Perspectives: Data Storage: Mystique Megs

The storage market can prove a mystifying experience for dealers. But as Simon Meredith explains, resellers that are prepared to diversify their skills will find there is more than one way to skin a DAT

The good news is that the storage market is going to continue to grow at well above the rate of the PC market over the next two years. The bad news is that it?s becoming much more of a commodity market and making money out of storage is going to require some effort on the part of the reseller.

?It feels a lot more like a ?boutique? market now,? says Bob Peyton, director of European storage research for International Data Corporation (IDC). ?If a reseller wants to play in the server game, he has got to become an expert and give the customer that one call.?

The high end of the market ? storage attached to servers ? is where the real value and profits lie for the reseller over the next 24 months. But making money means putting together solutions and acquiring the skills needed to manage a storage setup that is decoupled from the server itself ? one that does not come as an integral part of the machine.

Vendors are enthusiastic about decoupling. Tony Caine, regional director for Europe at Storage Dimensions, says it makes sense to detach the storage sale from the system sale for the customer because in most cases, thanks to falling processor prices, storage costs more than the rest of the system put together.

?A lot of the mystique about the server is going away and selling the storage that?s provided with the server makes it very hard to add value to the sale,? says Caine.

Some user organisations, he says, have started to do this by themselves, but most still buy the box without thinking about the storage solution. Resellers need to encourage them to think about the storage as a separate item on the shopping list. This should not to be hard, especially beyond the 20Gb level, when the investment in the system is bound to be substantial.

One way of approaching it is to look at the product life cycle. While a processor might have a useful life of perhaps 18 months in the server, says Caine, the storage solution ought to last for three years or more. Resellers need to sell, he argues, on cost per gigabyte over the lifetime of the storage unit, not on the initial capital outlay.

But, as ever, competition is just around the corner. Server vendors have started to wake up to the idea that users are thinking more about the lifetime cost of the storage and in response are starting to market the storage products. For resellers, this makes decoupling harder and in many cases, it is not worth the effort, says Jonathan Chapple, chairman of reseller Equanet. Many users prefer the bundled solution.

He says that in the early 90s, when no one knew much about servers, resellers could sell the concept but they were operating on a trial-and-error basis when they put Raid arrays together with controller cards and systems from other manufacturers. When the systems fell over, they had to experiment to find the answers.

?They were digging holes for themselves and then filling them in again. With mixed systems you could not blame anyone and that didn?t make users feel comfortable,? says Chapple.

When Compaq came along with its own Raid solution that seemed to work, it became easier to sell the whole solution rather than the mixed environment. ?If you are serious about a mission-critical environment, you have got to ask yourself if you want third-party products going in there,? says Chapple.

But as Martin Southern, MD of Primary Storage, points out, all resellers do when they settle for the storage that comes with a server or a PC, is transfer the problem (and the opportunity) to someone else. ?Very few manufacturers do their own maintenance ? it?s done by a third party. Compaq hasn?t got the capability of supporting everything so there is no such thing as an easy solution.?

In any case, the drives used in manufacturers? systems often vary, he adds. Compaq uses Seagate, Quantum and IBM drives in its machines. Users should not be convinced that just because it has the same label on the front that the ownership of the problem is going to remain in one company?s hands.

From a reseller?s perspective, the integrated storage solution may appear to be easier to support but it also means less opportunity to add value and, ultimately, it erodes the price of the drive.

More standard offerings in the market will mean less margin on products overall, says Southern. This will not be good news for the reseller because it will put pressure on marketing and support all the way down the line.

Dedicated storage vendors are latching on to this argument and trying to find ways to differentiate their products.

Xyratex, for example, has been selling its high-end solutions on the back of its serial Scsi architecture (SSA). Dave Leyland, sales manager at Xyratex UK, says it gives resellers a real differentiation.

?If they are all selling Compaq storage they end up in a price battle, so the intelligent ones are looking for value-added solutions and for something to sell instead of getting into a prizefight.?

Standardisation of storage in the desktop and server box will drive more business to the value end of the distribution channel, says Southern.

?For us it is all about making profit for the reseller, not just getting volume for the manufacturer. These guys [dealers] are getting squeezed because all the manufacturers care about is volume.?

