SSPs Shift Gears

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Shortly after StorageNetworks went public in June 2000, CEO Peter Bell counted more than 30 newcomers that stormed the SSP market with plans to topple his Waltham, Mass.-based company. They called themselves storage service providers (SSPs), and storage-for-hire was their game. Their market pulled in more than half a billion dollars in investments based on a simple plan to sell storage: Turn on a switch and it's there,just like any utility.

Unfortunately, things didn't quite work out the way many of these SSPs,and their investors,had predicted. The dot-com fallout and a crash in the telecommunications space were just some of the nails hammered into the SSP coffin. The market's latest victim: Sanrise, based in Dublin, Calif., which filed for Chapter 11 last month.

In fact, just a year ago, Evaluator Group, a Greenwood Village, Colo.-based analyst firm, sought to collect information on 56 companies playing in the SSP space. What it eventually discovered was the SSP market,once expected to grow to $10.5 billion by 2005,had sputtered, stalled and burned.

"We were going to cover all 56 [companies," recalls Jack Scott, managing partner at Evaluator Group. "We sat down with someone from [SSP Storability to go over the list. He would point to one and say, 'This guy is out of business.' Then he'd point to another and say, 'This guy is going out of business.' Of the 56 [companies we looked at, there are probably five to 10 that are viable today. And they are all changing their business models. This industry has had a real shock."

Analysts now say those SSPs suffered from an unstable business model. Many needed large capital investments up-front. To meet that requirement, some finagled barter deals with hardware vendors, which gave away truckloads of hardware with the belief they would ride the successful coattails of SSPs. Other vendors decided to forgo the initial hardware cost if the SSP agreed to pay the lifelong maintenance costs on the equipment.

"Anything to defer current expenses," Scott says. "A lot were back-end-loaded leases in which the vendors never

got paid."

In addition, some SSPs built storage farms in data centers owned by Internet service provider Exodus Communications and network service provider Global Crossing, with the hope of selling their services to customers tied to Internet data centers and telecommunications. For that reason, the SSPs needed huge bandwidth capabilities. "Unless you have a relationship with a communications carrier, the economics don't work very well," Scott says. "A lot of money and hardware were invested on what was a flaky business model to begin with."

Today, you can count companies like StorageNetworks and Storability Software among the few that have survived long enough to transform their business models. They're taking their proprietary software initially developed in-house to manage their customers' systems either on-site or at a co-location, and are now selling it to customers who are looking for ways to more efficiently manage their storage capacity. StorageNetworks and Storability are hoping to capitalize on the fact that, on average, most companies use less than 60 percent of their storage capacity.

For example, in March, Southborough, Mass.-based Storability announced availability of its Global Storage Manager, which manages heterogeneous storage environments. "Its software is probably the most comprehensive," Scott says.

The company began its transition into a software provider in December. Executives say Storability, which still is private, never made the initial hardware and data-center investments other SSPs did because it chose a business model that promoted managing storage on the customer's site.

Storability has downsized from 250 employees to 50 employees, and has sold off the professional-services and managed-services portions of its business. Last month, the company announced it had finalized the sale of some assets, including its AssuredStorage Operations Center (ASOC) and licenses for software technology tied to the delivery of remote-storage-management and administration services, to Storage Technology, Louisville, Colo.

In May, StorageNetworks released its proprietary storage software to the public. With its Storos StorageManager version 5.0 platform, StorageNetworks is now jumping on a new opportunity as a software provider. Customers still have ballooning data, CEO Bell says, and they also have plenty of storage capacity. That capacity, however, is not being used effectively. For instance, StorageNetworks recently met with a potential customer,a telecommunications company,and discovered it was using only 11 percent of its 400 TB. "And they thought they were efficient," Bell says. "It's not uncommon."

It's hard to predict how successful the metamorphosis will be for those companies, which are facing a tougher economic climate. An average sale, for example, takes six to nine months to complete. Competitors include veteran vendors Computer Associates, EMC and Veritas Software, among others. Moreover, numerous start-ups also are eyeing the storage-software market. Of note, StorageNetworks has yet to become profitable and has laid off 350 of its employees. Its stock price has taken a beating since its $150-per-share price zenith, to below $2.00 per share (as of press time).

StorageNetworks' strategy now is to target the storage inefficiency problem by promising customers a quick ROI. The company has set up a system of setting goals; once those goals are met, StorageNetworks moves on to the next set. Bell says customers are warm to this tactic: Scaled-down orders fit within tight budgets. Plus, StorageNetworks only asks for another sale once the first goals are completed.

"It seems to be the right approach," Bell says. "Only time will tell."

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