The NAS Market Begins To Take Shape.

The market for low-end Network Attached Storage (NAS), which is actually a special example of the emerging network appliance category, is beginning to take shape. All signs are that there is an enormous pent-up demand among small and medium-sized businesses for backup and file sharing services without the overhead of a general-purpose server. NAS products meet these and other data storage needs in the form of a cost-effective, highly robust, and virtually zero-installation and maintenance solution. The emerging market for these devices is interacting with other trends in the storage market such as the progression towards drive interfaces that handle higher levels of abstraction and the resulting reduction in the cost and complexity of the electronics required to connect storage to the network. Complicated and, at times, fiercely competitive interactions between niche NAS producers, OEM PC and server suppliers, network vendors, and hard disk drive companies will help to shape the NAS market as it explodes in the next few years.

Small and medium-sized businesses are increasingly adopting networking and the Internet in order to improve processes and information flow within their organization and with customers, suppliers, and business partners. A major obstacle in their path is their limited budget and lack of technical personnel and expertise. In many cases, these businesses don't have the resources to purchase, install, and maintain complicated technical solutions such as network operating systems and traditional general-purpose servers. Managers of these businesses are well aware that today's servers are expensive to purchase, install, maintain, and upgrade. Studies show that storage management cost is approximately seven times the original acquisition costs. This is, without a doubt, the main reason why a recent survey taken by Seagate Marketing Research shows that only about 13% of companies with 2 to 49 employees now use networks, compared to just over 60% of companies with 50 to 99 employees.

Tremendous Business Opportunity

The fact that only 13% of the 7.7 million companies with two to forty-nine employees now have servers provides a tremendous new business opportunity for current and future NAS vendors. The survey further indicates the main reason that small and medium-sized businesses install a network is to obtain additional storage, most commonly to provide client data sharing of files and databases and backup. Of the respondents to the survey, 43% said data sharing was their main reason, 16% named applications, 11% cited backup, and 11% said growth was the main reason. The survey further indicated that the primary applications for entry-level servers are file sharing (45%), printing (38%), database (37%), applications (31%), communications (20%), Internet (18%), and other (21%). In terms of purchasing motivation, client backup was shown to be the most powerful purchase motivator while strong interest was also shown in file sharing applications.

The emerging NAS devices can fill these needs because they are far simpler and less expensive so they are well-suited to small and medium-sized businesses with a small or nonexistent information technology infrastructure. They are normally designed to perform only the limited number of functions required to deliver network storage, including management of network traffic, file system I/O, user authentication, and their own system management. These devices also eliminate keyboard, serial and parallel ports, video, network I/O, disk I/O, memory management, and the processor hardware required to support them. To reduce costs, these devices typically use low or zero-cost operating systems such as Linux.

Simple Installation And Maintenance

As a result, NAS products install in minutes, require minimal ongoing maintenance, and provide unparalleled ease of use. They provide users, regardless of their technical background, with the ability to add or remove network storage without any downtime to the existing environment. NAS products also do not use a traditional network operating system, so they can support as many clients as necessary without incurring per-seat licensing charges. Web browser-based management allows the appliance to be installed, monitored, and maintained from any browser installed on the clients on the network and from any operating system. The hardware is far less expensive than traditional server-attached storage because the NAS doesn't need to support a wide range of functions. The systems also generally have far greater availability because their simplicity eliminates many of the things that can go wrong on a conventional server.

It's interesting to note that network appliances focusing on storage applications emerged from the market for Network Attached Storage (NAS) devices targeting high-end storage applications. NAS products were originally developed to offer higher reliability and performance than general-purpose servers. These high-end NAS devices offer an architecture that is optimized to move file data as efficiently as possible from disk to network and vice versa. A typical such device uses the I/O node containing several processors with different and logically separate processing functions as a fundamental building block. The network processor processes network protocols and manages associated caches. The file and storage processor is dedicated to managing the file systems and associated storage hardware. The result is a dramatic improvement in reliability and performance compared to general-purpose servers.

Core Storage technology Drivers

In order to consider how the NAS market will develop, it's important to consider the major trends in the core storage technology drivers. The average annual growth rate in disk drive capacity, measured in areal density or the number of bits that can be stored in a given area, has been rapidly accelerating. Traditionally, this parameter has grown at a rate of 30% to 50% per year. In the last few years, however, the growth rate has increased to 100% per year. Indications are that the areal density growth rate may increase to 150% in the near term. At the same time, interface transfer rates have increased by a factor of 30 since 1991, as the industry has moved from Synch SCSI at 5/10MB/sec, to Fast/Wide SCSI at 10/20MB/sec, to Ultra SCSI at 20/40MB/sec, to Ultra2 SCSI at 40/80MB/sec, and finally, to Ultra3 SCSI at 160MB/sec. In 2001, Ultra320 SCSI will provide speeds that are 60 times faster than the fastest ones that were available in 1991.

