Swimming with storage sharks
Despite a weak market, competition takes aim at EMC
By Rex Crum, CBS.MarketWatch.com
Last Update: 12:01 AM ET Oct. 16, 2002
SAN FRANCISCO (CBS.MW) -- Throughout the 1990s, EMC's pinpoint focus on data-storage technology helped it cash in on a burgeoning market and build its revenue to nearly $9 billion.
But a massive slowdown in information technology spending has taken a 60 percent bite out of EMC's revenue, and the company expects to post its fifth straight losing quarter when it announces results on Oct. 17. Its stock is down 95 percent from its high of two years ago.
When the company laid off 7 percent of its 17,000 employees on Oct. 3, its top executive succinctly summed up the cause: "The IT spending environment continues to be brutal," CEO Joe Tucci said.
But that's only half the story.
As the market shrinks, EMC faces aggressive new challenges from the likes of Hewlett-Packard (HPQ: news, chart, profile), IBM (IBM: news, chart, profile), Hitachi (HIT: news, chart, profile), Sun Microsystems (SUNW: news, chart, profile) and others that want a share of the estimated $58 billion market for hardware and software used to store computer data on networks.
Even Cisco Systems (CSCO: news, chart, profile), which rules the networking gear market, wants in on the action. Earlier this month, Cisco CEO John Chambers said that "the odds are 50-50" that his company will become No. 1 or No. 2 in sales for storage networking equipment. He did not give a timetable, but the company recently spent about $2.5 billion for Andiamo Systems in order to build up its fibre-channel storage technology, an area dominated by Brocade (BRCD: news, chart, profile). Two years ago Cisco bought NewSpeed for its technology that connects low-end servers with a company's main storage center.
It's not difficult to see why the storage market is so attractive. "Storage is a big world, and the demand is there," said Roger Cox, chief analyst with Gartner. "The (equipment) vendors are all about making things bigger and faster than before."
John McArthur, storage analyst with IDC, said the storage market breaks down into three parts. In 2001, hardware accounted for about 54 percent of the overall market, services made up 36 percent, and storage-management software took up the remaining 10 percent.
Within the hardware segment, disk storage systems -- the boxes that hold the disks that store data -- represent a significant part of the market and are the battleground for some of the most fierce positioning among the biggest names in technology.
According to IDC, in the second quarter of 2002, H-P took in $1.2 billion in disk-storage system revenue, while IBM (IBM: news, chart, profile) came in second with $767 million. EMC was third with $643 million. H-P took the lead this year with its acquisition of Compaq.
In a smaller segment of that market, H-P's merger with Compaq gave the company enough of a push to overtake EMC in sales of external-only disk-storage systems -- storage equipment that is not shipped inside of a server -- an area where EMC had long led the market.
"EMC still dominates software, but since H-P bought Compaq, it can sell more hardware and services," McArthur said. (McArthur declined to give out market-share figures for other segments of the software market.)
Buying market share
One sign of growing competition is the recent wave of acquisitions. EMC said on Oct. 25 it said it would buy privately held Prisa Networks, a maker of storage-management software, for $20 million in cash. Mark Lewis, EMC's chief technology officer and executive vice president for new ventures, said Prisa would boost EMC's offerings in the entry-level market for "SAN" systems.
SAN, or storage area network, describes a system that manages huge blocks of data. EMC has long led in this area, but competitors have entered with lower-cost options and EMC is now pursuing its own affordable systems.
The other common storage platform is NAS, or network attached storage, which generally stores and manage individual files for network users. EMC has challenged leaders like Network Appliance in this space over the past two years.
"Our focus remains taking market share and moving more of the market toward networked storage," Lewis said. "From our standpoint, we're building products that serve (customers) in a flexible way."
Sun Micro (SUNW: news, chart, profile) showed that EMC isn't the only company that can scoop up smaller players in order to fill out its storage strategy. Less than a week before EMC's deal for Prisa became public, Sun acquired another privately held storage-technology company, Pirus Networks, for an undisclosed amount of stock.
At Sun, Mark Canepa, executive vice president for storage products, said Pirus makes a switch that reduces the complexity and cost of its customers' data-storage systems.
"We're at a very critical point in data storage," Canepa said "We're trying to bring the complicated technology of the data center down to the mid-tier level and make it easier for our customers to manage."
No one doubts the importance and need for storage, especially because the amount of data to be stored grows every year. But that need is tempered by lighter IT budgets.
EMC vs. Network Appliance
That was made clear on Oct. 3 when Merrill Lynch analyst John Roy said the fundamentals of the storage sector were not improving as expected. He lowered his ratings and 2003 revenue estimates on storage-software makers Brocade Communications Systems (BRCD: news, chart, profile) and Emulex (ELX: news, chart, profile), and hardware maker Network Appliance (NTAP: news, chart, profile).
Network Appliance had just received high marks from others with its Oct. 1 release of hardware that supports both SAN and NAS technologies.
With Network Appliance's first major foray into the SAN market after years of being one of the leading NAS companies, analysts say the company could take a piece of EMC's SAN market share.
"Their offering is stronger than expected and I think they're the best-positioned enterprise storage player," said Don Young, storage analyst with UBS Warburg.
Demand may be going up, but again, that doesn't necessarily translate into increased sales. EMC expects to see its revenue drop for a third straight year, and Network Appliance saw its 2002 revenue fall to $798 million from $1 billion in 2001.
"The reality is there's not a lot of enterprise buying going on," said Brent Bracelin of Pacific Crest Securities. "We're seeing a tough September, a tough October, and a tough 2003."
Languishing share prices
Will stock prices of EMC and other storage players turn around anytime soon?
"I don't see what would drive that right now," said John Webster, analyst with Data Mobility. "Storage is such a diverse marketplace, and we've known that there's been a demand for additional capacity that continues to multiply for years, but that hasn't necessarily equated to boom times for people in the storage industry."
Nevertheless, the people running the storage shows remain convinced of the stability of their industry.
"In aggregate, I would assert that the storage market overall is growing and the share gains are going to companies that have the best value customers, and can integrate total solutions," said Bob Samson, vice president of sales and storage at IBM. "It's smaller growth than before, but even if the market is declining, we are gaining market share in it."
Steve Gomo, CFO of Network Appliance, said improving technology and increased use of large files offers new opportunities.
"If you go back 15 years and see how customers have gone from storing simple text documents to now where we're storing video," Gomo said, "you'll see that the demand for storage is driving productivity."
"It's obvious to us that there's going to be more demand for unified storage systems," he said. "Over the long-term, network storage is the place to be." |
