The Midmarket Shops For Storage

A couple of years ago, most vendors were clamoring to stake a hefty claim in the enterprise market. No better way to make millions than low-volume, high-margin sales. But in just two years, the market has shifted and enterprise customers are buying more storage equipment that is characterized as midrange.

Why? Simple: Budgets are tight and, even more important, those high-end functions that once existed only on enterprise systems have migrated down into midrange devices. This is one of the reasons Framingham, Mass.-based research firm International Data Corp. has identified the storage midmarket as a growth area.

According to IDC researcher Eric Sheppard, worldwide external disk storage systems that cost between $50,000 and $150,000 are expected to grow from 20.7 percent of total sales in 2002 to about 25.4 percent in 2006. In addition, growth for disk arrays that cost less than $50,000 is projected to go from 36.91 percent in 2002 to 43.88 percent in 2006.

This doesn't mean it's an easy selling season for storage VARs. The storage industry has attracted a lot more players in recent months. That, along with the fact that a price war is going on in storage, means this part of the market has become much more ferocious in its competitiveness. "On one side it's good that all the system technology has matured," says Tony Ferrante, vice president of sales at Computer Design and Integration, Teterboro, N.J. "But at the same time, I can see it making it more difficult for people to sell. The competition is getting stronger because you are getting more players coming into the market as well."

Everybody has a viable story to pitch and sell, explains Gib Semmes, a storage consultant with Alliance Technology Group, Hanover, Md. Everyone has hardware. Everyone has services. And everyone is beating each other up over price and margins. So solution providers have to offer something more. Semmes says that, as an independent storage integration firm, Alliance has invested nearly $2 million in their own labs, which are used to simulate customers environments.

VARs have to be more flexible. You cannot just be pushing boxes any longer. And a solid understanding of the technology is needed to play in this space. Even vendors are warning resellers that they need a real edge to be profitable. "There are vendors that are going to these VARs that have been rock-solid to them for years," Semmes says. "They are going to them and saying, 'Look, margins on hardware are dead as dead gets. If you are not going to sell our services -- our professional services for things like data migration or replication or disaster recovery -- then you might as well close your doors.'"

Semmes has a specific strategy for why he takes on certain clients and avoids others. As a general practice, he avoids NT shops. They don't tend to be very complicated environments, he says, so not many of those customers are looking for consultant-generated solutions. Instead, he focuses on the customers that fall in the midrange to high-end. Many of those are looking for solutions to rectify their complicated IT environments. "I'm not going to beat myself up" over certain accounts, Semmes says. "I don't want to fight the little ones."

Where does Semmes see the storage market going in two years? "I see us being able to walk into an account and pull [the technology] out of our pocket to handle the amount of storage [that needs] to be covered. We are already selling 260-Gigabit drives. Think about that. That is one terabyte in four drives."

Nonetheless, the price battles in storage are not entirely a consequence of a down economy. Yes, companies don't have money to splurge. But on another level, what is happening to the technology -- in which sophisticated features and functions are becoming more of a commodity -- is a natural occurrence.

When a technology is first developed, special features can be found only at the high-end. That's what happened when open-systems storage -- a move that took monolithic, mainframe storage and decentralized it -- became the new way for customers. In the mainframe world, things like snap copies, replication, storage utilization, high-end reporting on bandwidth and throughput are standard practice within the machine.

"Mainframe folks, you ask them exactly where their data lies and what kind of performance they are getting and they know it right off the top of their heads," Semmes explains. "But the open-system folks have always been lacking those tools."

Many experts agree that the storage industry itself helped create these complicated IT environments that customers now are struggling to get under control. The excess of the 1990s prompted vendors to oversell disk capacity. When customers encountered a storage problem, they became accustomed to just throwing more disk space at the problem. And that was an easy solution when money was overflowing.

But then budgets got slimmer. Customers were faced with both an out-of-control storage environment and no extra money to solve the problem. "Customers were sold on the path that all their data was mission-critical and it all had to be RAID-1 protected," Semmes says. "So they overbought. And the tools were not there to measure the utilization rates, so now they are trying to repurpose what they have. They are facing a lot of challenges out there."

Therein lies the problem for customers...and the opportunity for solution providers. Take Alliance Technology Group, which conducts storage assessments for customers. Essentially, they go into the environment and evaluate the problems before architecting a solution. Since 1997, Alliance has customized about 500 of these kinds of solutions. "As opposed to just throwing hardware at the problem, or throwing people at it," Semmes says.

What vendors have recognized is that, in this down economy, there is money to be made in the midmarket. Moreover, they are finding that even midrange customers have the same needs as the high-end customer," says Denise Bounaiuto, vice president of worldwide business partner sales, IBM Storage. "[So the midmarket technology] may not be to the ninth degree of what our high-end systems have, but it's a whole lot better than what customers in the midmarket space would have found previously."

IBM may have given away the high-end storage space to EMC, but analysts point to Big Blue's FAStT Storage Server as a popular midrange product. It scales to more than 10 terabytes and includes 2-Gigabit Fibre Channel connectivity, and it has a starting price of about $15,000. "What this means is the midmarket guys can start taking advantage of [the technology] without having to sell a division," says Arun Taneja, an independent storage analyst. "They have to deal with the same problem as the big guys. For that reason, the midmarket opportunity is huge."

This is something that NSI Software recognized. Traditionally, the company had focused on the enterprise side, catering to the needs of the financial sector. But in recent months, NSI has adjusted its pricing to be more competitive in the midmarket space.

"We are trying to respond to the needs of the market," says Bob Guilbert, vice president of marketing and business development at NSI.

It's a side that vendors,some of which in the past thought midtier customers did not have the same problems as high-end guys,are starting to factor in the midmarket when designing technology as well. IBM executives say they are trying to develop more systems that have what are called self-healing attributes, where the system diagnoses a problem, and either tries to correct it itself or it reallocates storage. This is called autonomic computing; one of its features is called Dynamic Capacity Addition, where unused or new storage is brought online without bringing down the system.

What is noteworthy here is that IBM is considering the midrange as it dives into this new endeavor of autonomic computing. IBM views the midrange market as a growing space, and they characterize those customers as companies with 1,000 employees or fewer. These companies don't have large IT staffs and, of course, they do have tight budgets.

They also tend to have storage-utilization rates of about 60 percent. "So what they are looking for is better management tools, along with the storage products that they are buying," Bounaiuto says. "They are not just looking for hardware. They are looking for hardware with storage-management tools to get better utilization of their storage dollar."

IBM executives say that the cost of managing software is eight times higher than the actual purchase pice of the storage hardware. "It's up to us to lower the price performance of the hardware but it's also more important to give customers a storage-management strategy that goes along with that," Bounaiuto says.

She adds that smaller businesses right now are more willing to spend money to enhance their IT infrastructure. "But let me put a big caveat on it," Bounaiuto says. "They are willing as long as they can physically see a return on the investment. If you can not do that, they are not willing to spend."