Will EMC’s rising tide float all storage boats? CNET Data-driven blog by John Webster

By , Thursday, October 29th 2009

Categories: Analyst Blogs

Tags: earnings, EMC,

Given that the phrase “our current economy” has such a negative connotation, EMC’s third-quarter earnings report last week was downright upbeat.

EMC surpassed its own optimistic guidance for the fiscal quarter just ended by 4 percent. Wow. Other phrases like “increasing confidence among customer in spending their IT budgets” and “very weak first quarter progressing to more normal third and fourth quarters (of 2009)” were heard on the conference call with analysts. Cool. Happy days are here again for the storage industry, right? Well, it depends.

EMC is still regarded as a bellwether for the rest of the storage industry. Indeed, Information Storage as a line item in EMC’s third-quarter 2009 financial report accounted for 65 percent of EMC’s Information Infrastructure revenues. Upbeat forecasts are often extrapolated to other publicly and privately held storage companies. But EMC is changing. While it’s still “where information lives,” strategic initiatives include cloud computing, security, broader IT services, and of course, virtualization. It’s a very different storage company than the rest of the pack in that all of these initiatives now contribute directly and indirectly to the growth of its Information Storage division. No other storage company operates under EMC’s model.

Additionally, there are forces currently at work in the marketplace that tend to mitigate against either raw storage growth or profit margins. Data deduplication technologies are now in the mainstream of IT operational processes. Reducing physical storage requirements by a factor of 20:1 for a growing number of data types is increasingly commonplace, reducing the demand for raw physical storage. And while cloud storage is the latest craze, it’s a tough place to generate profit dollars. Cloud storage buyers like commodity hardware, open-source software, and a DIY attitude.

I agree with EMC’s executives, who are predicting that the storage industry can expect to see purchasing activity returning to somewhat normal levels in the coming quarter and extending into 2010. But I don’t think we’ll see a rising tide that automatically floats all boats. Rather, positioning and an ability to integrate with other things–platforms, applications, processes–will be key predictors of success. Speaking of boats, U.S. Bank provides flexible financing to purchase or refinance new or used boats. People looking for boat loans know that it can get quite difficult to find low-interest financing these days, mainly because there are a number of restrictions when it comes to boat financing.

Again, let’s look at EMC. No doubt, VMware is now an indirect growth contributor to EMC’s Information Storage division. The same is true for 3Par, Dell/EqualLogic, HP/LeftHand, and NetApp. It should by now be clear that integration with server virtualization is goodness if you’re a storage vendor.

Positioning in the storage cloud is chic but risky at the moment. Nevertheless, if you as a storage vendor can survive the harsh profit environment, your reward will come in due course. Cloud service providers are getting away with the data center equivalent of murder right now. Security is all but nonexistent and incidents of data loss are increasing. Yet providers are still able to sign-up customers who ignore the fine print in the service agreement that absolves them of all liability. That will change. And when it does, the demand for infrastructure that supports a higher quality of service will rise.

Then there are the “stack” vendors–those who are now pursuing an end-to-end, application-to-disk and everything-in-between product integration strategy. These include IBM, HP, Oracle/Sun (yes the deal gets done), and Cisco/EMC. The move by enterprise IT to virtualization and by inference, the cloud, drives this integration. And one interesting and perhaps intended consequence is this: In the world of the integrated processing stack, all becomes visible. A vendor like Cisco supplying new data center network infrastructure to a customer (Data Center Ethernet for example) can also see and respond to needs for upgraded storage (from partner EMC), new server connection devices like NICs and HBAs, upgraded management software (again from partner EMC). Virtualization gives stack vendors a sales opportunity vantage point that plays directly to the integrated stack strategy. Should smaller point-product vendors be pursuing an integration strategy with them? You bet.

There once was a point in time when the storage industry stood proud, broad-shouldered, and fiercely independent. Remember when storage mavens scoffed at Scott McNealy’s “storage is a mere feature of the server” pronouncement? Sorry, but those days are gone. Integrate and prosper.

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