Data-storage firms' shift to software alters industry
boston.com
By Ross Kerber, Globe Staff, 3/25/2002
espite investing hundreds of million of dollars in infrastructure, it's clear that many data-storage services companies have flopped. Now they're turning to software as their salvation, in a development that could roil the multibillion-dollar data-storage market dominated by EMC Corp.
A year ago, the storage services industry still looked promising. A raft of service start-ups had set out to build communication networks that would transmit and store companies' data at outside data centers. The idea was that the service companies could manage the data more cheaply than the customers themselves, running their own software on storage hardware built by such giants as Hopkinton-based EMC, along with IBM Corp. and Compaq Computer Corp.
But in most case, the model didn't work out. The largest services company, StorageNetworks Inc. of Waltham earlier this year took a $114 million charge to write off its heavy investments in storage and network equipment. Now StorageNetworks is trying to transform itself largely into a software company, selling businesses applications that would enable customers to manage their own data storage. Competitors, such as WorldStor of Fairfax, Va., are taking a similar tack.
In Colorado, the chief financial officer of CreekPath Systems Inc., Paul Cardosi, says the company abandoned the services business model when it realized it couldn't build infrastructure quickly enough for customers. Now it, too, is selling software it developed to run banks of storage devices - but letting customers use the software to manage the data themselves. ''Everybody's doing it,'' he said.
Industry analysts say, in hindsight, the companies known as SSPs, for ''storage-service providers,'' faced two main difficulties: The expense of building storage networks and data centers dwarfed the revenue they took in. And corporate customers were reluctant to let an outsider control their most sensitive data.
''The only customers of any number turned out to be dot-coms,'' said Doug Chandler, analyst at International Data Corp., the Framingham research firm.
Paul Gillin, a vice president at TechTarget in Needham, another research firm, said the collapse of some networking ventures also reduced the value of the infrastructure the service companies had created by increasing the supply of assets for lease. ''The companies never really overcame that,'' he said.
At the same time, the market for storage services has drawn in larger providers like IBM and telecommunications companies like BellSouth. AT&T vice president Bernie McElroy said many of the original storage-services companies lacked the customers to support their heavy infrastructure spending. ''Most companies went in with a `build it and they will come' model, which didn't work in many cases,'' he said.
StorageNetworks chief executive Peter Bell says the strategy was right at the time and says the company's growth had laid the foundation for new versions of its software suite, known as ''StorOS.'' Sales of that software, and partnerships with BellSouth and EDS, will help the company become profitable later this year, Bell hopes.
At the end of December, StorageNetworks still had $289 million in cash from several stock offerings, and about 400 employees, down from a peak of 660. Its revenue rose to $124 million in 2001 from $48 million in 2000, at a time when most other technology companies were shrinking.
Announcing these figures on Jan. 31, StorageNetworks also reported a writeoff of $114 million for storage equipment it had built but could no longer lease out. Bell said the charge was necessary to transform the company to focus on software sales. ''The box era in storage is over,'' he said.
In Southborough, another local player, closely held Storability Inc., now has 105 employees, down from 200 a year ago. Executives say they weren't hit as hard by the downdraft because they were helping other companies manage storage, rather than operating their equipment. But now it, too, is hawking software it had developed for the original business model.
The shift was inevitable, said Storability's new chief executive, Tim Leisman. ''We had way too many customers say, `We love the technology, sell it to us, we want to do it ourselves,''' he said.
Some wonder whether all of the extra software brands could pose a threat to EMC and other traditional data-storage hardware companies that have also been turning to high-margin software sales themselves and marketing hardware-software packages to their customers.
In a March 19 report, for instance, Legg Mason analysts wrote that ''StorageNetworks possesses a key opportunity to step in as a trusted advisor to customers that view EMC, IBM and Veritas as having hidden interests,'' meaning that their software might be seen to favor certain types of hardware.
EMC spokesman Greg Eden dismisses the idea. EMC's software division, he said, ''started out with software in mind. In contrast, a lot of these service-providers are now moving to software because their original model wasn't working. ... It makes it more difficult for them to offer a cohesive product.''
Ross Kerber can be reached by e-mail at kerber@globe.com. |