Primary Storage has managed to carve itself a niche in between the decoupled and the standard PC vendor offering. It builds solutions that mirror those offered by vendors such as Compaq and IBM. As it sources the products independently, it claims that it can offer a lower price to users and, while taking out all the risk and the hassle of putting the solution together, offer more margin to the reseller.

But to make money, Primary will also work with resellers on specific configurations, says Southern. This means Primary adds most of the value on the product, leaving dealers to provide advice and handholding. Southern thinks there is a growing need for such a service.

?IT directors are asking what they should do about storage and resellers are sometimes nervous about talking to them about their storage strategy. We can help them with that, we can go in with them and give them the confidence to do it. Once they?ve got that confidence they can start talking to other customers about storage.?

According to Caine, resellers will be forced to develop the ability, not just to talk about, but to provide decoupled storage solutions. Later this year, clustering will be marketed heavily by Microsoft, Compaq and IBM and this technology ?almost demands? a separate storage solution.

Caine also believes the increasing use of client/server architectures, the wider adoption of NT Server, and a consolidation in the number of servers in use across businesses will lead to more upgrade opportunities.

?People are using 10 servers with 500Gb on them rather than 50 servers with 10Gb and there?s an increasing trust of NT solutions.

?We see NT eating into a lot of HP and RS/6000 business,? he says.

Software, says Peyton, is the primary driver behind the storage market and the rate of uptake of products such as Windows 97 and NT Server 5 will affect the growth rate of the storage market. After all, it was the smaller-than-expected uptake of Windows 95 that held back the market last year.

Selling storage on Unix platforms may remain a more profitable business. Despite the popularity of Windows NT, Caine agrees that Unix-based installations tend to be larger and generate more business. Recent market projections show NT overtaking Unix shipments rapidly, while the value of the Unix market remains higher than the total value of NT sales.

The network computer (NC) could also drive decoupling of storage as companies that adopt the model look for larger and highly responsive and reliable storage to sit at the centre.

?If you take away the local device, you had better make sure that the central storage that replaces it is available and is damn fast,? says Caine.

According to Storage Dimensions, thin-client architectures will catch on with some users. Savings on storage, replacing unused localised disks with one large central resource, is an important part of its appeal. Caine claims to know of one financial institution that is looking at replacing 230 servers with just 20 systems and a network of NCs.

The reseller providing such a system will need to be more of an integrator than a fulfilment house, he points out. The value and profit of the sale, if it materialises, will be substantial.

But this is the higher-value end of the market where new systems will always require large amounts of storage. Lower down the scale, the market is more reliant on the opportunity to provide upgrades to the desktop PC and notebook. The adoption of the new versions of Windows 9x will be key in this market over the next year.

IDC?s European Storage Flash report, written by Peyton and issued in December, opens with a statement predicting a slow-down and stabilisation of the growth rate in Europe, from the cyclical swings measuring 25 per cent and 78 per cent at the extremes between 1991 and 1995, to about 21 per cent over the next three years.

The report says: ?The implications will be most strongly felt in the distributor channel with annual growth being very close to the average market growth in the future.?

Peyton says that there will be a polarisation between volume and value in the distribution sector with companies like Karma forcing the pace.

?Karma has looked at the market and said: Gosh, this is a commodity product isn?t it? If you want pallets of disk drives delivered to your door then I think I can do that for you and I think I can do it on five or six per cent margin and make a profit on it.?

The Karma approach, he says is to make no promises about service and support and value, just to ship at the lowest possible price. Karma is a Turkish company and operates through a series of franchise-type agreements across Europe. That allows Karma to buy in bulk and the vendors love this , says Peyton, because to them, it looks like one big customer.

A distributor like Karma, able to supply products to sub-distributors or larger resellers at low prices, is forcing the pace in the increasingly price-driven low end of the market. If, as Southern stated earlier, vendors are only interested in volume, distributors like Karma will get priority and other distributors may struggle to secure supplies, especially after the OEMs have taken their bite of the cherry.

