Behind the coming carnage in storage

Despite the dot-com implosion and the bust-ups in the telecommunications and equipment manufacturing sectors, storage makers have had relatively little problem getting investments.

At last count, there were more than 250 storage start-ups in the United States alone. Indeed, venture capitalists put $162 million into new storage companies in the first quarter of this year, according to PricewaterhouseCoopers/Money Tree.

However, storage technology is in the midst of a massive but slow change. To be sure, business opportunities will emerge, but the lethargic pace of transformation will limit the number of new entrants and likely lead to trouble for many storage start-ups. What will happen next? In a word: carnage. Here's why:

Changes in storage technology can help IT drive down operating and capital costs. But these advances pale in comparison to technologies like application servers or middleware that can enable new business initiatives. IT managers who need to manage risk will be aggressive with business-centric application technologies, but they will be far more conservative when it comes to investing in storage.

Consumers are still mired in the last big storage change. In spite of the hype surrounding storage area network (SAN) systems, 60 percent to 70 percent of all storage is still anchored to servers with older Direct Attach Storage technology. SANs will replace these implementations, but most customers are at the beginning of this cycle, not the end. With companies just starting to see returns on their investments, it will take years before they are ready to consider new technology directions.

The storage oligopoly restricts start-up opportunities. The six biggest storage companies, EMC, Network Appliance, Compaq Computer, IBM, Hitachi and Sun Microsystems, control about 90 percent of storage distribution to corporations. (Editor's note: Jon Oltsik holds shares in EMC and IBM.) National distributors like Pioneer have insignificant end-user reach, while smaller mom-and-pop regional resellers have only limited resources. Storage start-ups can't afford their own direct sales force, so if they can't partner with one of the big fish, they are as good as dead.

The leisurely

Storage technology is in the midst of a massive change, but this process will evolve slowly.

pace of the storage transition means the best most storage start-ups can hope for is to be acquired by one of the big guys. The remaining players will be lucky to get pennies on the dollar. As for the larger storage market, the steady but slow technology progression means that the storage incumbents will win if they reduce their costs.

Large companies will continue to purchase storage equipment from the old guard and eschew geeky networking solutions from IP bigots like Cisco Systems. Aggressive start-ups will rattle the market by offering lowball pricing that forces incumbents to shave costs.

The only clear opportunity is in selling software tools that help IT departments manage their storage growth. EMC may have the early lead here, but it can't win the software battle with its traditional high-priced--and proprietary--bully-the-market approach. Veritas is likely to pose a threat, while management tools heavyweights like BMC, CA and IBM/Tivoli will compete if (and this is a big if) they can improve their storage IQ. A storage start-up may actually win this battle, but as always, watch out for Microsoft. The right solution must be straightforward to use and implement and offer immediate returns on investments.

Storage channel

Storage start-ups can't afford their own direct sales force, so if they can't partner with one of the big fish, they are as good as dead.

and services present the invisible opportunity. Although venture capitalists are loath to invest in resellers and professional services, these businesses offer tangible benefits for customers. If they can establish an international presence and gain end-user trust, companies like distributor Datalink and services expert Glasshouse will wind up sitting in the catbird seat.

Clearly, the time of storage transition is upon us. But like the ice age, it will take some time to play out.

The suppliers--and investors--who are betting on rapid change are in for a big disappointment. The reality is that the companies that take a longer-term view, control costs, offer aggressive pricing, and provide customers with genuine and immediate benefits have the best chance for success.

As for the rest? Strap on your seatbelts; it's going to get bumpy out there.