Data Storage Market Suffers From the Mainframe Syndrome

The latest numbers from IDC, a market research company, reflect that the data storage market has begun to parallel the mainframe computer industry in one crucial way: Increased capacity doesn't increase vendor revenue. For most of the 1990s, mainframe vendors generally reported that each year they sold more MIPS, the primary measuring unit of mainframe-computing capacity, while revenues consistently fell. The situation is similar in the storage market, in which the increase in the number of gigabytes per unit sold hasn't offset a corresponding decline in dollars per gigabyte sold.

According to IDC, the third-quarter 2002revenues that disk storage systems generated worldwide dropped 3 percent, as compared to the second quarter. Revenue that Network Attached Storage (NAS) and Storage Area Networks (SANs) sales generated declined more sharply than the overall market: Open SAN sales diminished 6 percent, and NAS plunged 10 percent. Overall, the external storage market, which includes both network-based and direct-attached storage, fell 5 percent.

The revenue drop in the SAN and NAS markets presents a misleading picture of the contribution SAN and NAS technologies have made to the industry. SAN and NAS continue to emerge as the dominant approach to storage in many enterprises. Gartner reports that in 2001, network storage represented approximately 55 percent of all external storage systems. That number is expected to climb to 80 percent by 2006.

The same factors that are fueling network storage growth are dampening revenue growth. As disk prices fall, companies can deploy drives with more capacity but that cost less on a per capacity basis.Also, with SAN, companies can deploy fewer, larger SANS with the same number of people. Another contributing factor in decreased revenue is the continued improvement in storage management software. Management tools let administrators use storage resources more efficiently; the amount of redundant capacity that enterprises need to maintain is shrinking. Finally, the overall growth in resource consolidation over the past 2 years has eliminated many department-level systems. As companies centralize their IT resources, the need for smaller distributed data storage nodes has eased.

Shrinking revenues have led to fierce competition between the major data storage vendors, a group that includes both third-party vendors such as EMC and Network Appliance (NetApp), and larger server vendors such as Hitachi, Hewlett Packard (HP), IBM, Sun Microsystems, and now Dell. According to IDC, by revenue, NetApp has grabbed the market share lead from EMC in the NAS arena, garnering 38 percent of the market, compared to EMC's 31 percent. In Open SAN, HP claimed the top spot with a 30 percent share of the market, compared to 27 percent for EMC. EMC, however, continues to lead in the combined network storage market. EMC sales represent 28 percent of that market.

In the overall storage market in 2002, HP retained its lead with 27 percent of market share, followed by IBM, which held 20 percent. Hitachi, which purchased IBM's disk drive business, saw the biggest jump in sales, with revenues growing 23 percent quarter over quarter.

As data storage vendors scramble to grab or maintain market share, they're beginning to forge interesting alliances. Perhaps the most promising alliance is EMC's partnership with Dell, which calls for Dell to manufacture and market a model in EMC's entry-level CLARiiON line of storage solutions. The deal lets EMC market beyond its traditional Fortune 200 stronghold and puts Dell on the map as a storage player. IDC reports that Dell's storage revenues jumped 70 percent quarter over quarter in 2002. The EMC deal has helped Dell bring 1500 new customers into the fold, Dellreported.

For the short term, exploding capacity and falling prices are good for end users. Vendors are working hard to attract and retain customers and are heavily investing in new product development and adding features and enhancements to their existing products.

In the long run, however, declining revenues signal a significant danger for both vendors and their customers. If the market continues to shrink—IDC projects a 20 percent drop in revenues in 2002 following the company's 21 percent drop in 2001—a shakeout is inevitable. With fewer market players, innovation could come to a halt, which augurs poorly for storage in general. To return to the mainframe analogy, even though vendors continue to sell more MIPS every year, mainframes have long since ceased to be the primary engine in most IT infrastructures.

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