Data Storage: A Strategic Vacuum Waiting For A Strategic Company.

The exponential growth of e-commerce is making data mining more crucial than ever, but the companies that hold the key to its future--storage system suppliers--are squandering their advantage by focusing on undercutting each other on price rather than positioning themselves on value. In an Information Age, growth in all industries will increasingly depend on the ability to organize, locate, and retrieve information in order to turn raw data into valuable knowledge. Companies with an online presence are accumulating data faster than ever. The Economist forecasts that business-to-business e-commerce alone will amount to $1.3 trillion in just four years.

Given this growth, it is not surprising that International Data Corp. estimates that demand for corporate data storage, which has been growing at more than 80 percent a year for the past four years, will double annually for years to come. Yet the more data one accumulates, the more important it is to administer it strategically before the task of managing it becomes overwhelming. Meeting this need is not just a matter of selling storage. It is a matter of selling solutions.

The stage is set for a new strategic industry, but today's leading suppliers of data storage systems are waiting in the wings. Rather than differentiating themselves for long-term positioning, they are concentrating on getting bigger by short-term profit margins. Rather than grasp the opportunity to provide clients with new strategic value, they are concentrating, instead, on undercutting each other on price--and commoditizing their product in the process with pricing schemes quoted on the basis of pennies per bit, instead of value provided. The result is a price drop of 35 percent a year, following a pattern established by the hard disk industry, with capacity breakthroughs followed hard on heels by earnings disappointments.

Unquestionably, the leading data storage firm, EMC Corp., has experienced enormous growth this decade, growing net income 331 percent from 1991 through 1998. Wall Street has taken note, making EMC one of the best performing stocks in the S&P 500 in the '90s, including a 210 percent increase in market value in 1998.

In a sense, EMC owes its market success to technological failures it encountered in the early '90s. Faced with serious quality problems in its hardware, the company aggressively sought to make up for its credibility problems by inventing and marketing the message that data storage is a strategic issue, demanding a strategic response. In that way, they were able to build a client relationship at a higher corporate level. They broke out from the commodity box, but their strategic position is time bound. Their system is proprietary and closed from many perspectives, including disk sources, networking hardware, and networking protocols. Clients can take the EMC system in its entirety, dealing with no one else--or they can avoid the company altogether. EMC's growth has been impressive--but its growth engine will eventually peter out, as competitors work together to create common standards and eventually manage to offer open systems that work.

In the fast-moving data storage bandwagon, EMC took the driver's seat. Yet, will it be able to hold on to it now that so many other players are jumping aboard? Consider Hewlett-Packard. After spending years reselling EMC equipment with HP servers, HP launched a joint venture with Hitachi, rolling out its first storage system last May. This summer, IBM re-entered the fray, introducing a data storage system that is to serve as its flagship in restoring the leading place in the high-end storage field that the company lost three years ago.

The game is heating up. Yet, is anyone changing the rules? In launching its high-end data storage system, IBM illustrated how the industry has turned what should be a sophisticated business solution into a classic commodity, focusing on the storage price of pennies per megabyte, as if they were selling pork bellies.

Instead of focusing their strategy on providing tailored solutions to growing data management needs, storage suppliers are limiting themselves to cutting customers' glass house costs. Sooner rather than later, they are going to underprice each other through the floor, while someone else comes along and shoots right through the ceiling by grabbing the real business of the future--providing strategic solutions.

The current industry players know that they have to redefine themselves, but, unfortunately, they are redefining themselves in words rather than by actions. Abraham Lincoln once posed the riddle: If you call a tail a leg, how many legs does a dog have? Five? No, four because calling a tail a leg does not make it a leg. Similarly, calling yourself a "solutions company" does not make you a solutions company. Providing solutions to clients begins by solving your own internal contradictions and putting your own house in order, but data storage businesses are caught in a vague middle. They encompass two cultures that are at continual loggerheads: hardware experts and professional service consultants. Their offerings are not well defined. They recognize the need to make the migration from hardware to personal services, but everything from accounts systems to sales rewards are geared to selling boxes, rather than solutions. They do not have a migration plan that will allow them to manage risks along the learning cu rve. Rather than plan for tomorrow's positioning, they are eagerly chasing after today's golden egg.

The result is that storage buyers do not believe their suppliers can play a strategic role in their business. CIOs discount their ability to deliver overall solutions. Research conducted by Information Week indicates that nearly 85 percent of IT executives at large companies are interested in deploying Storage Area Networks. Who is going to offer the SAN that meets the market's growing needs? Will outsiders steal the show? Sun Microsystems, which set up a network storage division last year, is seeking to bring the revolution to the storage industry as an offshoot of its Java and Jini revolution.

When it comes to superb technology, StorageTek has always offered promise, but never seemed quite able to fulfill it. The Louisville, Colorado-based company is the diametric opposite of EMC. It has hired excellent technologists and built up vaults full of great technology, but it has no idea how to sell it or translate it into a concrete strategic promise of clear, high-level benefits for clients. The result of this game plan (or lack of one) can be seen in the numbers, specifically the numbers for revenue growth. While EMC has achieved revenue growth every year since 1991--from a low of 18 percent in 1996 to a high of 103 percent in 1993-StorageTek's peak growth rate was 16 percent in 1994; its slowest year was 1993, when it experienced a 9 percent contraction.

The company's problems are easy to recognize, starting with the fact that it sells on finer points that impress "geeks" but leave corporate executives unmoved. Ultimately, it is making a purely cost-oriented argument, vacating the higher-end ground. StorageTek's precarious position became clear with IBM's recent storage system rollout, as Big Blue is its biggest customer, accounting for about 15 percent of revenue.

This is an industry ripe for a company prepared to rewrite the rules. If none of the current competitors do, an outsider is bound to fill the vacuum. For StorageTek and other current players in the data storage industry, the question is will they keep shooting them-selves in the foot by competing on price or start aiming at the competitive ground of the future by focusing on value? Will they have the guts and vision to let go of their current economic engines and the brains to develop a migration path to the future? With the Internet generating ever-expanding amounts of data, clients are looking for more than storage space. They are looking for ways to develop new knowledge, using vast amounts of unused data that is piling up in their vaults, secure, but unused. The company that wins the data wars will be the one that shapes a strategy that allows it to break out from the crowd and compete on the basis of overall value, rather than underselling on price.

Jorge Rufat-Latre is a director at Strategos (Chicago, IL).