Microsoft's enterprise storage play—a window on NAS, a head in the SAN

MarketWatch: Storage, June 24, 2003

Event Summary

Since it moved into the NAS market two years ago, Microsoft Corp has covered a lot of ground. According to Gartner Inc, Microsoft's software powered 38% of all NAS devices sold last year. Although some rivals argue that Gartner's figure includes a large number of machines that should actually be classified as servers, the importance of Microsoft in the NAS market is highlighted by EMC's announcement in April that it plans to bring to market a Windows-powered NAS box--despite the fact that it already sells NAS devices powered by its own operating system. This month Microsoft will ship the latest version of its NAS operating system to EMC and other OEMs such as Hewlett Packard Co and IBM Corp. The software is a cut-down version of Windows 2003, and is called Windows Storage Server 2003--succeeding the software previously called Windows-powered NAS, which itself succeeded the Windows Server Appliance Kit, or SAK. The ground that Microsoft has taken has all been at the low-end of the market, where NAS has seen the strongest growth. Last year sales of low-end NAS boxes costing between $5,000 and $25,000 grew by 41%, according to IDC, compared to a shrinkage of 14% across the NAS market as a whole.

Market Overview

NAS accounted for only 11% of the total $12.5bn external disk system worldwide last year, according to Gartner Inc. That proportion is set to almost double by 2007. While SAN or DAS block-level disk revenue will grow only very slowly over the next few years, NAS revenue will grow at a very healthy clip. Following the disk sales slump of 2001 and 2002, Gartner expects block-level external storage system revenue to show a CAGR of just 1.7% between 2002 and 2007. Over the same period NAS revenue will more than double to reach $3bn, showing a CAGR of 17%, the researcher predicts, giving NAS a 20% share of all disk storage systems revenue.

The availability of NAS devices powered by the familiar Windows operating system is one reason for the take-up of NAS. But there is also an increase in the amount of data being generated as files--such as web pages, PowerPoints, multimedia files, and spreadsheets, and the simpler management and better disk utilization rates offered by NAS in comparison with block-level storage. Other factors are the tightening of data retention regulations, the increase of mobile and wireless working moving data storage off the desktop, improvements in NAS performance.

The rise of NAS maybe a short-lived trend however. There is also a trend for greater convergence of NAS and SAN block-level storage via the use of NAS heads. If vendor marketing staff get their way, this will result in customers no longer considering NAS to be a separate form of storage from block-level storage but simply the same cake with a different frosting on top.

Market Size and Shape

The NAS market is hugely top heavy, and it is set to stay that way. Some 65% of NAS revenue in 2002 came from very expensive devices costing $100,000 or more according to Gartner. The researcher expects the sector to become more democratic by 2007--but only slightly. In 2007 high-end NAS costing $100,000 or more will account for 60% of total revenue, Gartner predicts.

Some of that small shift of share away from very expensive NAS devices--some of which can cost over $250,000--is being driven by Microsoft. According to IDC, Windows powered 32% of all NAS boxes sold last year. Of course the huge majority of those Windows-powered NAS boxes were low-end machines, and well over half cost less than $5,000. By last year however the software had crept up-market into around 20% of upper mid-range NAS devices costing between $25,000 and $100,000, IDC estimates.

Two vendors dominate the market--Network Appliance and EMC Corp. Bitter rivals, the two have seen their enormous market shares slide recently but they still own huge percentages of the sector's revenue, together with almost uncontested positions at the high-end of the market. According to Gartner, in 2002 NetApp accounted for 37.4 % of all NAS revenue, and EMC accounted for another 36.8%. Trailing in third place with a diminutive 6% came Dell Computer Corp, followed by Hewlett Packard Co with 4.0%, Quantum Corp with 3.5%, and IBM with 2.9%, all making their marginal shares at the low end of the market.

The reason for EMC and NetApp's huge share of the cake is that the major suppliers that could have challenged them have so far ignored the market, mostly because of the threat posed by NAS to sales of general purpose servers. One NAS box can replace 50 or more servers that were dedicated to file serving. Roger Cox, Gartner analyst said: "Server companies have a problem--they get more money for a general purpose server than for a NAS device, although they say they make less profit on the general purpose server. It's surprised me that they haven't done better in NAS, but the problem is that they get into a conflict between server and NAS."

At the top-end EMC and NetApp's stranglehold tightened last year. For hardware above $100,000, EMC took 54% of revenue in 2002, while NetApp took 41%, according to Gartner. In third place came start-up BlueArc Corp with just a 2% share--a respectable performance given its size compared to the titanic EMC and NetApp.