Trouble in store
With competition increasing, rivals merging and market demand dropping, EMC is crossing into a dubious new era as the king of digital storage
By Ross Kerber,
The Boston Globe Staff
5/27/2002
A furious round of pairing up is underway in the data storage industry as EMC Corp. and its competitors try to survive a sales slowdown.
The sector has been dominated for years by Hopkinton-based EMC, which builds and sells big cabinets of disk drives that keep track of computerized information. But since last year, rivals like IBM Corp. and Fujitsu have gained market share and chipped away at EMC's dominance by bundling storage products and server computers together - and using the combination to undercut EMC.
At the same time, technology advances keep lowering the cost of storage. So even as airlines, insurance companies, and other customers store more data, they're spending less on new storage capacity. SoundView Technology Group, an investment banking firm, estimates prices for a megabyte of storage have fallen 45 percent since last year, compared to 30 percent annual declines in the late 1990s.
Together, these trends have squeezed profit margins and forced storage companies to take a hard look at their options. Hewlett-Packard's purchase of Compaq gives it control of a big competitor for mid-market equipment. Meanwhile, Japan's Hitachi Ltd. has struck deals with IBM and Sun Microsystems Inc. to collaborate on developing and selling high-end storage gear.
The pressure is hardest on EMC, the biggest standalone storage company, which saw its revenue decline 20 percent to $7.1 billion and posted a $507.7 million loss last year. In response, the company laid off more than 20 percent of its work force and struck its own partnership with Dell Computer Corp. last fall. Dell will likely begin manufacturing some of EMC's mid-range Clariion devices and marketing the equipment with its own salespeople.
The arrangement worries some of EMC's existing sales partners. ''No one wants the products they're invested in to be overdistributed,'' said Ed Walsh, a vice president of reseller Computer Network Technologies Inc. in Minneapolis.
In the long run, Walsh and others say sales of a new wave of storage software should rejuvenate the industry by helping companies better manage data on hardware from different vendors. But until that happens, they expect more consolidation as differences among storage equipment become less pronounced.
''There will be fewer players and fewer choices and severe price competition,'' said Scott Robinson, chief technology officer of another Minnesota-based storage reseller, Datalink Corp. The situation, he said, ''is only good for the customers.''
It wasn't supposed to be like this. Not too long ago, many storage executives predicted a deluge of new computerized information would make the sector virtually immune to a downturn. Instead, total worldwide spending on external data storage hardware fell to $18.7 billion in 2001 from $22.8 billion in 2000, according to the research firm International Data Corp. in Framingham.
Analysts now don't expect spending on storage to return to 2000 levels for at least two more years. Spending on the categories of storage systems that EMC sells is expected to track with that trend.
One illustration of the weak demand came last week in California when a components maker, JNI Corp., fired its chief executive for failing to tell his accountants he had given a manufacturer the option to return some circuit cards used to connect storage devices and server computers. When the manufacturer sought to return the products earlier this year, JNI was caught by surprise and forced to reduce its 2001 revenue by $501,000.
Richard Stice, a Standard & Poor's analyst who follows storage, said a return of that size would have been unusual even a year ago. Such provisions ''were usually put in [contracts] as the last resort,'' he said, adding: ''Well, the last resort has come due now.''
It's hard to pinpoint how much the sales slump has hurt EMC's competitors, since most are part of larger technology companies that don't break out their sales and earnings for data storage.
Yet not every storage company is suffering equally. IDC estimates storage systems revenue rose at IBM, Hitachi, and Fujitsu last year compared with 2000, while EMC, Compaq, and Sun all posted storage revenue declines.
IDC storage analyst John McArthur says most companies that gained sales did so because they are able to sell many servers and storage devices together as complete packages, much as they did before EMC took away IBM sales in the mid-1990s with superior technology.
''This is a massive trend and one of the most difficult things for EMC to wrestle with,'' McArthur said. ''A reason why IBM's global services division has been so successful, and one reason HP-Compaq makes sense, is that both get you a better meld of servers and storage.''
One measure is the ''attachment rate,'' or how often servers and storage are sold together. At research firm Baird & Co. in Milwaukee, which recently surveyed hundreds of purchasing managers, about 35 percent of those who used servers from Hewlett-Packard also used its storage devices, while almost all of Compaq users did the same.
As Hewlett-Packard assimilates Compaq's big storage business, the bundling strategy represents a big opportunity for the combined company, said Baird analyst Will Slaughter.
Mark Lewis, a former Compaq storage executive who now will help lead Hewlett-Packard's networked storage unit, agrees that many customers don't want to buy servers and storage from different companies.
''Customers in the finance sector especially are saying, `Don't bother me with the server-storage stuff,''' Lewis said.
In Burlington, Mark Canepa, Sun's top storage executive, admits the performance of some previous storage hardware fell short, but says a new deal for Sun to resell Hitachi equipment will close the gap.
''What's happening is that EMC's value proposition of saying `we've got a better product' went away,'' Canepa said. ''So now all they can do is compete on price.''
EMC's top executives declined to be interviewed for this story. At their annual meeting earlier this month, however, executive chairman Michael Ruettgers and chief executive officer Joseph Tucci acknowledged the price competition that has caused three straight quarterly losses and sent EMC's stock plunging from over $100 a share into the single digits. In response, they vowed to continue EMC's heavy software development spending. They have also brought in consultants to review EMC's sales structure to accommodate its new relationship with Dell.
Others at EMC say they're not worried about competing with server vendors.
''Everywhere you turn, the companies that have been narrow and deep are the ones that lead their industries with innovation,'' said Don Swatik, EMC's vice president for alliances.
Looking forward, EMC says it plans to continue acquiring smaller software companies like Belgium's FilePool, which it bought last year for an undisclosed sum. With about $5 billion in cash and little debt, EMC still has the resources to pull off these deals.
Already, some have seen changes on EMC's part as Tucci tries to loosen up the company's aggressive sales culture to adapt to price competition. Partners like Datalink's Robinson say EMC is allowing resellers more independence to close deals. In the past, Robinson said, ''if a deal got big enough, they would take it direct,'' meaning EMC would reassign the deal to one of its own sales people.
All of these steps could help sway the decisions of the customers who will ultimately decide the fate of the storage providers. One is Gary Foster, chief technology officer of Omgeo LLC, a trading software provider in Boston. Omgeo's network includes Sun servers, but Foster bought 100 terabytes worth of EMC's Symmetrix equipment last year and expects to need more storage capacity in 2003. Perhaps he'll buy it from Hitachi, Sun's new partner?
''They've certainly become the latest and greatest,'' Foster said. But given the extra training and other costs associated with a switch, he said, ''you would have to have a quantum leap'' in performance to justify a switch from EMC. He doesn't expect to change brands.
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Ross Kerber can be reached at kerber@globe.com.
This story ran on page D1 of the Boston Globe on 5/27/2002.
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