StorageNetworks Then and Now: A QandA with Peter Bell

In 1998, StorageNetworks was born and what followed was over 50 startups in a market where investors poured more than $500 million. For many of the storage service providers, that business model crashed. The most recent was Sanrise, which filed for Chapter 11. The few companies that still are surviving are now re-inventing themselves into software providers. Peter Bell sat with VARBusiness editor Sonia R. Lelii to talk about the early days and where he plans to take StorageNetworks in the future.

VB: Talk to me about starting StorageNetworks. How did it all begin?
Bell: When we started the company, our first set of customers were in Houston, Texas. They were oil and gas companies. Our longest-standing customer is Unocal. Big oil company. They were our first company in October of 1998. In the oil and gas business, they do seismic data processing (go out and bid for oil rights, risky business,) They do seismic analysis. Huge requirements of storage capacity needed four times a year, when they have the bids. They have transient requirements for storage. It spikes four times a year. So we went to these guys and said, 'Hey ,if we had the ability to have storage on demand. Would you want that?' They said, "Boy, that would be great. We can have a more efficient way to get it when we need it." Like a utility, turn up the heat and turn it down.

VB: Tell me about some of your early competitors. How similar were they to StorageNetworks' business model?
Bell: There were a lot of companies, not just in storage, but generally they were not real companies. No customers, no products. They were not doing anything. I remember going to the analyst conferences I would go up and present. Then these private companies would go up. And they would say, "We are going surpass Storage Networks next year and here is how we are going to do it." Then they would get off the stage and they would come see me in the back room and say "Hey, we are running out of money, would you guys buy us?" Most of them were a joke.

VB: So which ones were viable competitors?
Bell: None of them. Our biggest competitor, at that time, was the customer mindset of not changing. We were saying there is a new way to manage storage, a more efficient way that can reduce costs. Our biggest challenge was the status quo. The IT resistance to change. If you talk to CIOs and IT directors today, 99 percent are concerned with the inefficiencies of their storage environments. Two years ago, when the economy was great. They were not concerned with inefficiencies. The issue then was, "Why change?" That was the real competitor.

VB: Who are your competitors today?
Bell: EMC, Veritas, Computer Associates, BMC. Those are the four.

VB: Do you think EMC can reinvent itself quickly enough?
Bell: EMC has a lot of cash. Plus, three times that company has changed their business and succeeded. They went from memory to disk in the late 1980s, early 1990s. They went from mainframe disk to open systems disk in the mid-1990s. In 1998, they went from storage devices to enterprise storage infrastructure. The challenge is as they get bigger it gets harder, and now they are doing it with much more credible competitors before. They are dealing with a much tougher economy. So they are dealing with two major forces coming at them they didn't face before.

VB: In the early days of your business, what percentage of your customers were dotcoms?
Bell: The first year was all brick and mortar companies. Basically it was in two markets, Houston oil companies and New York financial services. Around late 1999, we got more money and we started to scale the business. That is when both the dot com or initiatives for Internet businesses [started to take off--like a Fleet bank wanting to do Home Link. It was pure venture guys, the dot coms, or enterprises that wanted a quicker time to market for a new service. We went public in 2000, about 80 percent of our business was from Internet-related applications. Today, in the first quarter, it's about 80 percent brick and mortar. Now it's data center application, Oracle, messaging application. E-mail is a big driver. It's CRM applications. It's supply chain stuff.

VB: Why?
Bell: I think storage was essentially oversold in the market by a factor of three. In other words, for every three gigabytes sold, the customer only needed one. If you look at the margin compression of the hardware guys over last year, it's gone from high 50s and low 60s to 30, 35, 40 percent because the customers realize they have way too much storage. Prices have plummeted because vendors are reacting to low demand. There are a lot of storage area networks but they are islands. The information still continues to double (but) storage is not effectively shared. I just met with a customer at a large telecommunications firm. Their big application is billing. They thought they were efficient. We just did a study with them. It turns out they were at 11 percent utilization with about 400 terabytes. Even at storage that is 5 cents a megabyte, if you bring them up to 50 percent utilization, you free up about 300 terabytes of storage and you save them 9 million bucks.

VB: They were using only 11 percent of 400 terabytes?
Bell: It's not uncommon. Storage is either direct-attached or SAN islands. So, it does not have modularity or the partitioning that customers need. If I call our IT guy, he can tell you what the usage is on each phone in this company. IT does not know what is going on in storage. They now are recognizing this is a problem; there is no hardware vendor who is going to solve it. And the interoperability stuff, that is a farce. That is not going to change.

VB: At what point did you realize that storage as a utility was not going to work?
Bell: Probably second half of 2000, when we started to see a lot of infrastructure providers. The Exodus and 360 Networks. 360 Networks went public a year after we did, raised more money than we did, and within a year they declared bankruptcy.

VB: How are we going to solve the issue of mistrust in our economy created by the Enron, Arthur Andersen and WorldCom scandals?
Bell: It's a big problem. It's going to take some. We have the best capital market system in the world. Now it's under question. Then there is more tactical stuff in the storage industry because customers say, "I don't trust anyone because they all lied to me. Or I don't know who is lying so I'm not going to buy right now"

VB: How do you get past that?
Bell: What we are going to do is what we have been doing. Every week on Monday mornings, we review every customer. We have been doing this since the start of the company. [They are labeled red, green or yellow. Red means there is a problem; yellow means there is a potential problem; and green means they are satisfied. Over the four years we have been in business, we have never had a customer cancel, other than a dot com that has gone out of business. We are running at 100 percent green. I can look at any customer in the eye and say, "We are the only vendor that is going to solve your problem, which is inefficiency." And if we don't think we can deliver it, we won't even take your order. Long term that will prove to be one of greatest strengths. Will that solve the problem of trust? It only solves it after we do business with a customer for a year. And we keep delivering every quarter, every month, every day. But you have to do it with every customer, every investor, every employee. It is going to take time. Then, every time someone reads about [another financial scandal, it slows down the process. It's going to take time.

VB: Do you sense a customer's mistrust?
Bell: They don't always tell you. I know what they are thinking. I sense it. I tell customers, "I know everyone is trying to sell you stuff probably more than ever... You have a lot of guys lying to you. And you have a big problem you are trying to solve and you don't know where to start." I know they are thinking it. And if they don't say anything, I try and bring it up. Our strategy to our customers is to start small. You want to get where your computing costs go down and service levels go up. Let's have metrics set up every 90 days and let's have success tied into those metrics and measure them and then move to next step. Customers love that because I'm not asking for a huge order which is good for their budgets. Two, I'm only asking for the next step when I prove on the first step. I can show them a quick return on investment. It solves the customer problem in a way that meets their budget and allows us to build on for the future. That is how we are treating the market, working with customers It seems to be the right approach. Only time will tell.

VB: How do you evaluate your new competition?
Bell: I have them in three buckets. The first are the hardware and system guys who are now delivering more software. I believe it will be hard for these companies to separate their software from the hardware because they have never done it. More importantly, it's culturally difference, particular on the sales and marketing side. When you move into software, you have to be more partnershipcentric...which is counter cultural to many of these companies. The second bucket is Computer Associates and Veritas Software--companies with strong heritages in software. Those are the ones I worry about the most. The third bucket is the number of startup companies. You have to keep your eyes on that space today because it's to early to tell which will be the winners.