The Storage Bubble Is Soon to Burst
By MARK VEVERKA
Two years ago, star venture capitalist Vinod Khosla
publicly predicted that
an optics bubble was nigh. There were hundreds of
overvalued startups
looking to capitalize on the telecom mania, and the
Kleiner Perkins partner
saw that the market could never absorb them all. Recent
bankruptcy filings by
Yipes and Global Crossing, which were thought to be
exceedingly
well-funded companies, are testimony to the crash of that
once effervescent
market.
We caught up with Khosla recently in Arizona, where over
cereal and coffee,
he told us he planned to make a similar prognostication
about another bubbly
sector: storage startups. Sure enough, Khosla gave a
speech the next day at
technology guru George Gilder's Storewidth Conference in
southern
California that foretold a similar fate for storage. We
were unable to attend
the presentation, but Darren Thomas, chief executive of
one such startup,
Zambeel, was on hand.
"Khosla's intent was to show that there simply are too
many players in the
space. There are a hundred and something storage
companies," Thomas
notes. "Clearly, there is a storage bubble, and it's a
bubble because the space
is hot."
The former head of Compaq Computer's highly regarded
storage business,
Thomas heads a company funded, in part, by Khosla. Zambeel
has raised a
hefty $65 million to date, much of it thanks to Thomas,
who was aggressively
recruited by Kleiner Perkins to run the firm. Thomas was
attracted to the job
because he anticipates that new storage hardware
architecture is going to
emerge sooner or later. Not surprisingly, he thinks
Zambeel, which has
developed technology for storage area networks, has a good
shot at making
that happen. Storage area networks give computers access
to large numbers
of data-storage systems and are deemed more efficient than
traditional
storage hardware.
In bringing attention to the bubble, Khosla also went on
to explain why
Zambeel and his other storage plays, amid hundreds of
competitors, should
survive the imminent shakeout. Of course, the venture
investor probably
would settle for a "liquidity event," be it a merger or an
initial public offering,
that at the very least would pay off investors, including
himself.
As it turns out, Khosla's proclamation may have been more
of a declaration
than an earthmoving prognostication, protests Gary Bloom,
chief executive of
storage software maker Veritas Software.
"I predicted it during the last part of last year. We did
our last venture
investment during the latter half of last year," Bloom
says. "Now we've seen
all of the valuations fall. I just think he's a little
late, because a lot of the air has
already been let out."
Bloom, who oversaw venture investments at Oracle when he
was the No. 3
executive there, said Veritas took a $16 million write-off
in the third quarter of
its last fiscal year for investment losses. He says the
company's leavened
venture portfolio is valued at about $20 million, a drop
in the ocean for a
company that boasts $1.9 billion in cash.
Says Bloom: "The real challenge for the start-ups is
delivering the technology
that they are all talking about."
The Truth Is Out There
Last week, Veritas announced it had beaten the Street's
modified
expectations for the second quarter, but shares plunged
six bucks, to 31.50,
after CEO Bloom gave analysts lower estimates for the
second half of the
year.
Enterprise software of many flavors, not just storage, is
going though a
transformation. Gone are the days of the mega-deal. Big
deal flows have
slowed, and customers are buying less in anticipation of
future needs, Bloom
says. Software makers must do a larger number of smaller
deals to make their
numbers.
Because most larger software sales are closed toward the
end of a quarter,
Veritas was surprised when a number of big customers cut
their orders by
more than a half when it came time to buy. Deals
originally valued at $4
million were slashed to $750,000, and that didn't bode
well for the rest of the
year.
"These budgets were created during very difficult windows
of economic data,"
Bloom says. "It's a more buy-as-you-go approach that
customers are taking."
The good news for Veritas shareholders is that the
company's small deal flow
has been steady, and market share in recovery and back-up
storage software
has risen since Sept. 11. Look for Veritas to make news
next week during its
annual customer hoedown in Dallas, where the software
maker plans to unveil
a new line of products for IBM's Unix server platforms. As
an "agnostic," or
neutral, manufacturer, Veritas has provided software to
most of the major
storage hardware players, including industry leader EMC,
Compaq, Hitachi
Data Systems, and Hewlett-Packard. Until now, IBM has been
a missing link
in its product offerings.
As is often the case in cutthroat technology marketing
wars, EMC apparently
isn't thrilled with Veritas's new relationship with
nemesis IBM. Thus, the folks
from Hopkinton, Mass., have planned a counter-marketing
announcement in
Manhattan in attempt to steal some of Veritas' thunder.
As hardware becomes less relevant and more commoditized,
Bloom says
EMC will tout its shift into the higher margin
storage-software business. "In a
funny way, we like that they are trying to rain on our
parade," Bloom says. "It
is a very public acknowledgment that all of the value in
the storage market is
moving away from the hardware to the software."
To that point, EMC was subjected to some tough love last
week from
brokerage analyst Ashok Kumar of U.S. Bancorp Piper
Jaffray. "We are not
sure who the new king [of storage] is going to be, but it
probably won't be
EMC. They are today's re-enactment of the trains-to-planes
evolution that
happened in transportation 70 years ago," Kumar stated in
a note. "The value
they have in their systems will be replaced by more
efficient, more valuable
functions running in network boxes. EMC is still an
extremely important and
influential company, but their window to shift their
business emphasis is
closing," he wrote.
Wasn't it just yesterday that world-beating EMC couldn't
be stopped? |
