Change is blowin' in the wind: the storage business is finally becoming the business of storage.

As the year 2003 draws to a close, a careful look at a few key indicators signaling what likely lies ahead for the storage industry is very revealing. The next phase in the evolution of the data storage industry is taking shape. This phase will be marked by a new set of rules and a value system far different from that of the past. No longer can we count on exuberant and excessive spending on storage or the pure fascination with information technology to drive the industry to record revenue levels.

Since the middle of 2000 when the global economic slump began, old beliefs about storage revenue growth have been shattered in the face of economic reality. Investors and vendors alike now see that the value in the storage industry is derived from the data itself and no longer from the containers that house the ones and zeroes that have become the genetic code of the Information Age. New technology funding and investments have plummeted since 2000, and now funds go only to ideas that solve real problems. Needs are replacing wants as the new driving economic force in the technology markets. As a result, the present-day disk industry is roughly two-thirds the annual revenue it was in 2000, with revenue growth still in the future. Overall storage revenues are growing less than 10% annually (and falling in some cases) in a business where the demand is increasing at 50-70% annually--a strange economic model indeed. Is an economic model like this sustainable?

Skewed Storage Markets

The storage industry demonstrates a consistent and heavily skewed economic model where less than ten vendors normally generate more than 75% of the revenue in almost any storage segment. The numerous remaining vendors simply slug it out for the remaining few market share points. This skew is true of markets such as the NAS segment where two companies, NetApp and EMC, generate in excess of 70% of all the $2B annual NAS revenues. For end-user disk storage systems suppliers, six vendors (HP, IBM, EMC, Sun, Dell and Hitachi) generated 76% of the worldwide revenues in 2002. Seagate, IBM, Maxtor and Western Digital combined for 81% of 2002 hard drive revenues. For enterprise tape systems, STK and IBM basically capture the entire market; while for non-mainframe tape systems, the top five revenue producing vendors are HP, IBM, STK, Quantum, and Sony combining to generate over 70% of the marketplace revenues. In the high end server and mainframe market, IBM, HP/CPQ, and Sun currently account for 67% of sales revenues.

Bottom-line: The storage industry has many entrants but the majority of revenues are generated by a small number of dominant companies.

Consolidation or Dominance?

Do these skewed market share examples signal a trend to consolidation or simply a group of currently dominant vendors? What does this mean for new entrants in the storage business? Where will they be in the next two to three years? Though venture capital investments are significantly down from past levels for storage and technology businesses, there are presently over 250 storage startups in existence. Also, the VCs are not as naive as they were in the .com boom period, as present day investment heavily favors projects that solve real problems. We seldom hear the word IPO anymore. Over the past few years, choosing the IPO path has become a much more difficult strategy for market entry than ever before. Most of these newly created startups have the goal of getting bought out or merging with another larger company--and potentially one of the dominant companies as their stated exit strategy. The new reality is that it has now become very difficult for any new startup to be successful without a significant partner at hand.

Bottom-line: Expect that even more aggressive storage industry consolidation activity lies ahead.

Storage Management Companies Unite

The worldwide storage management software market recorded it first ever year-over-year decline in revenues in 2002, when revenues totaled nearly $4.7B. The storage skew is again obvious as the ten largest storage management companies generated 85% of all revenue in this market segment in 2002. EMC, Veritas, and IBM account for approximately 57% of all storage management software revenue. The recent Legato acquisition by EMC helped Legato financially and helped EMC acquire additional software revenues, a customer base, and a software-trained sales force. Digging deeper, however, of the ten largest remaining storage management software companies, eight are now part of hardware or systems companies. After the Legato acquisition, only Computer Associates and Veritas remain as the two pureplay independent storage management software companies out of this group. How long can the last two remain independent before they follow the well-established consolidation trend underway? Where is Microsoft in this picture?)

Maybe of more significance is the growing question that software companies will build increasingly proprietary products as they become more closely tied to a hardware or a system company's product line. This appears to be adding to the continued slowdown for the always hopeful--but always distant--open systems movement. Another issue centers on the question: Will the consolidation movement stifle innovation or encourage it? Likely, consolidation will encourage free, aggressive but more proprietary innovations as each vendor can quickly develop any new, unique added-value features and functions without having to seek standards approval or find resources from another vendor to move forward.

Bottom-line: With storage management software consolidation by hardware vendors an active area, the open systems and interoperability efforts will face increased funding challenges from hardware vendors.

Where is the Value in the Storage Industry?

Most users today still look at the hardware purchase price as their primary purchase criteria. This has become increasingly unfortunate and reflects the now old and out-of-date viewpoint that the value of the IT infrastructure exists in hardware. This is like measuring the value of the television industry by the number of sets sold (the old rules) rather than the value of the content being transmitted by television (the new rules). With hardware prices falling 35-40% annually, the value of the storage industry shifts to what we do with the data, not where we store it. It was also thought that the value of the storage industry would evolve to the management of data itself but as we can now see, this isn't really happening.

Soon, the real value of the storage industry will lie in the data itself, not the containers or the software that manages it. This issue is a paradox--as relatively few businesses actually know the value of their data. How can the future of the storage industry be based on some thing we don't know much about? Four distinct levels of classifying data exist: mission-critical data, vital data, sensitive data and non-critical data. These levels indicate which backup, recovery or high-availability technology may be best suited and most cost-effective for each data-classification level. More importantly, this classification process enables us to begin to understand the value of our data.

Bottom-line: With hardware prices falling 35-40% annually, the value of the storage industry shifts to the data itself, not where we store it. This indicates that the people, products and tools that derive and create value from stored digital content will represent the long-term value proposition for today's storage industry.

Which Way is the Wind Blowing?

The entire storage industry is comprised of storage hardware, software and associated services. Presently, storage services represent the only measurable revenue growth area. Hardware revenues have shrunk since 2000, and storage management software revenues shrank for the first time ever in 2002--largely due to the economic crisis, but also in some part to the increasing complexities in using the software to manage storage. This hints that a trend may be building to simply add more storage hardware and not manage data beyond performing basic backup and recovery tasks. As Einstein said "it is in the middle of difficulty that one finds the greatest opportunity." The storage business is now shifting to the business of storage. It is here where the new opportunities lie.