Storage Central: Industry Expected to Take a Revenue Hit This Year

After experiencing tremendous revenue growth in 1999 and 2000, the total storage industry is expected to shrink by 18 percent in 2001, according to a report recently released by International Data Corp. (IDC).

That could be a jolt to an industry that has continued to grow except for some slight dips in 1992 and 1998 before experiencing a high storage growth in 2000--when vendors raked in $31.2 billion in market revenue, a 10 percent year-over-year increase. Revenue also increased 11 percent in 1999. Now, IDC analysts expect 2001 revenue to drop to $25.5 billion.

"The gray market has officially affected storage, too," says Eric Sheppard, an analyst with IDC, based in Framingham, Mass. "We had seen growth in 1999 and 2000 that was high and clearly unsustainable. We expect the market to decline again next year at around 17 percent."

Sheppard says IDC attributes the recent revenue explosion to companies stocking up on disk drives for their Y2K testing as well as the dot-com and telecommunications boom. Conversely, the main culprits for the revenue drop range from the demise of numerous dot coms to intense price competition among storage vendors and a corporate clampdown on IT spending.

EMC, Compaq, IBM, Sun Microsystems and Hewlett-Packard all are projected to suffer revenue declines this year in storage. But some suffered more than most. For instance, Sun Microsystems went from $3.1 billion in revenue in 2000 to $1.6 billion in 2001--a 48.9 percent belly-flop. This summer, Sun signed a deal with Hitachi Data Systems to resell the enterprise Lightening 9900. But thus far, any potential deals have yet to materialize in IDC's revenue numbers.

"The Hitachi deal came late this year," says Sheppard.

Likewise, EMC had $5.6 billion in revenue in 2000 to dropped to $3.8 billion in 2001--a 32.6 percent decline. Analysts say EMC and Sun have been hit hard together because it was not uncommon for EMC to sell its storage in Sun's server environments.

"As Sun goes, so does EMC," says Sheppard.

IDC acknowledges that the storage pricing wars have been particularly fierce. "We are seeing price erosion for EMC far higher than normal," he says. "We heard of couple of instances where multi-terabyte deals were selling five cents a megabyte. Those were extreme cases."

In the midst of these revenue swings, storage leaders Compaq Computer and EMC continue to duke it out to acquire the mantle as the undisputed storage king. Compaq is projected to regain its title as the number one leader in worldwide storage systems revenue, for both internal and external storage, that was taken away by EMC in 2000. Compaq had $5.3 billion in revenue in 2000 and dropped to $4.4 billion 2001--a 16.8 percent decrease.

"The bad times have hit EMC harder than they have hit Compaq," says Sheppard.

EMC, however, still remains the storage leader in the external storage category, which includes environments that use ESCON and Fibre Channel. EMC had $5.6 billion in revenue in calendar 2000 and they are projected to pull in $3.8 billion in 2001. Compaq's revenue totaled $3.2 billion in 2000 for external storage, while this year the company is projected to earn $2.7 billion. IBM actually is expected to increase it revenue in external storage this year: The Armonk, N.Y.-based company had $1.7 billion in 2000 and that is expected to increase to $2.1 billion this year.

In the past EMC has challenged Compaq's leadership position by saying the figures included external disk capacity, which IDC defines as three or more disk drives sold with servers. It does not include workstations or PCs. Unlike Compaq, EMC does not sell servers. But Compaq's rebuttal is that EMC likes to cut the numbers so they work to their advantage.

"All the numbers can be cut different ways," says Mark Lewis, general manager of Compaq's Enterprise Storage Group. "They like to emphasis markets that include ESCON and other markets we don't play in. It's like being in the TV show business and saying, 'We are the top rated comedy show on Tuesday nights.' That's fine, but we are the number one overall rated network.

"We have both felt the macro-economic effects. But we have gained share. We like to gain share in good markets and we especially like to gain share in bad markets," Lewis adds. "Our business was able to sustain the economic woes better than EMC. We have a better pricing model and we have a better business model."

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