Storage market data released last month by Gartner highlight an alarming trend: The big vendors keep getting bigger, and the rest are being squeezed into oblivion.
The trend is due in part to the merger mania sweeping the storage sector, and in part to some savvy market moves by the biggest vendors.
According to Gartner's worldwide external controller-based disk storage revenue analysis, the market size for the second quarter totaled $3.6 billion. The top seven vendors accounted for 84.1 percent of worldwide revenue in the quarter, up 1.6 percent from last year, according to Gartner analyst Donna Taylor.
"The growing market concentration amongst the top vendors has been a result of not only M&A activity, but of the success of the marketing strategies followed by the major vendors in penetrating the SMB market in particular," says Taylor.
What does that give us? EMC rules the roost at 23.8 percent, followed by IBM and Hewlett-Packard (each at 14.6 percent), Hitachi/HDS (8.3 percent), Sun Microsystems (7.6 percent), then Dell and Network Appliance (both at 7.5 percent).
But these raw numbers hide the full picture. EMC's total actually excludes OEM revenue from Dell and Fujitsu Siemens, and HDS OEMs some gear for HP and Sun Microsystems. So in reality, we may be looking at a top three that consists of over half the total, followed by a further third owned by the next four challengers.
"It's a competitive market and customers aren't looking for more vendors," says Tom Heiser, EMC senior vice president of corporate development and new ventures. "They're looking for deeper relationships that will result in better service and more cost-effective, comprehensive solutions that will help them better manage their information."
EMC's M&A strategy, he says, is inherently focused on building out its core product portfolio and potentially moving into fast-growing adjacent markets. Documentum, for example, enabled the company to enter the content management market. Smarts, on the other hand, supplemented existing storage and resource management capabilities while adding a network management element.
"With time, as with any market, consolidation is natural," says Heiser.
Such acquisitions, however, don't leave much for lesser vendors. In fact, the tiny morsel remaining is shrinking faster than an Antarctic ice shelf.
"Smaller vendors continued to see their market share erode, as the 'Others' category experienced a revenue decline of 4.9 percent in the second quarter," says Taylor.
Are Higher Prices Coming?
So what might the eventual consequences be of a growing market concentration among the top vendors? Could this mean higher prices and fewer choices for end users?
At first glance, this seems unlikely, since the cost of storage has been crashing for years.
"Disk and tape capacity grows at 30 percent, yet the price falls at a rate of to 30 percent annually," says Fred Moore, an analyst with Horison Information Strategies.
According to Horison figures, the overall cost of disk was $10 per GB at the end of 2005. By 2009, it will have sunk to $2, and by 2015 it will be down to $1 per GB.
In other areas of storage, the advent of iSCSI and other innovation has steadily eroded margins. Vendors such as EMC, sensing the end of the hardware gravy train, moved into software, services and beyond to remain profitable.
The beneficiary, of course, has been the end user. But that may change if market consolidation trends continue.
"Continued consolidation in the industry will reduce end-user choice and slow price declines as a result," says Taylor.
Greg Schulz, senior analyst and founder of StorageIO, concurs.
"There is a definite fear that mergers will lead to pricing changes," Schulz says. "We might see some price hikes, depending upon market conditions."
However, he can also see the possibility of continuing price drops. Take the case of the Fibre Channel (FC) switch space. There is one school of thought, he says, that feels that Brocade buying McData will drive up prices. The people in this camp believe that between Brocade and Cisco, it will be much easier to maintain higher margins.
But there is another view. Smaller vendors such as QLogic may well gain more recognition as a result of the Brocade-McData deal. QLogic, after all, is already a significant FC technology presence. It supplies adapters to a veritable who's who of the server and storage world, as well as switches and switch chips that it OEMs for blade servers and other gear for the likes of IBM, HP, Sun, Cisco, McData and others. Then there are other FC vendors out there such as Emulex, which dominates the back-end (storage controller) switch market space, as well as promising firms such as PMC-Sierra and Broadcom. This wealth of options, Schulz feels, may serve to prevent upward price pressure.
He also believes that there is a positive side to mergers and acquisitions in terms of improved functionality at lower cost.
"Some new security features are likely to be added to storage hardware as a standard item," says Schulz.
Small Vendor Casualties
While this is all fine and dandy for the big guns, what will it ultimately mean for small vendors? Are the innovators being pushed out, or will there still be room for them?
"Some innovators could be squeezed out if they are not strong enough, if they do not have a sound or realistic business plan or mis-execute," says Schulz. "However, they also stand to be acquired if they have a good solution and a sound business plan."
Keep in mind, though, that it's not always the best widget that gets acquired. It's how that widget can be sold, supported and integrated with other technologies, as well as its installed base that represent its real value.
"The value proposition of smaller vendors may go beyond technology," says Schulz. "It can relate to their experience in dealing with the channel, SMBs, other complimentary technologies, and so forth."
So the game appears to be that the big become bigger and the small get acquired. And certainly, many existing startups were formed with that exact goal in mind.
"A lot of the younger companies are looking to team up with larger companies that have the resources to bring their technology to market faster and on a global basis," says Heiser. "Seeing their technology widely adopted and making a difference in the market can be quite rewarding for entrepreneurs and employees in smaller, startup-type organizations."
He feels there is always room for innovation in the market. EMC, in fact, has an internal team to make strategic investments in young companies that have promising technology.
'There Will Always Be Options'
If you look outside of storage, it becomes clear that consolidation is the natural tendency. Look at the auto industry, aerospace, grocery stores, food distribution, banking and telecom and you see a few giants emerge while the rest are lost to history.
"The level of concentration in storage could go even higher," says Schulz. "But I don't believe the market will allow a single vendor or two vendors to dominate. So there will always be options for the end user."
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