An equally important trend for the network appliance market is the progression in the disk drive interface towards gaining higher and higher levels of intelligence while taking over functionality that was previously provided by the host. Back in the early days, the host had to decode the basic magnetic changes or flux reversals that were served up by the drive interface. The interface has progressed from ESDI, which operates at the bit level, to IPI-2 at the physical sector level, to SCSI and ATA, which work at the logical block level. Just prior to the introduction of each of these interfaces, the host managed the level they operated on. The desire by disk drive makers to provide additional capabilities in the interface has traditionally been met by resistance and interface issues. Eventually, the advantages became compelling and the disk drive interface gained a new level of intelligence. Today, the interface appears to be moving towards the OBSD standard, which can answer object or file requests from the s ystem, providing them with capabilities similar to the basic function of NAS devices.

Business dynamics are also playing an important role in maneuvering for the new storage appliances. While the average price of a server has fallen by 50% since 1991, the price of the average hard disk has fallen by 75%, placing hard disk drive vendors under enormous competitive pressure. This pressure is further illustrated by the fact that total revenues in the hard disk drive business have not risen substantially in the last five years while the trend in gross margins has been mainly downward. The main reason for this revenue short-fall is that the supply of storage capacity, due to the huge increase in areal density, is currently growing at approximately three times the 50% level at which demand for storage is rising. In effect, disk drive vendors are outstripping the requirements of the typical user and generating a very small return on investment as a reward. The result is that disk drive vendors are thinking about how to take their core competency and move into other market segments where they can gener ate a larger return.

Who's Going To Win?

With these trends in mind, which companies will be best suited to meet needs of the small and medium sized businesses that appear to present the largest opportunity for NAS sales? Small and medium-sized businesses place 60% of their computer hardware and software orders from resellers, primarily because their lack of technical resources means that they require a considerable amount of education and technical support. Larger companies with extensive marketing resources--such as distribution channels, service and support networks, advertising budgets, etc.--have the greatest opportunity to sell through these channels. These well-positioned firms have many alternatives for approaching customers such as OEM arrangements, vertical market solutions, software bundling, solution bundling, network starter kits, and an ISP focus. In complex and competitive computer channels, there's no substitute for experience and appropriate resources.

Existing NAS vendors that have been successful in the high-end market have the advantage of already having traveled up the learning curve on many of the technical issues involved such as network/file protocols and operating systems. They also frequently have existing intellectual property and market knowledge that can be re-purposed for the network appliance market, but in many cases, these companies will be too small to be long-term players in this market. So they will be faced with the choice of specializing in a market niche, partnering, or being acquired. OEM PC and server vendors, on the other hand, have to successfully manage a major shift in their market focus to be successful in the NAS market. They will be forced to operate on much tighter margins than they are used to receiving in the general purpose server market. On the other hand, these vendors have powerful advantages such as recognized brand names, service infrastructure, and distribution channels.

In addressing this market, network vendors have the advantage of a complementary product line, as well as brand name, Ethernet expertise, support network, and distribution channels, but these companies will have to develop technical expertise in what is, for most of them, an unfamiliar area. Finally, hard disk drive vendors have the advantage of substantial technical expertise, as well as being able to take advantage of the trend that most of the technology required for the NAS is on its way toward being incorporated into the disk interface. Drive manufacturers also have the advantage of direct control over the cost of the vast majority of the value-added in a NAS product. The hard drive supplier can also bring their brand name and distribution channels into play.

Future Trends

It's also worth spending a little space thinking about how the NAS concept will be affected by some future trends in the storage business. The Storage Area Network (SAN) provides an efficient way to manage large amounts of shared space and is expected to become the architecture of choice for larger configurations. NAS vendors are beginning to think about a hybrid NAS/SAN system in which the NAS provides an inexpensive and maintenance-free method of adding storage capacity to the enterprise network. As an afterthought, it's worth noting that the NAS concept is not limited to the business environment alone. Hard disk drives are already being used in personal video recorders and set top boxes today.

In conclusion, it's evident that the structure of the NAS market should become much more clear in the next year or two. Strategic partnerships will continue to emerge, involving technology sharing, sales channels, brand recognition, and access to support and service networks. It's clear that the market is going to grow, but the jury remains out on just how rapid the growth will be. The main questions that remain to be answered are: Who gets married next? How will the gross margin be distributed among the various elements of the supply chain? Where does storage go next? What's the killer application? The NAS market is worth keeping an eye on because once it starts moving, watch out!

Gerry Humphrey is the senior director of strategic planning and marketing at Seagate Technology (Scotts Valley, CA).