tougher environment have taken a toll on the sector's stock performance. Last week alone, EMC's stock tumbled 19% to finish at $29.40 at 4 p.m. Friday in New York Stock Exchange composite trading. The shares were trading at nearly $80 apiece as recently as late January. Network Appliance Inc., Sunnyvale, Calif., a company that jumped eagerly into the market for mid-range storage boxes that could be attached to networks, has fallen from a high of $152.75 Oct. 20 to $16.81 at 4 p.m. Friday in Nasdaq Stock Market trading.
Suppliers to the storage industry also have been hammered. Emulex Corp., Costa Mesa, Calif., supplies major vendors such as EMC with computer chips, switches and other items. At 4 p.m. Friday in Nasdaq Stock Market trading, Emulex shares were at $18.81, down from $109.75 in January.
Over the past decade, EMC, Hopkinton, Mass., rose to the top of this previously ignored segment of the computer industry by offering high-performance products through its top-drawer sales force. But its soaring profit margins attracted renewed competition from giants such as H-P and International Business Machines Corp. In addition, upstart players, such as Network Appliance, and a host of eager start-ups pioneered new ways to store some data more efficiently on networks, challenging EMC's more traditional technology.
IBM has doubled the size of its storage sales force over the past two years in an unabashed effort to go head-to-head against EMC. "Storage is probably the most competitive sector of the [technology] industry," said Linda Sanford, IBM's new head of storage, in a recent conference call with analysts. Ms. Sanford acknowledged that IBM failed to make much headway last year against the market leader, but said, "even when we lose, customers get a better deal out of EMC."
Hewlett-Packard also is aiming to boost its storage sales force to nearly 1,000 in coming months. H-P customers have enjoyed price drops of "well over 50%" during the past 12 months, said Marc Sullivan, head of North American storage sales for the Palo Alto, Calif., company. "Customers are reaping the benefit of price sanity right now," Mr. Sullivan added.
To be sure, EMC remains the kingpin. Despite similar competitive threats last year, the storage giant increased its share of the mainstream storage market to 26.1% from 24.4% a year earlier, according to International Data Corp. EMC officials, citing a "quiet period" leading to the first quarter's March 31 end, declined to comment about the level of competition in the sector. But EMC spokesman Mark Fredrickson says the company has fought off assaults from rivals in the past.
Last month, EMC bought itself some breathing room by lowering the range of its expected revenue growth for 2001 to between 25% and 35% from an earlier percentage growth-rate target in the mid-30s. It also warned that an economic slowdown in the U.S. could keep EMC from reaching its $12 billion sales goal for the year.
Despite uncertainty in the U.S. economy, big businesses still plan to spend heavily on information technology, according to a survey by the Research Board, a New York organization of information technology officers from blue-chip companies. But analysts say companies are taking greater care to vet major technology investments, which could slow the growth in demand for new storage capacity.
At Merrill Lynch & Co., for example, storage systems last year accounted for about one-third of the $3.4 billion technology budget. Top managers have mandated that the overall budget remain flat this year. So spending on storage isn't likely to climb much, despite an ever-growing need for capacity, according to James Berlino, a Merrill data-storage analyst who also consults on in-house technology decisions. "Everything now has to be justified," he said.
Glenn Akiyama, a systems administrator at AT&T Broadband in Denver, Colo., just helped his boss sift through four competing bids -- including offers from EMC, IBM and Sun Microsystems Inc. -- to settle on a six-terabyte, $1.8 million storage unit from Hewlett-Packard. "That was really cheap," says Mr. Akiyama. |
