Critical Mass: Network Appliance Takes On Tier One

For many years, Strategic Technologies (STI) president Mike Shook was quite satisfied partnering with storage-system providers Hitachi Data Systems and Sun Microsystems. The $100 million Cary, N.C.-based integrator regarded the two vendors as best-of-class in their respective data-center and midrange-storage segments. Successful businesses don't stand still, though, and STI is no exception. Last year, Shook decided to broaden the company's storage portfolio and started shopping around for a key player.

His pick? Not the company you'd expect.

STI didn't go with storage leaders EMC or Hewlett-Packard. Nor did it go with IBM. Instead, the company added Network Appliance (NetApp), the fast-growing, second-tier supplier of midrange and high-end storage systems that today is nipping at the heels of tier-one vendors.

NetApp wasn't a leap of faith for STI, which counts among its clients CSX, SunTrust Bank and Wachovia. In fact, Shook sees NetApp as a better long-term bet than EMC in terms of its platform and price performance.

"With NetApp, we can beat EMC's CLARiiON day in and day out," Shook says. "We believe NetApp is really a powerhouse. We can't turn a blind eye to that."

Few are turning a blind eye to NetApp these days. A company that a dozen years ago was an upstart vendor making file servers known as "toasters," NetApp boosted its sales by 30 percent-plus last year. And while roughly 20 percent the size of EMC, it's growing faster and stealing market share from its rivals.

NetApp is best known for its network attached storage (NAS). It is now also becoming a player in SANs, iSCSI, virtualization, storage security and even tape. And when it comes to buzzwords like information life-cycle management (ILM), NetApp is on a level playing field with the big boys. All told, the company grew sales by a whopping 37 percent in fiscal year 2005, to $1.6 billion, and is on pace to climb to $2 billion in revenue.

Numerous storage integrators and analysts contend that NetApp has the technology, product breadth and channel programs in place to support key storage consolidation, backup, replication and disaster-recovery implementations.

"They continue to innovate, and we find that with their products we can deliver real value to customers in the primary storage space and in the data-protection space as well," says Scott Robinson, CTO of DataLink, a NetApp partner.

That didn't happen overnight. NetApp CEO Dan Warmenhoven has made some aggressive and well-received moves to broaden the company's reach, putting it in an even greater position to go after EMC head-on. With its $300 million acquisition of Spinnaker Networks early last year, NetApp now has the key components to roll out a storage grid architecture, while a deep partnership with Veritas Software gives it rich data-protection and system-virtualization software. In recent months, Warmenhoven formed a pact with IBM, which has the rights to OEM the entire NetApp product line. NetApp has made other key acquisitions: tape vendor Alacritus and data-encryption company Decru.

Warmenhoven makes no bones about gunning for EMC and HP. "The company we have to take share from is Hewlett-Packard; the company we have to beat is EMC," he says.

During the past decade, NetApp has been putting the technical foundation in place to be a contender. The company has developed and championed some key technologies, including the WAFL file system, and is also credited with helping put iSCSI, a low-cost alternative to Fibre Channel, on the map. With a wide range of products today, NetApp continues to defy its critics, scaling into some of the largest of data centers even though it lacks a product like EMC's DMX or IBM's Shark. It is the vendor of choice for Oracle and Yahoo, managing petabytes of data for its free e-mail service.

"They have a huge amount of momentum with enterprise customers, and they've got a pretty good story to tell with a pretty cohesive platform," says Dan Renouard, chief storage analyst at investment research firm Robert W. Baird and Co.

Moving To the Channel

The percentage of NetApp's sales through the channel in North America for the fiscal year ended April 30 was 45 percent, up from 36 percent in the prior year. The goal this year is 48 percent, says Leonard Iventosch, vice president of Americas channel sales. Just a few years back, he says that percentage was in the 20s. On the government side, 80 percent of sales will go through the channel. Overall, 53 percent of NetApp's gross revenue worldwide comes through the channel.

"Our senior executives believe that is a good thing," Iventosch says. "Their thinking behind that is twofold: One is you can't grow and scale without the channel, especially in the midmarket, and it also allows our senior-level direct salespeople to focus exclusively on large enterprise accounts." Still, one-third of NetApp's overall enterprise business goes through the channel.

Baird's Renouard says NetApp is still underdistributed.

Eric Geslien, director of business development with NetApp partner All Points Networking in South San Francisco, says since the vendor converted its direct-sales reps into channel reps, they have become more motivated to work with partners. "They've really changed their business model from a direct to a channel-friendly model, and it has helped us compete," Geslien says.

Another key move into the channel came two summers ago, when NetApp moved its products into two-tier distribution, inking deals with both Arrow Electronics and Avnet. Steve Tepedino, co-president of the Americas for Avnet Technology Solutions, says the NetApp relationship has gone from zero to 60 in that time. Avnet will push $100 million of sales with NetApp this year, and Tepedino calls it the "fastest-growing partnership" inside the company.

Effective May 1, NetApp officially implemented a new hard-deck model, where every district manager had to turn in a list of accounts that are above the hard deck. Those are accounts where they can work directly or with partners. Everything else has to go through the channel, or they don't get paid.

NetApp is also targeting EMC resellers with special rebates and margin enhancements. In an effort to help partners generate more demand, NetApp rolled out the first in a series of campaigns this quarter targeted at its iSCSI products. That included channel-only bundles, live seminars, and targeted marketing and telesales, with the goal of developing 3,000 additional leads. "We expect 80 to 90 percent of those leads to go to the channel," Iventosch says.