Vendors currently do not have enough drives to meet demand from the distribution sector. Some Seagate models are on allocation whereas distributors have stock of others but the prices are too high. The cause of the problem appears to be a better-than-expected uptake from PC vendors.

This has limited the number of drives available to the distribution channel in the first quarter of the year. This does not please the distributors. One senior figure at a major UK disk drive distributor said: ?The OEMs are calling the tune. What we are being told is that they exceeded their forecast and none of the manufacturers it seems have the guts to turn around and say: Well, you can?t have it.? Another said that there was a small suspicion that vendors might be withholding stock of popular models to force prices upwards.

Hugh Baker-Smith, general manager at Frontline, pointed out that there had been a considerable change in the dynamics of the market since the takeover of Conner by Seagate.

There are now only three major independent players in the disk storage business ? Seagate, Western Digital and Quantum. This has made the business less flexible. ?The chain is too far removed from the market and they can?t respond quickly enough,? says Baker-Smith.

Andy Batty, director of marketing for Europe at Seagate, admits that it is getting harder to keep supplies at optimum levels. ?Demand is exceeding supply and I don?t know how long that will last. We try to forecast demand, but unfortunately it is not a precise science.?

Geoff Evans, product manager for hard disks at Hitachi, says demand is hard to predict in every sector. In the fourth quarter of last year, some of Hitachi?s 2.5in products were on allocation. Now that the company can supply drives, demand is sporadic. The cause appears to be a shortage of notebook products available for the systems builders market, which in turn has been caused by a shortage of TFT screens in the Far East.

Richard Nathan, MD at Seagate distributor Dynamic, confirmed there were some shortages and that business, while healthy, was not at the expected levels for this time of year. But he could not put his finger on the reason for the slow-down in the market.

?There are a lot of different factors affecting the market,? he says. ?We are not short of opening new accounts, but the volume purchases are not creating that buzz you usually get. Margins are still wafer-thin.?

CHS also reports a general sluggishness in the market. Matthew Beavis, general manager of storage products at the company, says demand for low capacity drives cannot be met because the manufacturers are moving towards 2Gb or higher capacities. But, he says, ?it is difficult to know why the business is the way it is at the moment?.

Peyton is not surprised that enthusiasm for storage appears to be waning in the distribution sector. ?It looks like the upgrade binge cycle of growth is over. In the past we?ve seen gigantic swings from one year to the next with the major growth coming in the even years ? 1992 and 1994. We expected the same thing last year with Windows, but it didn?t happen. This means that disk drives are going to move closer to PC growth rate and that?s going to affect the distribution channel.?

Companies like Ideal Hardware, which have developed a model which delivers value that people will pay for in the form of increased support and technical expertise and delivery, will come under some pressure, says Peyton, as disk manufacturers seek security in volume business with OEMs and box-shifters.

Resellers will find it hard to make higher margins on products as the PC vendors try to make the disk drive an inclusive part of the system and the upgrade market slows down. They will seek out lower prices for standardised products.

Southern believes that if they avoid the standard vendor offerings and try to provide solutions instead, dealers can make money out of storage upgrades. ?We can take a lot of the mystique out of it. But you are going to need good engineers and sales people who can qualify the needs of the customer properly.?

Caine says resellers that are technically competent are already equipped to sell, install, and support advanced storage solutions, but they need to modify their approach.

?The education process is in getting people to look at it in a slightly different way, as a network-attached device. It?s almost a case of winding people back and getting them to look at the cost of ownership instead of the pure product sale,? he says.

Often, the potential for making cost the issue instead of process depends on who you are talking to, says Caine. IT directors will immediately catch on to the argument, network managers will be more concerned about features and benefits, and budget holders want a good price.

This is part of the problem with storage, says Chapple. When Equanet was pushing storage products, it found it was usually the budget holder doing the buying. Trying to sell expensive storage solutions to these buyers is extremely difficult. Last year, Chapple decided to divert his resources into other areas. Making money out of storage while selling to the top end of the market with decoupled products is not easy. It does require some expertise.

Resellers are going to have to face up to the fact that, with storage products, they will either have to skill-up so that they can add value themselves, either with standard upgrades or decoupled solutions, or let someone else take care of adding the value for them.