Data Storage: A Strategic Vacuum Waiting For A Strategic Company - Industry Trend or Event

Computer Technology Review, Dec, 1999 by Jorge Rufat-Latre

The exponential growth of e-commerce is making data mining more crucial than ever, but the companies that hold the key to its future--storage system suppliers--are squandering their advantage by focusing on undercutting each other on price rather than positioning themselves on value. In an Information Age, growth in all industries will increasingly depend on the ability to organize, locate, and retrieve information in order to turn raw data into valuable knowledge. Companies with an online presence are accumulating data faster than ever. The Economist forecasts that business-to-business e-commerce alone will amount to $1.3 trillion in just four years.

Given this growth, it is not surprising that International Data Corp. estimates that demand for corporate data storage, which has been growing at more than 80 percent a year for the past four years, will double annually for years to come. Yet the more data one accumulates, the more important it is to administer it strategically before the task of managing it becomes overwhelming. Meeting this need is not just a matter of selling storage. It is a matter of selling solutions.

The stage is set for a new strategic industry, but today's leading suppliers of data storage systems are waiting in the wings. Rather than differentiating themselves for long-term positioning, they are concentrating on getting bigger by short-term profit margins. Rather than grasp the opportunity to provide clients with new strategic value, they are concentrating, instead, on undercutting each other on price--and commoditizing their product in the process with pricing schemes quoted on the basis of pennies per bit, instead of value provided. The result is a price drop of 35 percent a year, following a pattern established by the hard disk industry, with capacity breakthroughs followed hard on heels by earnings disappointments.

Unquestionably, the leading data storage firm, EMC Corp., has experienced enormous growth this decade, growing net income 331 percent from 1991 through 1998. Wall Street has taken note, making EMC one of the best performing stocks in the S&P 500 in the '90s, including a 210 percent increase in market value in 1998.

In a sense, EMC owes its market success to technological failures it encountered in the early '90s. Faced with serious quality problems in its hardware, the company aggressively sought to make up for its credibility problems by inventing and marketing the message that data storage is a strategic issue, demanding a strategic response. In that way, they were able to build a client relationship at a higher corporate level. They broke out from the commodity box, but their strategic position is time bound. Their system is proprietary and closed from many perspectives, including disk sources, networking hardware, and networking protocols. Clients can take the EMC system in its entirety, dealing with no one else--or they can avoid the company altogether. EMC's growth has been impressive--but its growth engine will eventually peter out, as competitors work together to create common standards and eventually manage to offer open systems that work.

In the fast-moving data storage bandwagon, EMC took the driver's seat. Yet, will it be able to hold on to it now that so many other players are jumping aboard? Consider Hewlett-Packard. After spending years reselling EMC equipment with HP servers, HP launched a joint venture with Hitachi, rolling out its first storage system last May. This summer, IBM re-entered the fray, introducing a data storage system that is to serve as its flagship in restoring the leading place in the high-end storage field that the company lost three years ago.

The game is heating up. Yet, is anyone changing the rules? In launching its high-end data storage system, IBM illustrated how the industry has turned what should be a sophisticated business solution into a classic commodity, focusing on the storage price of pennies per megabyte, as if they were selling pork bellies.

Instead of focusing their strategy on providing tailored solutions to growing data management needs, storage suppliers are limiting themselves to cutting customers' glass house costs. Sooner rather than later, they are going to underprice each other through the floor, while someone else comes along and shoots right through the ceiling by grabbing the real business of the future--providing strategic solutions.

The current industry players know that they have to redefine themselves, but, unfortunately, they are redefining themselves in words rather than by actions. Abraham Lincoln once posed the riddle: If you call a tail a leg, how many legs does a dog have? Five? No, four because calling a tail a leg does not make it a leg. Similarly, calling yourself a "solutions company" does not make you a solutions company. Providing solutions to clients begins by solving your own internal contradictions and putting your own house in order, but data storage businesses are caught in a vague middle. They encompass two cultures that are at continual loggerheads: hardware experts and professional service consultants. Their offerings are not well defined. They recognize the need to make the migration from hardware to personal services, but everything from accounts systems to sales rewards are geared to selling boxes, rather than solutions. They do not have a migration plan that will allow them to manage risks along the learning cu rve. Rather than plan for tomorrow's positioning, they are eagerly chasing after today's golden egg.