EMC's Big Bet on a Superstorage System
By Faith Keenan in Boston, with Jim Kerstetter in San Mateo, Calif.
Friday April 26, 8:49 am Eastern Time
BusinessWeek Online
EMC may be badly battered, but it's battling back with a vengeance. Even as it loses money and its stock swoons, the once-mighty data-storage leader could be on the verge of something big. On Apr. 29, it'll introduce a new storage software system called Centera. The few tech analysts who have received confidential briefings on the product describe it as a cheap but smart way for companies to create digital archives for photos, canceled checks, e-mails, or virtually any document. "They have technology that has great potential to be a real breakthrough," says Bill North, director of storage-software research at tech-research firm IDC.
EMC (NYSE:EMC - news) could use some good news. Prices of its high-end storage boxes, the company's bread and butter, plunged 60% in 2001 because of increased competition and tight tech budgets. It finished the year with a 21% drop in revenue, to $7 billion, from $8.9 billion a year earlier. It posted a net loss of $508 million for the period, compared with net income of $1.8 billion in 2000. In late April, it suffered another blow when its stock closed below the psychologically important threshold of $10 -- 90% off its high of $100 in September, 2000.
The product launch could open a big new market for EMC and boost its battered stock. And, if successful, Centera will mark a major step in EMC's make-or-break transition from a big-box hardware vendor to one that sells more of a hardware/software mix. Until now, EMC has typically sold large, expensive digital-file cabinets to Fortune 500 customers like banks and airlines that conduct transactions that are continually updated.
RAIDING THE ARCHIVES. Those systems were often too expensive for smaller players like biotech companies or hospitals. And they didn't fit their needs for more archival, rather than transaction-based, storage. So these sectors often jerry-rigged their own systems, using cheap disks or tape, and hiring software developers to tailor programs for them. But retrieving data from tape is a time-consuming, labor-intensive process.
Centera's edge is that it would tag data in a way to allow customers to index, catalogue, and retrieve it within seconds. To move into the market, EMC hopes to sign up two dozen or more of specialized software programmers to link Centera's smarts to the user's control center. "We think it's a huge market," says Joe Tucci, EMC's CEO and president.
How huge? Tucci wouldn't speculate, but tech analysts are talking billions of dollars. The market for archive data, also called reference information or fixed content, could grow at a 92% compound annual rate for the next three years, far outpacing the more traditional storage market geared toward transactions, forecasts Enterprise Storage Group [ESG], a research firm in Milford, Mass. Increasingly, regulatory agencies like the Securities & Exchange Commission and the Food & Drug Administration are requiring companies to keep more data and for a longer period of time. SOFTWARE WAR. By 2005, reference data will represent 54% of new information, up from 37% of storage capacity today, says ESG. That translates into a potential market of $28 billion by 2006, assuming sales of 2,800 petabytes of storage at a current price of about 1 cent per megabyte. [One petabyte can hold half the contents of all U.S. academic research libraries.]
EMC's new system is a hardware/software combo [heavier on the software] that specially tags files for easy retrieval. Say a cancer patient needs to get a second or third opinion. Instead of the patient having to carry a magnetic resonance image [MRI] around, the doctor would be able to call up the image instantly online. Better yet, instead of saving several copies of an e-mail sent to 20 people, Centera knows to keep only one, saving capacity and reducing management costs. The new product is the outgrowth of FilePool, a Belgian company that EMC bought for about $50 million in cash a year ago.
As storage-hardware margins shrivel, the new battleground is software. And EMC's new-product announcement comes just as the war is heating up. Archrival IBM on Apr. 23 announced its roadmap for developing new software under the Storage Tank trademark. But its planned products -- including software for archival storage -- are still a year away.
"PAPER TIGER"? Mike Zisman, general manager for IBM's storage-software organization, says the products need more testing. "[Centera is] a very immature technology, and it's untested in the marketplace," he says, referring to EMC's offering. "I wouldn't be surprised if this is being rushed because of our announcement" on Apr. 23, Zisman adds. EMC says there's no connection with IBM's announcement, and it adds that beta testers are pleased with its product.
Smaller companies are already moving into segments of the archive market. Isilon Systems, a startup based in Seattle, recently launched a product targeting the streaming-media and medical-imaging markets. Network Appliance (NasdaqNM:NTAP - news) in Sunnyvale, Calif., launched its NearStore software in January. Mark Santora, NetApp's senior vice-president for marketing, says he believes EMC is throwing out a "paper tiger" because it's worried about smaller companies moving in on its turf.
EMC says its product is ready to ship. And analysts say they think it's better than the others available, but that the market will be so big that there's plenty of room for all the current players. Even so, EMC has just endured a tough year, and it'll need a big hit to give investors an incentive to stick with the stock.
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