Just two years ago, enterprise storage seemed to be the most recession-proof part of the IT industry. Vendors and analysts believed that as long as applications such as customer relationship management, enterprise resource planning and e-commerce continued to produce reams of data, companies would have to invest in more storage capacity.
A dismal 2001 for the sector has proved otherwise. During the year, worldwide spending on storage declined 8% and server revenues fell 12%, according to market researcher International Data.
EMC, which slashed its head count by several thousand, was perhaps the hardest hit by the downturn. Its revenues slumped by a fifth and gross margin by 40%.
As the world's largest independent storage vendor, EMC maintains a similar profile in its market to those enjoyed by Microsoft in desktop software and Cisco Systems in enterprise networking. But EMC is not only battling against lower IT spending among its customers: competition in the storage market is at its fiercest in years.
Hitachi Data Systems, in particular, has made strong inroads into EMC's market in the two years since it left the IBM-compatible mainframe market and devoted its energies to storage. In 2001, Hitachi posted an increase of 4% in total storage revenues to US2,1bn and an 84,6% increase in storage shipped to 18,1 petabytes, while EMC and other vendors struggled.
According to a report from equity research firm AG Edwards & Sons of London, much of Hitachi's momentum comes from agreements with Hewlett-Packard and Sun Microsystems, which resell Hitachi's high-end storage systems . HP and Sun are thought to contribute around 30% of Hitachi's revenues.
IBM, too, is resurgent in the storage market. Big Blue's range of storage products - from tiny hard-drives for handheld computers to enterprise-level tape and disk - is among the widest in the IT industry.
But it slipped up in enterprise disk storage in the mid-1990s. It was only after the launch of the Shark product range in late 1999 that IBM started to re-emerge as a serious player in this market.
IBM has since sold more than 10 000 Sharks worldwide, says Ben Gosling, storage solutions manager at IBM SA. "Five years ago, we were not seen as a significant player in the open systems and networked storage market. But with storage contributing around a seventh of IBM's revenues, it's an important market for us," he says.
In its calculations of the revenues of the top three vendors relative to each other, AG Edwards estimates that EMC took 48% of the high-end Raid market in the first quarter of this year, compared with 74% in the comparable period of 2000.
Hitachi, in contrast, has grown its relative market share from 15% in the first quarter of 2000 to 35% in the first quarter of 2002. IBM showed disappointing quarter-on-quarter performance, dropping from relative market share of 29% to 17%, but is still stronger than it was in the first quarter of 2000, when it owned only 10% of the three vendors' total market share.
EMC is not taking the aggression from its competitors lying down. In April, the vendor hit back at Hitachi by suing the company for allegedly infringing six EMC patents. Hitachi responded with a counter-suit and accused EMC of competing in the courtroom rather than the marketplace.
EMC says it spent four years trying to resolve the matter amicably before launching the suit. Most analysts, though, see the move as an attempt by EMC to retain market share at any cost.
EMC has also expanded its presence in the midrange storage market through alliances with companies such as Dell Computer to make up for disappointing sales of its flagship Symmetrix product line. In recent months, EMC has launched new niche products such as the Centera array, a disk-based alternative to the tape systems normally used to store fixed data, such as cheque images and x-rays. This product is slightly more expensive than tape, but gives users faster access to data.
EMC is as confident about the future as ever, pointing out that the current flux in the storage market may help to cement the company's position rather than erode it. "With the changes taking place in the competitive landscape, customers run the risk of buying systems that may be discontinued in the near future," says EMC SA country manager Frank Touwen, making a thinly veiled reference to the merger of Compaq Computer and Hewlett-Packard and to EMC's lawsuit against Hitachi.
" We have an evolutionary approach to hardware and software that allows companies to move ahead while retaining their present investments [in storage technology]," he says.
EMC still has a commanding lead over its two main rivals and an edge in certain technologies such as storage management software, according to AG Edwards. It is also keeping a tight focus on R&D. But with two well-capitalised and ambitious competitors, it will have to work hard to retain its dominant position.