"[NetApp] deserves a huge amount of credit," says IDC analyst Janet Waxman. "They are smart, they are predictable and very consistent with the channel. They've got it figured out."

NetApp also has been successful in wooing some major channel partners. During the past year, GTSI, a large public-sector integrator and EMC reseller, has substantially increased its NetApp business. And in some cases, at EMC's expense. In one bureau within the Department of the Interior, GTSI displaced EMC based on a lead provided by NetApp, says Steve Krauss, the integrator's storage-infrastructure manager.

A Common Rival

Make no mistake--EMC, the Hopkinton, Mass.-based storage giant NetApp would love to supplant, is hardly in trouble. In fact, it is perhaps among the healthiest of hardware companies in the IT industry. And with $9.6 billion-plus in revenue, EMC still dwarfs NetApp in overall scale and breadth of products. Yet, unlike large-scale systems, NetApp's midrange products lie in the sweet spot of the market. That's because midrange systems can manage storage just as reliably, if not more so, at a fraction of the cost. For that reason, many argue that EMC's biggest rival in storage may not be IBM, but NetApp.

As it turns out, it's both. Late last year, when IBM moved Andy Monshaw back to run its struggling storage business, it became apparent the company had a gaping product hole and flat growth in its midrange storage line. IBM's NAS 50G hardly lit the world on fire. Describing NetApp as the "one clear choice" to bolster IBM's portfolio, Monshaw and his team aggressively pursued a deal with NetApp. In April, the two companies agreed to the OEM pact.

"It gives them additional credibility in those high-end shops where those guys are bigoted against them," GTSI's Krauss says.

Common Software Platform

On the technology front, one of NetApp's key advantages is its recently released DataOnTap7g platform, which is the single operating environment for all its products, including its NAS filers, SANs and iSCSI systems. By contrast, EMC has fragmented operating environments. NetApp's single architecture is simpler from a programming and management perspective, and prevents interoperability problems, according to Warmenhoven.

That resonates well with many partners, including Forsythe Technology, which carries storage products from EMC, HP and virtually every major vendor. "It comes down to simplicity," says Jim Geis, Forsythe's director of storage solutions. "You don't need to learn a new piece of software for different products."

DataOnTap7g lets organizations bring their storage utilizations up from the average of 30 to 40 percent to 70 to 80 percent using a technology NetApp calls FlexVol, which enables an administrator to reclaim and reallocate unneeded space, thus lowering costs. That level of virtualization makes it possible to simplify how customers configure data. With FlexVol, administrators can spread volumes across 100 drives vs. 14, notes Trace3 CEO Hayes Drumwright, a NetApp partner.

"Now, because of dual parity, you can have two drives fail and not have a RAID group go down, which allows you to greatly expand how big you make RAID groups," Drumwright says.

Such innovation is encouraging VARs to work with NetApp. Take DataLink, one of NetApp's largest partners, which also counts EMC and Hitachi as key partners. DataLink's NetApp business doubled last year, says Robinson, who applauds NetApp for being out ahead on a number of technologies.

"They are early to market in combining some of that functionality with some of the virtualization capabilities they have with DataOnTap7g," Robinson says.

Carving Its Own Niche

But if NetApp hopes to become a multibillion-dollar player, it's going to have to find new areas of growth. Warmenhoven has placed a big bet on Decru, for which he plunked down $272 million, or nearly 10 times the annual revenue of that company. And he believes that recent high-profile data losses will justify the premium paid for Decru.

"It's the solution the market has been crying out for, but no one has been able to deliver," Warmenhoven says.

Decru and NetApp have begun developing a solution called CardVault that stores secure credit-card data and supports the Payment Card Industry, or PCI, standards, which mandate that merchants and payment-processing providers use best practices to secure credit-card data.

Challenges Ahead

Can NetApp ever catch up to EMC? Many still perceive NetApp as a one-trick pony with its NAS offerings.

"Even though I think they have a great performing disk, how do you say it performs against a [Hitachi] TagmaStore or [an EMC] DMX?" asks Nick Cellentani, vice president of storage consulting at solution provider Adexis in Columbus, Ohio.

While Howard Elias, executive vice president of EMC's office of technology, describes NetApp as a "tough competitor," he shrugs the vendor off as a meaningful threat. Elias says EMC's midrange business is growing at rates ranging from 40 percent to 50 percent. "We have a larger business that's actually growing faster than NetApp," Elias says.

Yet there is no denying NetApp is knocking at the door of the tier-one storage market through technology innovation, business deals and a newfound channel push. If NetApp keeps growing at the same rate, the tier-one big boys just may have to let it in.

NetApp AT A GLANCE

Year founded: 1992

Number of employees: 3,900

Revenue: $1.6 billion (FY 2005)

FY 2005 gross margins: $237 million, up 48%

% of commercial Sales through the channel: 45% vs. 36 % in the year prior

% of NA government Sales through channel: 80%

Total % of gross Sales Through Channel: 60%

Worldwide offices: 89

Worldwide installations: 60,000

Key Customers: Bank of America, Citicorp Securities, CSX, Lockheed Martin, Merrill Lynch, Oracle, Texas Instruments, Wachovia and Yahoo!

Key products: Fabric Attached Storage (FAS) Series for primary storage, NearStoreR200 for nearline backup, V-Series storage virtualization, NetCache for content and Web delivery, DataOnTap operating system