Taking a stake in the storage market
Investors should take a new look at the systems storage market, as a host of new vendors are fueling trends that should keep the group primed for growth.
Last November, I explored many of the emerging trends in the market. There are many positive aspects about systems storage, the hardware and software technologies that enable the storage of large data sets. The first positive point is growth--the market for these technologies is expected to grow over 35 percent to $15 billion this year. I forecast this growth rate to continue for the next 3 to 5 years.
The Internet is a driving factor in the market, as the growing infrastructure to provide increased communication, content, and e-commerce requires significant growth in storage systems to support increased data. Streaming media--potentially a huge market in the future--makes these storage requirements even more of a priority going forward.
Most storage technology is connected directly to a server, and is chosen for reliability, connectivity, performance, and cost. EMC remains the market leader in this segment, IBM a not-too-distant second, followed by other large computer companies such as Hitachi, Sun Microsystems, and Compaq.
The new developments in the storage market are a result of the changing demands of storage customers, coupled with innovation and new competition that blossoms from such a large, high-growth market.
On the customer front, Internet-based business growth is putting a premium on scalability and reliability, making these features more important than price. Who doesn't know of an example of a Web-site that was overwhelmed and ran out of both computing power and storage space? The well-publicized outages of Net firms such as eBay highlight the importance not just of backing up data, but of being able to restore it quickly--a feature that is now a criteria when purchasing high-end storage technology.
The increasing importance of storage, both as an element of traditional corporate technology platforms and the Internet, is not lost on vendors. Hewlett-Packard has said--and I agree--that within two years over 50 percent of a computer system's cost will be related to storage, well up from the 25 percent to 30 percent today. EMC's dominance in the space shouldn't be seriously challenged, in my opinion, but IBM is likely to become even more fierce a competitor.
Another new development in the market is the deployment of new storage architectures, often from new vendors. Keep an eye on the emerging use of network-attached storage (NAS), and storage area networks (SANs). Both of these new technologies attempt to solve performance bottlenecks and configuration constraints.
In a NAS environment, a storage system is attached directly to a network, offering increased capacity to any server or client on the Internet. High-performance and ease-of-use are two attributes most commonly seen with this architecture. Network Appliance was one of the pioneers in this segment, and remains a leader in what is now over a $1 billion market.
Internet (or internal network) caching is a more recent application of this architecture that has tremendous growth potential. Caching, in short, is storing copies of frequently used Web pages or data sets close to a user. This method cuts access times while simultaneously reducing network traffic. This potential multibillion-dollar market has attracted significant attention--Network Appliance is also a key competitor here, as are software vendors Inktomi and Novell, and network vendor Cisco--even Intel is addressing this space with a low-end solution. I like Network Appliance's position in this space--but the market is still wide open.
The final segment that deserves watching in the storage space is the SAN segment. Based on a new, faster interconnect and protocol called FibreChannel, vendors are attempting to break up storage systems into component parts (such as controller, software, and raw storage) and create a network to attach them together. The advantages of this architecture include more flexibility, lower cost, and easier scalability.
Already a number of companies that supply core networking technologies, such as adapter vendors Emulex and Qlogic, switch vendor Brocade, and hub vendor Gadzoox, are public companies, with many more vendors likely to file for public offerings over the next year. Implementation of this solution remains challenging, and many standards have yet to be set, but this area will likely prove to be the most dynamic of all the storage segments.
Understanding this, EMC has also entered the SAN fray, with its own solutions--focused more at the high end than competing solutions. Their entry does, in my view, validate the long-term viability of this market.
From an investor perspective, this whole area is likely to become even more dynamic. Expect both increased competition and visibility as both new entrants and existing vendors go after the market share leaders.
The preceding comments should not be considered a recommendation concerning the purchase or sale of any securities mentioned herein.